Part 31 - Revealing How I Conduct Fundamental Analysis of a Stock for Long-Term Investment
Part 31 - Revealing How I Conduct Fundamental Analysis of a Stock for Long-Term Investment
Investing in the stock market can be daunting, but a disciplined approach to fundamental analysis can help you identify high-quality stocks for long-term wealth creation.
By combining fundamental analysis with elements of technical analysis, I’ve developed a straightforward yet effective process to select stocks that offer strong growth potential while minimizing risks.
This article outlines my step-by-step method, which focuses on understanding a company’s business, financial health, and market position, ensuring you pick stocks that can deliver consistent returns over time.
Whether you’re a beginner or a seasoned investor, following these steps will help you find the best stocks for long-term investment.
Why Fundamental Analysis MattersFundamental analysis involves evaluating a company’s intrinsic value by examining its financial statements, management, industry position, and external factors.
Unlike technical analysis, which focuses on price patterns and market trends, fundamental analysis digs into the “why” behind a stock’s potential—its business model, profitability, and growth prospects.
By combining both approaches, you can make informed decisions, balancing long-term value with optimal entry and exit points.My process is designed for long-term investors who aim to hold stocks for years, capitalizing on compounding growth. However, I also incorporate technical analysis for swing trading or timing entries, ensuring flexibility.
Let’s dive into the step-by-step procedure, illustrated with an example of Reliance Industries Ltd., one of India’s largest conglomerates.
Stage 1:
Initial Research – Know the Company
The first step in fundamental analysis is understanding the company behind the stock.
This qualitative assessment sets the foundation for your investment decision.
Step 1:
Google Search the Company
What to Do: Start by searching the company’s name on Google (e.g., “Reliance Industries”). Read the first two or three articles from reputable sources like business news websites (e.g., Moneycontrol, Economic Times, or Bloomberg) to get an overview of the company’s operations, industry, and recent developments.
Why It Matters: This helps you understand the company’s business model, sectors it operates in (e.g., oil and gas, telecom, retail for Reliance), and its market reputation. Look for details on products, services, leadership, and recent achievements or challenges.
Example: For Reliance Industries, articles highlight its dominance in petrochemicals, leadership in telecom (Jio), and expansion into retail and renewable energy.
This confirms its diversified revenue streams and growth potential.
Step 2:
Check for Red Flags – Fraud, Corruption, or Legal IssuesWhat to Do: Search for terms like “[Company Name] + GST fraud,” “[Company Name] + corruption,” or “[Company Name] + court case” to uncover any legal or ethical issues involving the company or its directors.
Why It Matters:
Companies embroiled in fraud, tax evasion, or litigation pose significant risks.
Legal battles can drain resources, damage reputation, and lead to stock price volatility.
If a company or its directors are involved in serious cases, avoid investing unless you’re prepared to monitor the stock closely.
Action if Risks Are Present: If you choose to invest despite red flags, check the stock price daily and set a tight stop-loss to limit potential losses. For example, if a company faces a GST fraud case, its stock may drop suddenly, requiring vigilant monitoring.
Example: A search for “Reliance Industries + GST fraud” or “Reliance Industries + court case” reveals no major ongoing fraud cases against the company or its key directors (as of 2025). Minor regulatory disputes may exist, but Reliance’s strong governance makes it a safer bet.
Stage 2:
Financial and Ownership Analysis
Once you’ve vetted the company qualitatively, dive into its financial metrics and ownership structure.
These quantitative factors determine the company’s stability, growth potential, and investor confidence. Use stock screening tools like Dhan ScanX, Screener.in, Moneycontrol, or Stock Edge to access this data.Key Metrics to AnalyzeBelow are the critical financial and ownership metrics I evaluate, along with their significance and ideal thresholds:
Current Price and 52-Week High/Low:
What to Check: Compare the stock’s current price to its 52-week high and low to gauge its price range and market sentiment.
Ideal Scenario: A stock trading near its 52-week high in a bull market suggests strength, while one near its low may indicate undervaluation or weakness.
Example: Reliance Industries’ current price is ₹1,410 (as per your data), with a 52-week high of ₹1,551 and low of ₹1,115. Trading near the high indicates bullish sentiment, but proximity to the all-time high (₹1,609) suggests caution for overvaluation.
Stock P/E Ratio (Price-to-Earnings):
What to Check: The P/E ratio compares the stock’s price to its earnings per share (EPS).
A high P/E indicates high growth expectations, while a low P/E may suggest undervaluation.
