Part 29 Explained Stock Fundamentals: A Step-by-Step Analysis Guide
Part 29 Explained Stock Fundamentals: A Step-by-Step Analysis Guide
Fundamental analysis of a stock involves evaluating a company's financial health, business model, and industry position to determine its intrinsic value and investment potential.
Below, I’ll outline the key steps, important points to check, and how to check them, with an example for clarity.
Key Steps in Fundamental Analysis -
Understand the Company and Industry
What to Check:
Business Model: What does the company do? How does it generate revenue?
Industry Position:
Is it a market leader, challenger, or niche player?
Industry Trends:
Is the industry growing, stable, or declining?
Check for technological disruptions, regulatory changes, or economic factors.
Competitors: Who are the main competitors, and how does the company compare?
Important Points for Indian Stocks
Consistency: Look for stable revenue and profit growth over 5–10 years.
India-Specific Risks:
Monitor SEBI regulations, tax changes (e.g., GST hikes), and currency fluctuations (INR volatility).
Sector Dynamics:
Different sectors (e.g., IT, banking, consumer goods) have unique drivers.
For example, telecom benefits from digitalization but faces pricing pressure.
Long-Term Focus:
Fundamental analysis suits long-term investors due to market volatility in India.
Analyze Financial Statements
What to Check:
Income Statement: Revenue, net income, profit margins, and earnings growth.
Balance Sheet:
Assets, liabilities, debt levels, and shareholder equity.
Cash Flow Statement:
Operating cash flow, free cash flow, and capital expenditures.
Evaluate Key Financial Ratios
What to Check:
Price-to-Earnings (P/E) Ratio: Indicates if the stock is overvalued or undervalued compared to earnings.
Price-to-Book (P/B) Ratio: Compares market value to book value.
Debt-to-Equity Ratio: Measures financial leverage.
Return on Equity (ROE): Assesses profitability relative to shareholders’ equity.
Current Ratio: Evaluates ability to cover short-term liabilities.
Dividend Yield: For income investors, check if the company pays dividends and their sustainability.
Revenue:
Check: Is revenue growing consistently (YoY or QoQ)?
What It Means:
Steady growth = Good score;
stagnant/declining = Red flag.
RIL: FY24 revenue ~₹9.74 lakh crore, up 2.6% YoY = Stable.
Net Profit:
Check: Is profit positive and growing?
How: Annual/quarterly reports.
What It Means:
Positive and growing = Good;
negative = Avoid unless turnaround potential.
RIL: Net profit ~₹69,621 crore, steady = Good.
Debt:
Check:
Debt-to-equity ratio; is debt manageable?
How: Balance sheet, Screener.in.
What It Means:
Low ratio (<1) = Safe;
high (>2) = Risky.
RIL: Debt-to-equity ~0.4 = Strong.
Earnings Per Share (EPS):
Check: Is EPS positive and increasing quarterly/YoY?
How: Moneycontrol, Screener.in.
What It Means:
Rising EPS = Good score;
negative EPS = Think twice before buying.
RIL: EPS ~₹120, growing steadily = Positive.
Price-to-Earnings (P/E) Ratio:
Check: Compare with industry average.
What It Means:
Low P/E (< industry avg) = Undervalued;
high P/E (>25–30) = Expensive, ensure growth justifies it.
RIL: P/E ~26 vs. market avg ~22 = Slightly expensive, justified by growth.
Price-to-Book (P/B) Ratio:
Check: Compare with peers.
How: Screener.in.
What It Means:
Low P/B (<2) = Value buy;
high P/B (>3) = Premium, check moat.
RIL: P/B ~2.1 = Reasonable.
Return on Equity (ROE):
Check: Is ROE >10–15%?
How: Annual reports.
What It Means:
High ROE = Efficient;
low (<5%) = Poor performance.
RIL: ROE ~9% = Moderate, improving.
Dividend Yield:
Check: Yield and payout consistency.
What It Means:
Yield >2% = Good for income;
low = Growth-focused stock.
RIL: Yield ~0.3% = Low, growth-oriented.
Quick Checklist for Indian Stocks
Green Flags:
Rising EPS, low debt, high ROE, strong moat, growing industry.
Red Flags:
Negative EPS, high P/E (>30 without growth), high debt (>2), governance issues.
India-Specific:
Check SEBI regulations, GST impact, RBI policies, INR volatility.
Fundamental Analysis in Short -
EPS (Earnings Per Share)
- Check: Is EPS increasing quarter by quarter?
- Good Sign: Rising EPS = growing profitability.
- Caution: Negative EPS = company is losing money.
- Example: If EPS went from ₹12 → ₹14 → ₹16 over 3 quarters, that’s a strong uptrend.
P/E Ratio (Price to Earnings)
- Check: Compare with industry average.
