As an Investor, you have to know the fundamentals of the company before investing in its stocks. If you select a perfect stock then half of your work done, in this article we deeply discuss what are the fundamental analysis and the basic terminologies you need to know to evaluate the company stocks.
What Is Fundamental Analysis Of Stocks
Fundamental Analysis is the method of researching the intrinsic key values of the stock. It combines the company’s financial statement, external factors, and current industry trends. And more importantly, the intrinsic key valuation of the stocks doesn’t vary in a single night. This key valuation help to pick the right stocks which can show better returns in long-term investment.
Fundamental analysis is the method to determine the intrinsic value of any security or stock by comparing key ratios to find out a company’s financial health.
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Why Fundamental Analysis is Important
Fundamental analysis helps you to choose fair-value stocks, and you can able to identify whether the stock rate is overvalued or its fair value price.
The Fundamental analysis helps to find out technically strong company stocks in which you can see a good return in terms of long-term investment. Also, it helps to predict long-term market investment.
Basics Of Fundamental Analysis
If you want to evaluate the company’s fundamentals make sure the following basic terms.
- Company’s Financial History
- Its business structure and revenue model
- Company’s growth ratio over the years
- Its debt value and debt-to-equity ratio
- Cash Management
- Turnover
Important Terminologies To Know For Fundamental Analysis
Let’s see the important and basic terms which need to evaluate the company’s fundamental analysis.
1.EPS (or) Earnings Per Share
You can see whether the company is making a profit or not by looking at its EPS value or Earnings Per Share. Let’s see how to calculate EPS.
For example, if company A has a net income in FY 22 INR 500Cr and it has total outstanding shares of 50Cr then its EPS value is calculated by
EPS = Net income / Total Outstanding Shares ( 500/50) = 10.
So, the company’s total EPS share value is INR 10.
2. Return On Equity (ROE)
ROE or Return On Equity measures the company’s net income dividends by its shareholder’s equity. If the company has a higher ROE value then its shares can give more returns to its investors. Also, it shows how much the company can generate revenue by using its equity.
Return On Equity = Net Income / Average Share Holders Equity.
Also Read: Best Stock Market Books For Beginners
3. Price To Book Value (or) PB ratio
Many investors and experts commonly look at the stock’s PB value first, because it shows whether the stock is a fair price or overvalued by its valuation. Price To book value is calculated by the current market value of the share by the actual book value of the share.
Price To Book Value = Market Value of shares / Book Value of Shares.
If the PB value is below INR1 that share considered has a strong base that can show good results in the upcoming days.
4. Face Value
Face value is the actual value of the stock which can provide by the company, also known as a par value or face value. Usually, the face value of shares is INR 10, 1, 5.
5. P/E ratio
If you want to pick potential shares then you have to compare them with other company shares in the same industry. The P/E ratio is also considered the basic term to analyze the fundamentals, it calculates by dividing the price per share by the revenue per share.
Calculate PE ratio = Market value price per share / Company’s earnings per share.
6. Market Capitalization
Is the key metric of fundamental analysis, it means the total valuation of the company. It is calculated by companies total outstanding shares into company share value. The company is able to increase its market capital by increasing its number of outstanding shares.
market capital = No. of outstanding shares / Market Share Value.
7. Dividend
If the company has a good dividend yield then you can pick the shares which have given good returns to investors. Dividend Yield is an important factor interms of returns perspective. It is calculated by the dividend received by the shareholder divided by per share price of the company.
Dividend Yield = Annual Dividends received by shareholders / per-share value of the company
8. Debt
Debt is another key factor to consider in the fundamental analysis, if the company has low or nill debt value then it has a strong balance sheet, which helps to improve interms of revenue growth. Generally, Debt is taken by the company by providing bonds, taking loans from banks and etc.
9. ROCE or Return On Capital Employed
Is used to calculate the company’s profitability the term ROCE means how the company generates profit from its total capital. By evaluating the company’s fundamentals you can measure ROCE as important for profitability measure.
ROCE = Earnings Before Interest/ Total capital employed
10. PAT ratio
This metric indicates whether the company is well enough to generate cash profits or not. This ratio helps to understand the company’s ability to earn in cash. If the PAT ratio is higher then it has a better valuation.
11. EBITA margin
This is also used to measure the company’s profitability, also indicates the company can convert its revenue into profit. This metric is calculated by Company’s EBITA by its total revenue.
EBITA Ratio = EBITA / company’s annual revenue
Conclusion
These are the key metrics and ratios used to evaluate the company’s fundamentals, apart from this there are many basic terms like 52 w high and low, debt-equity ratio, and many terms which are also used in fundamental analysis. We can discuss this in another article.
Also, I include a video of famous investor Akshat Srivastava who can easily teach you how to do a fundamental analysis of stocks.