Ideal Scenario: A P/E below 25 is preferable for value investors, though growth stocks (e.g., tech) may have higher P/Es. Compare to the industry average.
Example: Reliance’s P/E ratio (not provided in your data but typically 20–25) is reasonable for its diversified business compared to the Nifty 50 average (22).
Dividend Yield:
What to Check:
Does the company pay dividends, and if so, what’s the yield (annual dividend ÷ stock price)?
Ideal Scenario: A consistent dividend (even if small) signals financial stability and shareholder focus. Non-dividend-paying growth companies can still be attractive if reinvesting profits.
Example: Reliance pays a modest dividend (yield ~0.3–0.5%), reflecting its focus on reinvestment for growth in telecom and renewable energy.
Face Value:
What to Check:
The nominal value of a share (e.g., ₹10 for Reliance). It’s less critical but helps understand stock splits or pricing.
Ideal Scenario: Not a primary factor, but a lower face value may indicate affordability for retail investors.
Example: Reliance’s face value is ₹10, standard for large-cap stocks.
Promoter Holding:
What to Check:
The percentage of shares held by promoters (founders or management).
Ideal Scenario: Promoter holding above 50% is ideal, as it shows confidence in the company’s future and aligns management with shareholders.
Example: Reliance’s promoter holding is 50.1%, a strong signal of Mukesh Ambani’s commitment to long-term growth.
Pledged Percentage:
What to Check: The percentage of promoter shares pledged as collateral for loans.
Ideal Scenario: Zero pledged shares is best, as high pledging indicates financial stress and risks sharp price drops if promoters default.
Example: Reliance has zero pledged shares, a positive indicator of financial health.
FII and DII Holding:
What to Check: Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII) ownership percentages.
Ideal Scenario: Higher FII and DII holdings (e.g., >15% each) indicate institutional confidence, as these investors conduct rigorous analysis.
Example: Reliance’s FII holding (19.2%) and DII holding (19.7%) reflect strong institutional backing.
Public Holding:
What to Check: The percentage of shares held by retail and non-institutional investors.
Ideal Scenario: Lower public holding (<30%) is preferable, as high public ownership can lead to volatility from retail sentiment.
Example: Reliance’s public holding (balance ~11%) is low, reducing volatility risk.
Sales (Revenue):
What to Check: Are quarterly/annual sales increasing consistently over 3–5 years?
Ideal Scenario: Rising sales indicate business growth and market demand.
Example: Reliance’s sales have grown steadily, driven by Jio’s subscriber base and retail expansion.
Operating Profit:
What to Check: Is operating profit (revenue minus operating expenses) increasing?
Ideal Scenario: Consistent growth shows operational efficiency.
Example: Reliance’s operating profit has risen due to cost efficiencies in telecom and refining.
Profit Before Tax (PBT):
What to Check: Is PBT growing year-over-year?
Ideal Scenario: Increasing PBT reflects profitability before tax adjustments.
Example: Reliance’s PBT has shown steady growth, supported by diversified income streams.
Net Profit:
What to Check: Is net profit (after tax) increasing annually?
Ideal Scenario: Rising net profit indicates overall financial health.
Example: Reliance’s net profit is increasing yearly, as per your data, reflecting robust performance.
Earnings Per Share (EPS):
What to Check: Is EPS (net profit ÷ number of shares) growing consistently?
Ideal Scenario: Increasing EPS signals higher profitability per share, a key driver of stock price growth.
Example: Reliance’s EPS is increasing, supporting its long-term investment appeal.
Order Book:
What to Check: Does the company have a strong order book (future contracts or projects)?
Ideal Scenario: A full order book indicates sustained revenue potential, especially for infrastructure or manufacturing firms.
Example: Reliance’s renewable energy projects (e.g., solar and wind) suggest a strong order book in its green energy division.
Debt Levels:
What to Check: Are the company’s loans and debt obligations minimal or manageable?
Ideal Scenario: Zero or low debt is ideal, as high debt increases financial risk, especially in economic downturns.
Example: Reliance has reduced its debt significantly (net debt ~₹1.2 lakh crore in 2024), strengthening its balance sheet.
Stage 3:
Combining Fundamental and Technical Analysis
While fundamental analysis identifies fundamentally strong companies, technical analysis helps time your entry and exit points for optimal returns.
I use a hybrid approach to enhance my investment strategy:
Fundamental Analysis: Confirms the stock’s long-term potential based on financial health and business strength (e.g., Reliance’s diversified operations and growing EPS).
