How to select a company using Fundamental Analysis
this volatile market, nobody wants to have a bumpy ride and lose money in the risky instrument like equity. Caution needs to be taken and instead of going for the `tips', doing your own `homework' certainly helps.
Common investors, if they invest their time in selecting the businesses, which are fundamentally strong, then they should not fret over the market movements.
Here are some pointers to look at before investing in any business.
- Look at the quarterly and yearly progress in the earnings of the company
- Look at its competitors' earnings and do a comparative analysis
- See whether the income is coming from its core businesses and its growing
- Give attention to debt part, see whether it is shrinking or growing
- Keep an eye on any change in management, geographical focus or any new launch of product which could make/destroy the value
- See what is the capital structure of the company, any change, issue of new shares, buyback
3. General Points
- The stage of the economy, i.e. Expansion, Recession, Peak, Trough
- See whether the company has monopoly or is the market leader in any segment which is expected to grow exponentially
Following are the additional points which you must look at before selecting the company.
Important parameters in Stock Selection
_ The company must have an adequate size (Sales of Rs 150 crore may be taken as adequate size for Indian companies)
_ Current ratio should be 2:1
_ The total debt should not be greater than its equity capital
_ The company should have paid dividends and earned profits for the last 7-8 years
_ There should be a 10% growth in earnings per share (EPS) over the last five years
_ The current price should also not be more than 2 times the latest book value.
_ The latest year's operating cash flow should be positive and it must exceed the current year's net income.
_ Look for the companies like Infosys which is a zero-debt company. Such companies are safe investments as the amount of the profit shared by the equity shareholders is bigger compared to that of leveraged ones.
_ Asset Turnover should be growing, as it shows the company's sales are increasing at the same asset base.
_ Return on Assets and Return on Equity, both these ratios should show grow every year as it shows the efficient use of the assets and capital
_ Number of issued shares should be the same or less over the years, if not then dig deeper to see whether company has issued any bonus shares or split the shares and see whether your EPS will grow or reduce.
_ Ask yourself questions like - How competitive the company is? Is the company equipped to tap the opportunities, how innovative it is?
_ Look at the Order book of the company - How strong it is?
_ The company should be investor friendly like Infosys, Reliance. It should pass the benefits to its shareholders immediately.