Simple and effective method to do fundamental analysis of stocks*
The Golden Rule: Pick the stock which is currently undervalued and has good future upside potential.
Select any sector in which you would like to invest.
( Try to look at consolidated figures rather than the standalone figures. )
- P/E ratio should be less than the Industry P/E.
- Lower the better.
- The 52 week low and high usually acts as a support and resistance.
- There would have been some negative news about the stock which causes its price to fall and make a new low.
- Vice versa for its 52 week high which most probably could be due to some positive news.
- See this as an opportunity to buy a stock which is undervalued and near to its 52 week low provided its fundamentals are sound.
- Always buy a stock which is 20% above its 52W Low for consecutive 3 days.
- Exit fully when stock is trading 20% below its 52w High.
- Return on Equity: Return earned by the company on the capital contributed by equity shareholders alone.
- Higher the better.
- This also gives an idea about how well is the money of equity shareholder is utilized by the company.
- Return on Capital Employed: Return earned by the company on the capital contributed by both equity shareholder and debtholder ( Debentures, loans taken by the company etc )
- Higher the better.
- See is the past 5 years trend of both ROE and ROCE.
- Fluctuations are okay unless there is too much deviation which will require further and deeper analysis.
- I don't look for a specific percentage rather I look for consistency.
- It's companies ability to pay off its interest ( repayment of interest on loan taken) obligations.
- More the better.
- A company can fulfill its interest obligations provided it has good earnings before interest and taxes.
- Extract of earning statement: Sales - Cost = EBIT - Interest = EBT - Tax = PAT
- EBIT is nothing but earnings before interest and taxes. EBT is earnings before tax after paying off the interest and PAT is Profit after tax, profit after paying the interest and tax.
- Higher the EBIT, higher will be the ICR. EBIT is also called as the operating profit, profit earned by the company from it’s business operations before interest and tax commitments.
- Book value is nothing but the shareholders worth in the company.
- price to book value usually means the price an investor has to pay for 1 rupee worth in the company.
- Lower the better, just like the PE.
*Stock market investments are subject to market risks. This is my personal fundamental analysis method. I won't be responsible for any profit / loss.