Fundamental analysis comprises of studying about company’s management, cash flows, valuations, books, debts, past performances, dividend, its short term, and long term potential to back its debts, vision, mission, scope, strategies, future prospect, key people, bottom line performance over time, earnings etc.
After reading this, you might think that doing fundamental analysis is a really daunting task, but you don’t need to worry.
In this article you will learn how to do fundamental analysis of stocks in a step by step manner along with two secret strategies to find multi-bagger stocks as well as turnaround stocks.
How to do fundamental analysis of stocks?
Here we go.
Go to BSEINDIA.com
In the search box type the name of the stock which you are interested in investing
Now select Financial
See its results Annual as well as Quarterly.
Firstly see Revenue, if it’s increasing every quarter as well as annual or it’s stable but not negative then it is a good stock
Then see its Net Profit, if it’s increasing every quarter as well as annually then it’s a good stock.
Net Profit and Revenue are highlighted in the below picture.
Then see its Debt and 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 you are seeing that the Debt 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 your money in.
Now its time to see the Shareholding Pattern of that stock. Just see the percentage of stocks that its promoters are holding & percentage the public is holding.
Suppose in 2014 the promoters are holding 66% while public or institutional investors holding rest 34%
In 2015 the promoters are holding 70% while public or institutional investors holding rest 30%
In 2016 the promoters are holding 72% while public or institutional investors holding rest 28%
In 2017 the promoters are holding 75% while public or institutional investors holding rest 25%
If this is the case then it is a very less risky stock as you can see that promoters holding has increased every year and not decreased so they have faith in their company.
See the P/E ratio of the stock and compare it with its Industry P/E ratio.
Suppose it is a Metal stock trading at Rs 200 and its PE ratio is just 8 and its Industry P/E ratio is 24.
Now you know that the stock has the potential to triple from here because its Industry P/E ratio is thrice its own P/E ratio.
Next, you need to check if Promoters have pledged its shares. If you find a company that is posting great results every year but most of its shares are pledged by promoters then simply avoid that stock.
The last thing you need to do is to see the Book Value. Book Value is the Total Assets of a company Divided by its Total number of shares.
Consider a stock having book value of Rs 85 and the stock is currently trading at Rs 450. It is obvious that the stock is overvalued at the current levels because it is trading way above its book value. It may be a good company and satisfy all the checkpoints above but the risk would be high in the investment.
Alternatively, suppose you find a stock having book value of Rs 400 and trading at Rs 100, would you simply buy the stock because it is undervalued? Even though the stock is undervalued and has the potential to go up by 4 times you need to remember the points discussed above and the stock must satisfy them.
You must not invest your money blindly in all undervalued stocks that you find.
How to identify turnaround stocks?
It is prudent to invest in positive turnaround stocks.
Consider the scenario, a company was posting losses every financial year, but ‘out of the blue’ this year, it has posted a profit. So this company ready for a turnaround and you can invest in it.
Also if a company that had huge debts but every quarter it is decreasing its debt, then it is also be considered as a turnaround.
Then just consider the other factors as per fundamental analysis to understand whether you should invest in the stock.
How to find multi-bagger stocks?
I know you can’t wait to read this. So here it is!
Just zoom out your chart and see the all-time data of a stock.
Let us discuss this with an example.
So consider a stock was just Rs 8 in 2006 and went up to Rs 240 in 2009 but started coming down again and retraced back to Rs 48. Now currently in 2017 if it has crossed the 240 mark and closed above it a few times. It is a multi-year breakout in that stock and it is a multi-bagger stock now.
You just need to and keep a tight stop loss and keep adding it till it doubles that is it reaches Rs 480-500.
So in this strategy, the first target is double the current market price. Now when the first target is achieved simply review the fundamentals as per the fundamental analysis method mentioned above and if you find everything alright then stay invested or if not then get out of the stock by booking your profits.
Conclusion: How to do fundamental analysis of stocks
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