Shares Fundamental Analysis (Complete Guide) for 2019

By | 08/23/2018

Everybody either an employee or a businessman, a shopkeep or a student want to make money how: shares fundamental analysis and financial ratio drive you nearer to the best opportunity to earn money and the tricky part is:

No one had the patience.

Everyone keep on searching for “type of fundamental analysis”, to get the best fundamental analysis tool.

So how can you be a rich person in a short period of time?

Equity Market !!

Yes, the Equity market is the only segments which make you rich and you can climb to the top of your expectation, but on the other hand, Equity market also brings you down and drop you like a stone.

Being optimistic, taking right and calculated steps always brought you the desired goal.

The biggest question in the equity market is how to select the company for investment.

Is there any formula for selection of the company?

“fundamental analysis vs technical analysis”

Both are the parameters for the players already in the position of sustaining in the market.

In this article, you will learn all about Fundamental Analysis, head to tow, and I am sure this will change the concept towards the equity market.

Also Read: What is Operating Profit Margin Ratio?

What is Fundamental Analysis?

What is meant by fundamental analysis? Fundamental Analysis is the process of forecasting the profit and price variation in the future. Fundamentally the examination of financial data, business model, taxation, demand & supply the management decisions.

Fundamental Analysis help in analyzing the present and future growth of the company. Basically, the fundamental analysis provides you the fair value of the company with the help of ratio analysis formulas, and if the fair value as per calculation is lower then the current market price of the company.

It might be possible that the investor can see the growth in share price in near term or long term.

Although you can not grab the perfect step to climb the tree you have to change the path on regular basis according to the situation. Fundamental analysis can bring you nearer to the result you required.

The data provides the investor with the projection of the company performance, management decision either favorable or not & the company fair value.

It is very important that you must work with the companies in the same industry, if you’re comparing the share price of FMCG companies, you must compare with FMCG company.

Fundamental Evaluation

How to do fundamental analysis of a company:

Looking at a whole our economy consists of several sectors of an industry group and every company belongs to one of the industry, any movement in the economy effect some of the sectors in a beneficial way and for some, they have to face and suffer.

Policy changes, budget, taxation financing, banking are some of the factors responsible for the movement of growth in the industry.

Also Read: Received Income Tax Notice? (Learn about It)

Industry Selection

Any time you open the books, you will find some sectors which are likely to benefit from the current & future economic condition.

If every company is expected to perform great and will be the benefit from the economic situation then selection of a company is not a difficult task.

According to the current market scenario, you must be stock specific to make money. The investor would consider industry potential in the future, the growth rate, market size, and the market scenario.

Sometimes an individual stock with the nonperformer industry makes history.

After industry selection, the investor would rank the companies according to the performance and future prospects.

Accounting ratios help to find low poles and their power of impact, these complete comparative analysis within the industry will help you identify the stock and make all your dream come true.

Shares Fundamental Analysis

Company/Stock Selection

Selection of stock and company consist of fruitful business modal, management decisions, and financial outcome after putting it all together and comparing the outcome with the market condition and economical decision, you will get the best conclusion.

Also Read: What is Beta Stocks

Bussiness Model/Plan

The Management of the companies always tried different things just to improve the bottom line of the company.

If we talk about New business:

There are lots of questions like:

  • Is this business profitable?
  • the targeted customers?
  • Is the company share traded is overvalued or undervalued?
  • Is business really feasible?

The same calculation required for existing business:

  • Is the company future plan workout?
  • Is the management required the restructuring of business?
  • Can it hold their existence?

Management

In order to hold the existence of the position, the company required the best management team to tackle every situation in the market. Who to use the best available resources for the favor of the company and make fruitful results.

Also Read: Drop Buying A House Save you ₹ 50 Lakhs (Change your mindset)

The investor always required to company management to take decision always in favor of the company according to the changing economic conditions.

Other Financial Segments

Tools for fundamental analysis:

Some of the other financial segments available for the stock valuation which will bring you nearer the concerned company. The list below is the terms investor should work on it without fail.