- Good Sign: Lower P/E than peers = undervalued.
- Caution: Very high P/E = possibly overpriced.
- Example:
If Asian Paints has a P/E of 60 and Berger Paints has 40,
Berger may offer better value—unless Asian Paints has stronger growth.
ROE (Return on Equity)
- Check: Is ROE above 15%?
- Good Sign: Efficient use of shareholder funds.
- Caution: Low ROE = weak profitability.
- Example:
A company with ₹100 crore equity and ₹20 crore profit has ROE = 20%.
Debt-to-Equity Ratio
- Check: Is it below 1?
- Good Sign: Low debt = financial stability.
- Caution: High debt = risk during downturns.
- Example:
If a company has ₹50 crore debt and ₹100 crore equity, D/E = 0.5 (safe zone).
Profit Margin
- Check: Is it stable or improving?
- Good Sign: High margins = pricing power.
- Caution: Falling margins = rising costs or weak demand.
- Example: Net profit of ₹10 crore on ₹100 crore revenue = 10% margin.
Free Cash Flow
- Check: Is it positive and growing?
- Good Sign: Company generates real cash after expenses.
- Caution: Negative FCF = may need external funding.
- Example: Operating cash ₹50 crore – Capex ₹20 crore = ₹30 crore FCF.
Reserves & Surplus
- Check: Is it building up over time?
- Good Sign: Strong buffer for future growth.
- Caution: Declining reserves = financial stress.
- Example: ₹500 crore reserves growing to ₹650 crore in 2 years = solid base.
Sales Growth
- Check: Is revenue growing YoY?
- Good Sign: Expanding business.
- Caution: Flat or declining sales = stagnation.
- Example: ₹500 crore → ₹600 crore → ₹720 crore over 3 years = 20% CAGR.
Promoter Holding
- Check: Is it stable or increasing?
- Good Sign: Promoters have confidence.
- Caution: Falling holding = possible internal concerns.
- Example: Promoter stake rising from 55% to 58% = positive signal.
Dividend History
- Check: Is dividend consistent or growing?
- Good Sign: Shows financial strength and shareholder focus.
- Caution: No dividend = reinvestment or weak cash flow.
- Example: ₹10/share dividend for 3 years = stable payout.
Reserves & Surplus
- Check: Is it building up over time?
- Good Sign: Strong buffer for future growth.
- Caution: Declining reserves = financial stress.
- Example: ₹500 crore reserves growing to ₹650 crore in 2 years = solid base.
Example:
Fundamental Analysis of Asian Paints
Business Overview
Market leader in decorative paints.
Strong brand and distribution network.
Financials
Revenue: ₹34,000+ crore (FY25)
Net Profit: ₹4,200+ crore
EPS: Consistent growth over 5 years
Ratios
P/E: ~60 (premium valuation)
ROE: ~25% (excellent)
Debt-to-Equity: <0.1 (low leverage)
Qualitative Factors
Strong brand recall
Expanding into waterproofing and home décor
Management known for innovation and cost control
Valuation
If intrinsic value (based on DCF or EPS growth) is ₹3,000 and market price is ₹2,700 → undervalued.
If market price is ₹3,500 → overvalued.
Example:
Let’s analyze Reliance Industries Limited (RIL), listed on BSE and NSE.
Business Model:
Diversified conglomerate with businesses in energy (oil & gas, petrochemicals),
retail (Reliance Retail),
telecom (Jio), and digital services (JioMart, JioCinema).
Industry Position:
Market leader in telecom (Jio) and retail, with a strong presence in energy.
Industry Trends:
India’s digital economy is booming (Jio benefits from 5G rollout), retail is growing due to rising consumer spending, but energy faces volatility due to global oil prices.
Competitors:
Telecom (Airtel, Vodafone Idea), Retail (Amazon India, Flipkart), Energy (ONGC, BPCL).
India-Specific Factors:
Benefits from “Make in India” and digital initiatives, but faces risks from environmental regulations and fuel price caps.
Example (Apple):
P/E Ratio: 30 (stock price $190, EPS $6.13).
Higher than the tech industry average (25), suggesting a premium valuation.
P/B Ratio: ~40, high due to Apple’s strong brand and intangible assets.
Debt-to-Equity: ~1.8, manageable for a cash-rich company.
ROE: ~150%, exceptional, indicating efficient use of equity.
Current Ratio: ~1.0, adequate but not robust, as Apple relies on operational efficiency.
Dividend Yield: ~0.5% ($0.96 annual dividend per share), modest but consistent.
How to Check It Practically
Use platforms like
Tickertape,
Screener.in,
StockEdge ,
ScanX from dhan
or Moneycontrol for financial data.
Read annual reports and investor presentations.
Track quarterly results and management commentary.
Compare with industry peers to benchmark performance.
