What is fundamental analysis in the share market?

Fundamental Analysis involves examining economic and financial factors.

Here are some aspects you need to understand about the company you wish to invest in:

• Stock Screening: Important factors to consider when selecting a suitable stock for investment.
• Company Structure: Understanding the company’s organizational setup.
• Competitors: Identifying the company’s competitors.
• Intrinsic Value of Stock: Determining the true value of the company’s stock.
• Reading Financial Statements: Analyzing the company’s financial statements.
• Future Opportunities: Analyzing future financial reports.

Key Factors for Analysis:

A) Financial Factors: (Financial Report)

B) Economic Factors: (Economic Report)

Considerations:

• Profit and Loss Statements
• Revenue
• Operations
• Debts
• Cash Reserves
• Competencies

Fundamental Analysis involves understanding the following aspects:

• Liquidity
• Profitability
• Price of the Stock
• Leverage

Liquidity:

The term liquidity refers to how quickly and easily a stock can be bought or sold in the market. It indicates the ease with which a stock can be converted into cash without significantly impacting its market price. Cash is considered the most liquid asset.

At the same time, stable stocks are less liquid . (buy/sell tradinding (Liquidity)

Two types of Ratio:

1. Current Ratio
2. Quick Ratio

Current ratio:

=Current Assets/Current Liabilities

Quick Ratio:
=Current Assets-Inventory / Current Liabilities

Good Range for selection= >1 (Greaterthan1)

Good Selection Range more than 1 %.

EPS (Earnings Per Share):

Earnings Per Share (EPS) is a statistic that describes the profit allocated to each outstanding share of a company. It is calculated on a quarterly or annual basis. EPS is determined by dividing a company’s net income for the period by the number of outstanding shares.

EPS serves as a fundamental measure of a company’s profitability and helps investors gauge whether a company is a good investment.

EPS = Net Income for the Period / Number of Outstanding Equity Shares

For example:
EPS = 200 Crores / 5 Crores
EPS = Rs. 40

TTM PE (Price to Earnings):

The Price-to-Earnings (P/E) ratio links a company’s stock price to its earnings per share. A high P/E ratio may indicate that a company’s stock is overvalued or that investors expect high growth rates in the future.

P/E Ratio = Current Market Price of a Share / Earnings per Share

The market average P/E ratio currently ranges from 20 to 25.

Leverage:

Leverage involves using borrowed funds to increase the potential return on an investment. It is a strategy that amplifies the effect of debt on the company’s operations.

Leverage is measured by the Debt-to-Equity Ratio:

Debt-to-Equity Ratio = Debt / Equity

Good Selection Range = <1 (Less than 1)

Profitability:

1. Return on Equity (ROE): ROE measures how effectively a company uses shareholders’ equity to generate profit. ROE = Net Income (Annual) / Shareholders’ Equity Good Selection Range = 15% to 20%
2. Return on Assets (ROA): ROA indicates how efficiently a company uses its assets to generate operating income. ROA = Operating Income / Total Assets Good Selection Range = More than 5%
3. EBITDA: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company’s overall financial performance. EBITDA = Net Income + Taxes + Interest Expenses + Depreciation & Amortization A good selection range for EBITDA should be increasing annually.
4. Dividend Yield: Dividend Yield measures the return on investment based on dividends received. Dividend Yield = Dividend per Share / Stock Price