Goodwill Bussiness Plan Investments Market Price Capitalization
Account Receivable Business Idea Depreciation Expenses Share Holders
Account Payable Cash Flow Management Taxes Promotors
Brand Cash availability Dividend R & D Loans
Book Value Liability Earning Product Demand Banking
Business model Assets Equity Sector Holding Brand

There are several valuation platforms for the investors, A complete financial calculator includes all kind of financial ratio which will reveal the data of profitability, Income, Long-term Plan, Working capital and many more.

You will get the detailed coverage of all kind of ratio in the article for getting closer to the company.

shares fundamental analysis and financial ratio

Financial Ratios

Financial Ratio is the tools to evaluate the financial health of the company in every aspect, this ratio help in comparing the companies in the same sectors.

Company balance sheet, profit & loss account, cash flow statement are used to figure out all kind of financial ratio.

Financial ratio

Some of the key financial ratios are categorized into these measures, technical analysis tools:

Here are types of financial ratio and types of ratio analysis:

  • Liquidity Ratio: Help the investor to get the availability of cash to debt.
  • Activity ratio: measures the activity to convert noncash assets into cash assets.
  • Debt Ratio: It measures company ability to pay its debt.
  • Profitability ratio: One of the most important and trusted ratio to measure the company ability to control the expenses and generate more profit. 
  • Market Ratio: provide the investor the market price and cost of the stock.

Also Read: 6 Insurance Mistakes to avoid (It works for Family)

Will Start with:

Profitable Ratio’s

The most important financial ratio, profitability ratio analysis which measures the company ability to generate or provide the real picture of the company financial health.

let’s start with:

Gross margin

This term gross margin has commonly used the term in every segment of business, even a small grocery store owner also known the meaning of gross margin and keep working to enhance the gross margin.

Before understanding gross margin, you must aware of the term gross profit.

Gross profit is the value of relationships between sales (revenue) and cost of goods sold (COGS).

Calculation of Gross Profit

Gross Profit ($) = Sales (Revenue) – Cost of Goods Sold (COGS)

This calculation provides you the value you earn after buying and selling the goods.

Gross Margin is simply the percentage calculated, with the relationship between gross profit and sales.

Gross margin calculator

Gross Margin ($) = {Sales (Revenue) – Cost of Goods Sold (COGS) / Sales (Revenue)} X 100

or

Gross Margin ($) = {Gross Profit / Sales (Revenue)} X 100

Higher gross margin indicates that the company management posses great efficiency to generate more profit from sold goods.

Also Read: What is Return on Capital Employed

How gross margin help investors:

Percentage of gross margin is different for every company, it is useful to compare the profitability of the same industry.

Operating profit margin formula

(OPM) Operating profit margin in simple words determine the company strength to control the expenses and boost the profit margin.

Operating Income is a synonym for earnings before interest and taxes (EBIT).

Calculation of operating profit margin

Operating Margin = (Operating income / Revenue) * 100

It is very important to understand the meaning of operating income.

Operating income is the income desired by the company after deduction of all expenditure mainly cost of goods sold

Calculation of operating income

Operating income = gross income – operating expenses – Depreciation – Amortization

Operating profit margin is the good indicator for the investor to analyze the comparison in the same sector of companies.

The management decision to reduce the expenditure and how to take advantage of the market condition to improve the operating profit margin.

Also Read: Effect of NPA in the Banking Sector

Higher the operating profit margin indicates the better results in the future for the company.

Return on Assets (ROA)

Return on assets itself define the meaning and calculation of the ratio, this financial ratio provides the investor the percentage of return company generates from their assets.

High return on assets (ROA) is not every time a good signal and low return on assets (ROA) is not every time a bad signal, some of the IT firms gots very low assets and some of the infrastructure companies possess high assets.

Return on assets calculator

Return of Assets = Net income / total assets 

Return on equity (ROE)

Every Shareholder is interested in knowing the current market value of the stock, Is he carrying a profitable portfolio or not?

Return on equity reveals the shareholders the actual growth as compared to your companies. Return on equity is not based on the industry wise. it’s a simple phenomenon who much percentage your investment providing you.

In both the scenario the ROE is different.

Also Read: Fill Income tax return ITR1 in 5 Minutes: The Complete Guide

Return on equity ratio formula

Return on equity = Net income/Average shareholders equity

Investor getting the dividend for instance 20 %, then the return on equity of the shareholders require to consider the amount received from the dividend.

