Basic Fundamental Analysis For Dummies

Although our main focus is on Technical Analysis but on special request of few friends in this post we will discuss the basic fundamental test used by us in our analysis. We will be using two sites namely screener.in and moneycontrol.com in our analysis. 

When it comes to picking stocks we don't use any rocket science we look for three things first the trend, second the stock should be undervalued compared to it peers and finally the growth potential. To know these you don't need to be an insider. You can easily know it through data available in public domain, this post will show you how...... So, here we go..

First of all whenever I receive any query with respect to any stock, I go chartink.com  or our charting site http://www.multiplierwealth.com/p/charts.html . The first condition I need is that the stock should be in a uptrend, even a sideways movement can be good sometime but a downtrend is not accepted

Also Read: Trend Is Your Friend

So, coming back to fundamentals. First thing we would look at is PE Ratio:

1) Stock PE To Industry PE- Investopedia defines PE Ratio as a valuation ratio of a company's current share price compared to its per share earning. But we need not know what PE is or how it is calculated all we need is that the industry PE should be greater than the PE of our stock. If that's the case with our stock it means its undervalued compared to its peers.

To check it go to moneycontrol.com search for the stock you intend to analyze, after searching scroll down to reach to this part and check out for PE and industry PE.

In above example PE of our stock is 6.37 while the industry PE is 24.78. So, it means our stock is undervalued compared to its competitors and the scope of upside price movement is good. Thus, our first test is qualified move to next one. 

You can also use screener.in to check industry PE and Stock's PE.

2) Sales and Profit Growth:- Its the rate at which the sales and profits our company is growing years after year. The greater it is the better it will be. I generally require sales and profit growth of 12% or more in last three years.

It can be checked from screener.in. Go to the site, search for your stock and then scroll down till annual results under it you will find your sales and profit growth make sure its 12% or more in 3 years column the greater it is the better it will be:

3) Debt- Equity & Interest Coverage Ratio- Company with lowr debt-equity ratio enjoy higher valuations compared the the one under heavy debts. Ideal debt-equity ratio 1:1

It can be computed using the follow formula

Here, Total liabilities can be found by adding unsecured loans and secured loans from the balance sheet and shareholder's equity is found as equity share capital in the balance sheet

Also, the point to keep in mind here is if the debt equity ratio is not perfect i.e. 1:1 then it doesn't means that the stock is useless or not worth buying but what matters is whether the company is able to earn sufficiently to pay off the interest on debts easily. This we can find using interest coverage ratio 

Interest Coverage ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:

EBIT and interest figures can be taken from Annual or Qurterly Results in screener.in. According to investopedia,  The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. We need the interest coverage ratio above 1.5. The higher it is the better it would be.

4) Promoter's Holdings:- Promoter's holding specifies the number of shares held by the promoters and the promoter group. The larger it is the better it would be. If the promoter's holding is low or the major portion is pledged then its not a good sign. If the promoter's have increased their holdings in recent quarters then its considered a positive sign while a decrease in promoters holding is not a good signal. 

To know about promoter's holding go to moneycontrol.com search for your stock and scroll down to shareholding pattern and mutual fund holdings 

The holdings of FIIs and DIIs in any stock is viewed as a positive sign.


5) Check the company's website: The basic information about any company's operation is displayed on its website. So, having a look at the website is not a bad idea a simple google search about the company should redirect you the the company's website. Most of the good companies have well build and fully updated websites.

If your stock has qualified the above test then its worth investing. Also, a point worth noting here is that there are several other factors that are required to be considered before investing a stock like mangement quality, corporate governance, industry prospects, balance sheet, cash flow analysis etc.  Hence, the above list shouldn't be treated as full and final but if you follow the rule "trend is your friend" and check the stock for above mentioned simple test you would do much better then the crowd.

So, I am sumarising the above as under:

1) First thing to look are the charts, never buy stock in downtrend just because they appear cheap, no one knows the cheap can get cheaper. Always prefer stocks in uptrend 

2) Check out sales and profit numbers and growth to see if the uptrend is based on fundamental growth or just a fabricated one

3) Check out company's ability to pay off its debt using interest coverage and debt equity ratio

4) Watch out holding pattern of promoters, FIIs and DIIs

5) Check out the company's website to get more information


If you have any doubts, views or suggestions with respect to above post you can put the same in comments I would love to answer them

check out suggested reads on fundamental and technical analysis here

Happy Investing
Multiplier Wealth