Technical Analysis: Identifies entry points using tools like:Moving Averages: A bullish crossover (e.g., 50-day MA above 200-day MA) signals a buying opportunity.
Relative Strength Index (RSI):
Buy when RSI is 40–50 (undervalued) and avoid overbought levels (>70).
Support/Resistance: Enter near support levels (e.g., ₹1,350 for Reliance) for lower risk.
Candlestick Patterns: Look for bullish patterns (e.g., hammer) to confirm entry.
Stage 4: My Long-Term Investment Philosophy
My approach to stock investing is rooted in patience and discipline, inspired by the idea of holding onto a “winning horse.”
Here’s how I manage my investments:
Swing Trading with a Long-Term Mindset:
If I buy a stock for swing trading (e.g., at ₹100), and it doubles to ₹200, I don’t sell immediately. Instead, I set a trailing stop-loss (e.g., at ₹125) to protect profits while allowing the stock to grow.
Example:
If Reliance rises from ₹1,410 to ₹2,820, I adjust the stop-loss to ₹2,000, locking in gains but staying invested for further growth.
The Power of Compounding:
A stock that reaches ₹200 can potentially grow to ₹400, ₹4,000, or more over decades if the company remains fundamentally strong.
Iconic stocks like Reliance or TCS have shown this exponential growth over time.
Philosophy: “Never leave the winning horse.” Hold quality stocks through market cycles, as long as fundamentals remain intact.
Monitoring High-Risk Stocks:
If a company has red flags (e.g., legal issues), I monitor its price daily and set tight stop-losses to mitigate risks.
However, I prefer avoiding such stocks altogether.
Case Study:
Reliance Industries Ltd.
Let’s apply my process to Reliance Industries (data as provided):
Market Cap: ₹19,07,070 Cr. – Indicates a large, stable company.
Current Price: ₹1,410 – Near 52-week high (₹1,551), suggesting bullish sentiment but caution for overvaluation.
High/Low: ₹1,551 / ₹1,115 – Strong performance within the year.
All-Time High: ₹1,609 – Close to peak, so wait for a pullback or breakout confirmation.
Promoter Holding: 50.1% – Strong management commitment.
FII/DII Holding: 19.2% / 19.7% – High institutional confidence.
Public Holding: ~11% – Low, reducing retail-driven volatility.
Net Profit and EPS: Increasing yearly – Signals robust growth.
Qualitative Check: No major fraud or court cases; diversified operations in telecom, retail, and renewables.
Decision:
Reliance is a strong long-term investment due to its financial health, promoter backing, and growth sectors.
Using technical analysis, I’d wait for a dip to ₹1,350 (support) or a breakout above ₹1,600 with high volume to enter, setting a stop-loss at ₹1,300.
Tools to Use
Access the above metrics using reliable stock screeners:
Dhan ScanX: Offers real-time data and customizable filters for P/E, EPS, and holdings.
Screener.in: Provides detailed financial trends (sales, profits) and ownership breakdowns.
Moneycontrol: Comprehensive for news, financials, and legal updates.
Stock Edge: Ideal for tracking institutional holdings and order books.
Begin with a demo account or small investments to test your analysis.
Combine Approaches:
Use technical analysis to time entries/exits, but rely on fundamentals for long-term conviction.
Stay Disciplined: Avoid stocks with legal risks unless you can monitor them daily.
Be Patient: Quality stocks like Reliance can grow exponentially over years if you hold through volatility.
Backtest: Use historical data to validate your strategy on platforms like TradingView.
Conclusion
Fundamental analysis is the bedrock of long-term investing, helping you identify stocks with strong business models and growth potential.
My process—starting with a Google search, vetting for red flags, analyzing financial metrics, and combining technical analysis—ensures you pick winners like Reliance Industries while minimizing risks.
By focusing on metrics like promoter holding (>50%), zero pledged shares, and increasing EPS, and using technical tools to time entries, you can build a robust portfolio.
Remember:
a stock that doubles can keep growing if the fundamentals remain strong.
Never sell a winning horse prematurely, but always protect your capital with disciplined stop-losses.
Disclaimer:
I am not a SEBI-registered financial advisor, and the information provided in this article is for educational purposes only.
It does not constitute a recommendation to buy, sell, or hold any securities. Investing in the stock market involves significant risks, including the potential loss of principal.
Always consult a SEBI-registered financial advisor or conduct your own research before making any investment decisions.
Past performance is not indicative of future results, and market conditions are subject to change.
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Check the following indicators using stock screeners like Dhan ScanX, Screener.in, MoneyControl, or StockEdge:
