How to do Fundamental Analysis of a Stock in Indian Stock Market?

By Advisorymandi
9-October-2018 12:41:30 PM

How to do the fundamental analysis of stocks? For starters, fundamental analysis (FA) is the centrepiece of investing in the stock market. Fundamental analysis of a stock does not only help in determining the health of a company but also managing portfolio. It is a tool which is used to make long-term investments in the stock market. By doing fundamental analysis, one can separate an excellent company from a junk company.  Thus, it is recommended to do a fundamental analysis of stocks before investing in any company. If you are not aware of the procedure of doing fundamental analysis of stocks or don’t have sufficient knowledge of it, then this article is for you.

In this article, we are going to explain fundamental analysis in investment and most importantly, how to do fundamental analysis of stocks in Indian stock market. In doing so, we will elaborate some guidelines that if you follow properly, you can easily select fundamentally strong companies to invest in.


What is Fundamental Analysis in Investment? – An Overview

Fundamental analysis is not just a term which can be defined in a single line. It is the foundation of most strategies related to finance and business. It refers to a method to do thorough research of a company carried out with the intention of making an investment. With this method, one can analyze the overall health of a company by analyzing its income tax statements, cash flow, balance sheets, and other publicly available data and documents. It also includes the in-depth study of a company’s fundamentals to find a stock’s intrinsic value. This intrinsic value is different front the value at which it is being traded in the market. For instance, if a stock is worth Rs 2000 based on your fundamental analysis but trading at Rs 1500 then you know that your stock is seriously undervalued.

Fundamental analysis in investment plays a major role in identifying the overvalued and undervalued stocks.  In order to define a numerical intrinsic value for the security of a company, there are some primary factors that need to be considered when conducting fundamental analysis such as –

What is the company’s revenue?

Is it growing with time or not?

Are they making any profit or not?

What are the turnover rates of the company?           

Does management taking care of their employees or not?     

Now that you are aware of fundamental analysis and factors behind conducting the fundamental analysis, it is time to explain to understand how to check the fundamentals of a stock or select a stock for investment.


How to Check the Fundamentals of a Stock?

As you know that checking the fundamentals of a stock or company to check whether the company is worth to invest in or not. With fundamental analysis, one can look at the information to gain insights on a company’s future performance and current health.

The steps to do the fundamental analysis of a stock in the stock market are as follows:


Check for Financial Ratio: Price-to-Earnings (P/E) in Fundamental Analysis:

The first step in order to do the fundamental analysis of stock in the Indian stock market is to check for financial ratios like P/E ratio, P/B ratio, ROE, and dividend yield. There are thousands of stocks in the Indian stock market; you can’t just start reading the financials (balance sheets, profit-loss statements) of all companies. This will take years, LITERALLY years! Thus, for initial screening, checking of financial ratios is a good way to begin the fundamental analysis journey of stock. In doing so, you can go for any reputed screener and edit the criteria. Among the financial ratios, the P/E ratio is the most reliable one. It is the price-to-earnings ratio (P/E) which is the ratio of a company’s current share price to its per-share earnings. In short, it will tell the investor about the rupee amount to invest in a company in order to receive one rupee of that company’s earnings.

A low P/E value tells that a company may currently be undervalued or it could be possible that, it is doing exceptionally better than its past trends. It is not just the company’s P/E you need to calculate. You also need to know “what’s the industry P/E ratio?”

Suppose a company has P/E value 9 and the industry P/E value is 27. It means that the stock of the company is undervalued and has a lot of potentials to grow in future.


Company Background:

It is important that you understand the company in which you are interested in investing. There is nothing better than a good understanding of the company’s background, future goals, and the company’s business model. You need to know more about the company’s management and the decisions taken by management for their employees. Without the complete understanding, you won’t be able to identify whether the company is performing good or bad.

So, find the answers to some questions like –

Is the company taking right decisions towards its future goals or not?

Is the company taking care of its employees or not?

What are the products and services of the company?

Does the services company provide have a good scope on the future or not?

The best way to know all the answers is to visit the company’s website. Check the “About Us” page, “Products” page, and “Promoters/Board of Directors” page to get the clear image of the company’s past and present.

