Understanding Fundamental Analysis for Smart Investing

Many investors hesitate to perform fundamental analysis because they believe it requires an in-depth understanding of financial reports and balance sheets. However, with a streamlined approach, you can assess a company’s fundamental analysis within two minutes. By focusing on specific parameters, you can make informed investment decisions without getting lost in complex data.

A useful tool for this process is Screener.in, a platform that offers accurate financial data. Once logged in, you can analyze a company’s fundamental analysis using these key metrics:

• Market Capitalization
• Stock PE Ratio
• Book Value
• Dividend Yield
• Return on Capital Employed (ROCE)
• Return on Equity (ROE)
• Face Value
• Promoter Holding
• Pledged Percentage
• Debt-to-Equity Ratio
• Operating Profit Margin (OPM)
• Current Ratio

By understanding these parameters, you can conduct a quick yet effective fundamental analysis before making investment decisions. Let’s break down each metric and its significance.

Key Metrics for Fundamental Analysis

1. Market Capitalization

Market cap helps identify potential multibagger stocks. If two companies in the same sector perform similarly but one has significantly lower market capitalization, it may have higher growth potential. Investors often consider such stocks for long-term investments. Learn more about market capitalization here.

2. Stock PE Ratio

The Price-to-Earnings (PE) ratio, calculated using Earnings Per Share (EPS), indicates whether a stock is undervalued or overvalued. Compare a stock’s PE ratio with the industry PE ratio:

• If the stock PE is lower than the industry PE, it is likely undervalued and a good investment.
• If the stock PE is higher, it is overvalued and may not be an ideal buy.

3. Book Value

Book value is derived using the formula: Book Value = (Share Capital + Reserves) / Total Shares

• If the stock price is lower than its book value, it is a positive indicator.
• A stock priced higher than book value isn’t necessarily bad but requires further evaluation.

4. Dividend Yield

Dividend yield represents the return investors receive as dividends. Key observations:

• Large-cap companies typically offer a 1.5% dividend yield.
• Public sector units (PSUs) often provide higher dividends.

Maximizing Dividends Strategy:

• Apply a 200-day Simple Moving Average (SMA) on the stock chart.
• Use a daily timeframe.
• Buy when the stock price drops 20% below the 200SMA level.
• Target the previous high or the 200SMA level.

5. ROCE (Return on Capital Employed)

ROCE measures how efficiently a company uses its capital: ROCE = EBIT / (Equity Capital + Debt)

• A ROCE above 20% is excellent for investing.
• Not applicable for banking and NBFC companies.

6. ROE (Return on Equity)

ROE indicates how effectively a company generates profit from shareholder equity: ROE = Net Profit / Equity Capital

• A good investment has an ROE above 15%.
• A business with an ROE above 10% for 5-10 years is considered stable.

7. Face Value

Face value is the initial price at which promoters receive shares. It remains unchanged unless a stock split occurs. While commonly noted, it has minimal significance in fundamental analysis.

8. Promoter Holding

Ownership strength is categorized as:

• Strong Hands: Promoters, Foreign Institutional Investors (FIIs), Domestic Institutional Investors (DIIs) (Should be above 70%).
• Weak Hands: Retail and High Net-worth Individuals (HNI).

9. Pledged Percentage

Companies often pledge shares to secure loans, which can be risky. If stock prices fall, banks may sell pledged shares, harming the company’s financial health.

• If pledged shares exceed 10%, avoid investing.

10. Debt-to-Equity Ratio

This ratio determines a company’s ability to manage debt relative to its equity: Debt-to-Equity Ratio = Total Debt / Shareholder Equity

• A ratio below 0.25 is ideal.
• Zero debt companies are considered the safest investments.
• Not applicable for banking and NBFC companies.

11. Operating Profit Margin (OPM)

OPM measures operational efficiency: OPM = (Operating Profit / Sales) × 100

• Used to compare companies within the same industry.
• Negative OPM signals poor financial health.
• A stable or increasing OPM indicates strong financial performance.

12. Current Ratio

The current ratio assesses a company’s ability to cover short-term liabilities: Current Ratio = Current Assets / Current Liabilities

• A ratio below 1 indicates liquidity issues.
• Ideally, the current ratio should be above 3, though above 2 is acceptable for trading.

Conclusion

By using these key metrics, you can conduct a quick and effective fundamental analysis before making investment decisions. Evaluating a company’s financial health ensures you invest wisely and avoid potential risks. Take advantage of resources like Screener.in to streamline your research and build a strong investment portfolio.

For more insights on investing, check out our beginner’s guide to stock market investing and technical analysis strategies. Stay informed and invest smarter!