Fundamental analysis of a stock before investing.

[patrick72]

Want to clean up the portfolio and want to make some sensible long term investments.

Am I looking at the right parameters to evaluate whether the stock is worth investing or not?

• CMP
• EPS
• P/E
• Industry P/E
• Book value
• P/B
• Dividend yield
• ROE
• ROCE
• Profit growth
• D/E

Which parameters should I add/remove from this list?

How do you all determine whether to invest in a stock or not?

 

[cookie34ss6]

@patrick72 That is a long list which is sometimes contradictory and even incorrect at times.

For example, ROCE is a non-GAAP measure which means different people have different definitions for both returns and capital employed. Company numbers are often inflated as they try to reduce capital employed to boost ROCE.

Similarly, you can find different numbers on different sites. Just look at Reliance:

https://www.screener.in/company/RELIANCE/consolidated/

https://www.valueresearchonline.com/stocks/44052/reliance-industries-ltd/#snapshot

https://trendlyne.com/fundamentals/financial-ratios/1127/RELIANCE/reliance-industries-ltd/

Just 2021 is 8% vs 8.76% vs 5.82%

Fundamental analysis is inherently difficult. Many people doing fundamental analysis are not making money because their analysis is correct. They are making money because in long term stocks go up and we have been in a great bull cycle.

That said, if you want to do fundamental analysis first understand the three statements - P&L, B/S and cash flow. Learn how they are connected and how can one hide something in one statement but it will be visible in other statement.

For example, companies will do channel stuffing i.e. send stuff to their distributors without taking money but show it as sales (it comes under Revenue Recognition). This boosts P&L and show increased EPS or P/E. But in the balance sheet will show Payables and you can calculate Days Payables to see what they are doing. This is not true profit just trying to delay the inevitable loss.

 

[raffaele]

@cookie34ss6 The last Point, stuffing. I think I saw something similar in STANDARD INDUSTRIES recently. Just look at their average quarterly sales over last 2 years. It's around 4-6 crores. The last quarter the sales went to 450 crores. I mean wtf.

 

[resjudicata]

@raffaele Well, financial industry continuously doing this in USA. It's not accounting fraud per se, merely shenanigan. Market actually seems to value these figures too, which is not surprising (considering even loss making companies trade at 10x sales during liquidity events lol)

 

[oneseedatatime]

@patrick72 I would add margins, such as operating margin, net profit margin, etc. Otherwise, everything looks great but keep in mind to only use these to compare stocks from similar industries or else you might make wrong conclusions. Also, try to read brokerage reports to understand the company better and also to understand the management's outlook and commentary on its business.

 

[patrick72]

@oneseedatatime Thank you for your response.

Sure, I'll add those. And good tip on comparison.

BTW what do you mean by brokerage? Where can I read about management of a company?

 

[oneseedatatime]

@patrick72 There is a website called Trendlyne. There you can analyse stocks and read brokerage reports. Brokerage reports are analysis reports made by research analysts at brokerage firms such as ICICI Direct, Geojit etc. They usually have various data points, management commentary, future revenue and other parameter estimates, etc. You should definitely read those but dont blindly follow their calls to buy, sell or hold. DYOR

 

[zakaland]

@oneseedatatime Why is trendlyne free? What am I missing?

 

[roxchristian]

@zakaland Adsense maybe

 

[oneseedatatime]

@zakaland im not sure why it is free but they do have a lot of data points that you can access without paying a single penny

 

[patrick72]

@oneseedatatime Interesting. Thanks for sharing.

 

[sweetiicake]

@patrick72 At least the following:

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Return of Assets

Return on Net Assets

Return on Capital Employed

Return on Invested Capital

Return on Equity

Current Ratio

Quick Ratio

Cash Ratio

Working Capital Turnover Ratio

Fixed Asset Turnover Ratio

Total Asset Turnover Ratio

Debt Ratio

Equity Ratio

Equity Multiplier

Debt to Equity Ratio

Long term Debt to Capitalization

Interest Coverage Ratio

Degree of Operating Leverage

Degree of Financial Leverage

Degree of Combined Leverage

Operating Cash Flow

Free Cash Flow

Operating cash flow to Sales Ratio

Free Cash Flow to Operating Cash Flow Ratio

Cash Flow Coverage Ratio

Cash Flow per Share

Cash Flow Liquidity ratio

Dividend Payout Ratio

Cash Flow Return on Investment

Cash Return on Gross Investment

DuPont Model (RoE) NPM | ATR | EM

Altman Z-Score (Original)

Enterprise Value (EV) [in Lakhs]

EV/EBITDA Ratio

EV/EBIT Ratio

EV/Revenue Ratio

EV/Share

Price to Earnings ratio

Price to Sales ratio

Price to Book Value ratio

Price to Cash Flow ratio

Price to Earnings to Growth ratio

Dividend Yield (%)

If its a company whose operations has the use of inventory, then Inventory Turnover Ratio, and Days inventory Outstanding should also be used.

I may have missed some here and there. But this should cover most of the requirements for Fundamental Analysis.

 

[patrick72]

@sweetiicake So you telling me that we should add almost all the metrics available?

Wouldn't that be overkill?

 

[sweetiicake]

@patrick72 If you are analyzing a company. You better get the whole picture. Having the data helps just in case you wouldn't want to miss out on something and regret it later. You can filter out of these and see what's important. Again, based on the company and industry, the metrics required to look at will change. As I mentioned about companies with Inventory.

 

[librarian]

@patrick72 If you actually want to do any "analysis" then this is the way to go.

On the other hand, if you want to just pick the popular stocks that's an entirely different thing and not FA.

In addition to what OP said, a major component of FA is analyzing the public statements of the company's management, their vision for the company, and do you think they are in a position to execute on that. That is because all growth projection is meaningless if all the management is doing is making grandiose claims which have a rat's chance in hell of getting realized (think VSS/Kunal Shah type CEOs and business ideas, I don't know about you but I wouldn't want to give either of them any of my money).

 

[simonssen]

@patrick72 Some of the ratios are just for comparing between stocks in a sector

We need to find the significant what advantage does the company has over other (MOAT) ?

If you normal it's okay

FCF

PAT

EPS

Revenue growth last 3yrs

P/E= If PE is less than growth rate then it's at a bargain

 

[rkm]

@patrick72 Add:

Margins, I prefer companies with either historically very steady margins or with margins > 10% annualized to improve ability of business to take a hit

Debt/leverage ratios (Debt to equity and interest coverage)

I like to look at inflation adjusted profit growth (not applicable for every stock)

Free cash flows and trend in FCF

CAPEX and ratio of capex to profits - basically to look for reinvestment in business

Trend of turnover ratio in inventory

Remove:

CMP

Easiest to just open moneycontrol page of the stock and click financials tab

Alternative website: tickertape

 

[nol]

@patrick72 The piotroski score is a pretty good measure of fundamentals. It covers 9 different parameters.

 

[gabby_123]

@patrick72 Good analysis is both qualitative and quantitative evaluation.

This list has only quantitative variables. Therefore it will only ever present an incomplete picture of the business.

 

[asaph2021]

@patrick72 PEG = PE / GROWTH RATE

If company is growing at 30% CAGR for last 5 year and available at PE of 35, then PEG = 35/30, 1.16, and its good. High growth business will come with high PE, as long as PEG is decent no need to worry about PE.