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://skcharts.blogspot.in/ . 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:

Interest Coverage Ratio

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
The Multiplier


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33 comments

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Dr arun
AUTHOR
June 8, 2015 at 1:59 AM delete

U r theUltimate man....thanks for sharing your knowledge daily :-)

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June 8, 2015 at 6:45 AM delete

keep learning keep earning............

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Yogesh Gujar
AUTHOR
June 8, 2015 at 3:29 PM delete

Thank you Very much sir for this valuable info....thanks....
sir can you please provide some more info regarding stock selection and / or FA and TA please.....
waiting for your reply sir....

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June 8, 2015 at 5:37 PM delete

yogesh ji plzz check articles section of our blog here is the link http://thestockking.blogspot.com/p/trading-psychology.html

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Sudhir P.
AUTHOR
June 8, 2015 at 5:59 PM delete

Thanks for explaining in simple language. Love to see some more information on other topics related to stock market.

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June 8, 2015 at 8:22 PM delete

keep learning keep earning....................... happy investing

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Papillon
AUTHOR
August 2, 2015 at 3:09 PM delete

Awesome article! Keep them coming.

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Saket Hawelia
AUTHOR
August 2, 2015 at 9:16 PM delete

Sir, i read a comment of urs on moneycontrol that u expect vinati to touch 1000 by 6 months... just wanted to check whether that profile is ur or if it is commented by a fake person...

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August 3, 2015 at 6:55 PM delete

yess that's me only i m expecting those levels in vinati............

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Anonymous
AUTHOR
August 9, 2015 at 8:56 PM delete

Extremely helpful article!!

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Prakasha C
AUTHOR
September 20, 2015 at 8:26 AM delete

Very informative ...

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September 20, 2015 at 12:38 PM delete

Thanks.................. keep learning keep earning

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September 20, 2015 at 12:39 PM delete

keep learning keep earning............... more helpful articles coming ahead

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sudheer raja
AUTHOR
October 24, 2015 at 11:13 AM delete

Excellent blog. come across lately but very informative. would you mind suggesting 2 to 3 stocks which are multibagger in 1 to 5yrs.

thanks in advance
sudheer

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October 25, 2015 at 12:36 PM delete

Thanks bro for 2-3 years you can look at ujaas energy, kse. bhageria dye, sakuma exports etc all good picks check portfolio section to see our all picks

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sudheer raja
AUTHOR
October 26, 2015 at 12:08 PM delete

thanks alot for your answers. but i telling from heart and soul . this is an outstanding blog i had come across. i really appreciate your efforts you are putting for small investors like me who don't know where to start. I will wish you will continue this work for ever.

As a long term investor , i am not a trader would you mind suggest me some good books on fundamental analysis to buy which will enhance my knowledge.

Thanks for your valuable time
sudheer

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October 26, 2015 at 11:07 PM delete

Go with the intelligent investor by benjamin graham check out books to read section of our blog for recommended books on investing

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Prashant
AUTHOR
October 29, 2015 at 3:50 PM delete

Hi Sir, I was just reading your article and I found it very useful. The only thing I was not able to understand is Interest expense while calculating interest coverage ratio.
Can you please explain this in detail?

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October 30, 2015 at 12:15 AM delete

HI Prashant, Interest is paid on the amount that the company has taken as loan from banks or from other sources its a fixed payment and a charge against profits you can find it under depreciation in quarterly results in screener website.............. lower interest coverage ratio means the company is not able to cover its interest expenses sufficiently and slight reduction in profits can turn it into losses................. thus higher the interest coverage the better it will be :) :)

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December 19, 2015 at 11:04 PM delete

Very clearly explained. I do all the above checklists before buying any stock. Keep it up buddy, love to learn more from you.

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geo antony
AUTHOR
December 20, 2015 at 9:07 AM delete

Thanks a lot Brother. Its very informative.

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December 29, 2015 at 8:14 PM delete

Thanks 4 sharing the knowledge... hats off....

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January 10, 2016 at 4:12 PM delete

doing a good job by showing way to earn on their own by learning and giving self confidence to new traders and investors

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Abhishek Ninaniya
AUTHOR
January 11, 2016 at 1:08 AM delete

Cheers :) :)

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January 16, 2016 at 3:41 PM delete

Thanks a lot Abhishek sir for sharing this valuable knowledge... i have 1 small query on EBIT... EBIT is nothing but Profit before tax... am i corect??

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Panneerselvam
AUTHOR
May 24, 2016 at 10:52 PM delete

Sir 1) how much difference should be there between indistry PE and Company PE 2)any specific promoters share holding ratio should be there for good stocks?
3) profit % commparision growth os with previous year profit and that increase has to be 12%?

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May 25, 2016 at 9:38 PM delete

not specific amount buddy but if a stock pe is less than industry pe witjout any negatives like huge debts its considered to be undervalued n good for investment purpose, promoter's holding of 50-60%+ or more is considered good, the more the better. and what usually drives stock price is growth potential so if a stock is growing at good pace its a buy as warren buffett stays if a business do well the stock eventually follows. Cheers

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May 25, 2016 at 9:39 PM delete

yes earnings before interest and tax, really soory for late reply

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December 1, 2016 at 2:17 PM delete

Abhi bhai how to check debt - equity ratio now from screener

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Lija Parida
AUTHOR
March 22, 2017 at 9:50 PM delete

Highly informative blog Abhishek. I was searching for a consolidated information on stock market and came across across this. Thank you very much.

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