When you get the liking of the company’s vision, business model, and products, only then move further to investigate more.


Financial Statement Analysis

Once you have understood the company’s background and future goals and find it appealing, you can check the financials of the company by reviewing its balance-sheets, profit-loss statements, and cash flow statements.

Here are a few steps to check the financial reports of a company:

1. How to select a stock for fundamental analysis? – In the Indian stock market, the best way to access the financial statements of a public listed company is to visit the NSE-BSE websites. Here, we will take an example of the fundamental analysis of a stock of Tata Motors Ltd. In the first step, you go to the website of bseindia and type Tata Motors Ltd. in the search box. In the new window, you will go and select “Financials” from the sidebar wherein there will be two options – Results & Annual Reports.

2. Check for Revenue & Net Profit – When you enter to see the results, the quarterly and annually trends will appear with the income statement listed revenue, other income, total income, expenditure, interest, tax, and net profit among others on the quarterly and yearly basis, you need to check the revenue. If the revenue figures are increasing every quarter and a year or stable but not negative then it is a good stock.

At the Tata Motors report, you will see that the revenue is steadily increasing on both quarter and annual basis except in June 2018 where it decreased compared to March 2018. But, overall, Tata Motors Ltd. has steady revenue. After that see its net profit value. Is it increasing every quarter as well as annually then it is a good stock?

3. Check the Debt – To check the debt info of Tata Motors Ltd., visit the sidebar once again and go to the annual reports. A list of yearly annual reports will appear in front of you in PDF format. You can go to the annual report to see the debt stats of any on the mentioned years. Look for the borrowings in the balance sheets of every financial year. If the debt is decreasing every financial year then it is safe to say that the company is at a good position to invest in. Same you can see of Tata Motors Ltd.

4. Check the Reserve Capital – To check the reserve capital value, you can look for the cash flow statement of the Tata Motors Ltd. to see its profits and losses after taxes and gauge the cash flow from operating activities before and after changes in assets and liabilities, investing activities, and cash flow from financing If the reserve capital is rising every financial year then the company is safe to invest. And if the reserve capital is increasing with decreasing debt every financial year then the company stock is must to invest in.

5. Check for Shareholding Pattern – If you are going to invest in some company’s stock then you need to know the shareholding pattern like – What is the percentage of promoter shareholding? 2. What is the percentage of FII-DII shareholding? 3. What is the percentage of public shareholding? If we take a look at the annual report data of Tata Motors of by Jun-2018 the total no. of promoter’s shareholding is 36.37%, FIIs – 18.27%, DIIs – 18.27%, and retail investor’s 13.74%. It clearly indicates that the company largely holds the voting rights. It is the sign that the company believes in its ideals and business model and planning to expand its operations to pursue future goals. That is the type of company worth to invest in.

6. Check for Pledged Shares – If you are not aware but pledging of shares is as taking a loan from the bank by giving shares as collateral. Sometimes, the promoter’s shareholding shows different value in the balance sheet, however, the real value is entirely different. It is because sometimes the company pledged its shares as collateral for money to run business operations or for personal reasons. If the investor invested in such company then the investor should be aware. Because as long as the market is bullish there is no issue but the main problem occurs in the bearish market. If the share prices are falling continuously, then it is obvious that the total value of the collateral will also decrease. This is certainly not good for the company’s future growth. And it would be too risky for retail investors of the promoter sell the shares in losses. It will create a panic among retail investors. Plus, the voting power of the promoter will also be affected by the sold shares. So, if the shares are pledged by promoters then simply avoid that stock.


Check the Competition:

It’s always advisable to see the peers of the company you are planning to invest in. Analyze the business activities of the company and its competitors. It will give you answer whether to invest in that company or any of the competitor. An industry sectoral analysis will give the idea of the competitors of the company you are thinking to invest in.


Hope, this post “How to do Fundamental Analysis of a Stock in Indian Stock Market?” is useful to you. Further, if you find this post helpful or have any query then don’t forget to mention in the comment section below. We will be happy to answer all your questions.


Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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ripples advisory
1 year 2 months ago

Thanks for share with us. Keep up the good job!