Technical analysis is good to find the entry and exit in a stock for Intraday or short term. You can book good profits using different technical indicators.
However, if you want to find a stock for investment, then fundamental analysis is the best tool that you can utilize. Fundamental analysis of a stock is used to determine the health of a company. It’s recommended to do a proper fundamental analysis of the stock before investing if you are planning for long term investment. To get multiple times return, you need to remain invested in a stock for long term.
In this post, I am going to explain how to do fundamental analysis on stocks. Here, I will elaborate few guidelines that if you follow with discipline, you can easily select fundamentally strong companies. Below is step by step explanation of how to check fundamentals of a company-
1. First go to BSEINDIA website. In the search box type the name of the stock in which u r interested for investing. Now select Financial, see its results Annual as well as quarterly-
Firstly see Revenue, if its increasing every quarter as well as annual or its stable but not negative then it’s a good stock. Then see its Net Profit , if its increasing every quarter as well as annually then it’s a good stock.
2. Then see its Debt as well as Reserve Capital :-
Suppose the Debt of a company was 100 crores in 2014, 90 crores in 2015, 70 crores in 2016, 50 crores in 2017
And its Reserve Capital in 2013 was 210 crores in 2014, 218 crores in 2015, 226 crores in 2016, 240 crores in 2017.
Here u r seeing the Debts of this company is decreasing every financial year and the Reserve Capital is increasing every financial year. So, it’s a safe company to invest in. If a Company has zero debt but has good Reserve capital then it’s a Golden stock to invest.
3. Now see Shareholding Pattern of that stock. Just see the percentage of stock promoters holding & public is holding.
For example :- Suppose in 2014 Promoter Holding 66% Public or Institutions holding rest 34%, 2015 Prom Holding 70% and Public and inst=30%, In 2016, Promoters holding 72% and public and inst=28%, and in 2017 Promoters holding is 75% and public and inst=25%. So it’s a very good stock as Promoters holding has increased every year, so they have faith in their company and If FIIs holding also increases every quarter or annually then additional good point for stock.
4. Now see its P/E ratio and also check its Industry P/E ratio-
Suppose it’s a Pharma stock trading at 200 rupees and its P/E ratio is just 9 and Its Industry P/E ratio is 27. What does it means ? It means that the stock has the potential to triple from here because its Industry P/E ratio is thrice its own P/E ratio.
5. Now, next see its Book Value. Book Value is Total Assets of a company Divided by its total no of shares. Suppose its Book value 85 and the share is already trading at 450. For me it’s already a overvalued stock because its trading way above its book value even though it’s a good company risk element is high for investment. Now, Suppose the BV of a stock 300 and its currently trading at 75 . It’s a good pick or safe pick for investment because its BV is still 4 times its current price. But u have to check other above mentioned factors also to invest in it. Only if its BV is high than its current price doesn’t mean that stock is good.
Apart from the above given steps, we have to check a lot of other aspects and figures of the companies financials before investing, which I will explain in coming posts. I hope this article will help you in taking well analyzed decision before buying a share. Happy Investing 😀