Return on investment (ROI)

Return on investment (ROI) is a simple calculation provide profit and loss on the investment made by the company in the past or current investment and also a tentative return for the planning to invest in future.

This is one of my favorite ratios, ROI is not directly or indirectly related to the business. ROI also not indicates how long the company will hold their investments.

Investment means for ROI is investing in land, mutual funds, bonds, other companies shares etc, there is no such prescribed formulae of return on investment.

The return of investment is also taken into account, some of the companies in the stock market are traded with high value just due to the investment made by the companies and they are getting the huge return from it.

Return on capital (ROC)

Return on capital referred to the return of invested capital in the business, capital refers to the all monetary capital invested, shareholders, and all debt receivable.

Also Read: What is Hedging and its Importance

This ratio helps the investors to calculate the return company generates from the money they invested in the company, if the ROC is good, so there is a possibility that company is only backing off due to capital, the potential of the company is incredible.

Return on capital calculation

Return on Capital = (Net operating profit margin – taxes) / total capital invested

Return on capital employed (ROCE)

(ROCE) Return on capital employed measures the company efficiency to generate profit with all this capital employed including assets.

ROCE is one the major fundamental ratio used at the beginning of selection of the company. A good efficient company with better management can generate ROCE as compared to other companies.

Return on capital employed calculator

Return of Capital Employed = Net Operating profit after taxes/Average capital employed

Efficiency Ratio

For every business, the role of management is very important, management decisions drive the business towards the path of profitability and trust towards shareholders and Promotors.

This Ratio analysis the efficiency of the management to handle the situation in every aspect of the business. This ratio measures the company assets ability to generate profits.

Efficiency ratios also accumulate accounts receivable turnover, fixed asset turnover, sales to inventory, accounts payable to sales and stock turnover ratio.

Also Read: Understand Tax saving options : 80C, 80CCC, 80CCD, 80D, 80U, 80E, 24

Debt Ratio’s

Company Debt plays an important role in the company the more the debt the more required skills to be in the race. Some corporations still manage to be debt free and giving their shareholders and promotors a good rate of return.

There are some of the ratios fundamentally reveal the financial health towards debt.

Debt to equity ratio

Debt to equity ratio is the indicator for the shareholders about the portion of debt and equity participating in financing the company assets. Lower the ratio is subject to low risk and higher the ratio indicates the higher risk level.

This ratio also reveals the burden of debt on the assets during the business.

Calculation of debt to equity ratio

Debt to Equity ratio = Total liabilities ÷ Total shareholders’ equity

Also, Read The Truth About How To Invest In Share Market in India.

Importance of financial ratios

Financial ratio examines the real scenario of the company by its numbers (balance sheet).

Not every time the top line or bottom line is important, there are significant things available in the financial data of the company.

According to smallbusiness.chron.com “Financial ratios are tools used to assess the relative strength of companies by performing simple calculations on items on income statements, balance sheets, and cash flow statements”.

Arranging all together

Understanding financial ratios in fundamental Analysis after all this provides you the bunch of companies that pass your analysis and over a period of time, you will get a good potential in your scope. some are unpredictable in their future performance.

fundamental ratio

Also Read: How to pay (₹ 0) Income Tax on CTC ₹ 14,63,000/-

  • Fundamental Analysis is the fantastic tool for the prediction of future performance of the companies all taking together like economical, technical, market condition, demand, supply etc.
  • You will also identify the company valuation, some time due to some bad weather the performance of the company drag down and it will also affect the bottom line of the company, but the valuation of assets remain same.
  • In addition, Fundamental Analysis help the investor to develop the skills to understand the company performance at a glance just through balance sheet, profit and loss account statement.

Author Profile

Amit Bansal
Amit Bansal
Hey, Amit Kumar Bansal, the man behind this blog. I always passionate about Taxes, Stock Market. This was one of the reasons why I have chosen the field of account. Blogging was not the coincidence it was a proper decision. The main aim of this blog is to help readers to take an informed financial decision. If you like my efforts kindly subscribe to this blog and also let your friends know about this website by sharing.

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