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.

1. Income
- 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

2. Change
- 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.

Popular posts from this blog

IOB capitalises on hike in stake by LIC

-
Indian Overseas Bank rose 1.53% to Rs 46.45 at 10:31 IST on BSE, after the biggest domestic instutional investors Life Insurance Corporation of India hiked its stake in the state-run bank. The bank made this announcement after trading hours on Wednesday, 25 March 2009. Meanwhile, the BSE Sensex was up 126.19 points, or 1.31%, to 9,794.09. On BSE, 31,003 shares were traded in the counter. The stock had an average daily volume of 1.93 lakh shares in the past one quarter. The stock hit a high of Rs 47 and a low of Rs 45.95 so far during the day. The stock hit a 52-week high of Rs 156.80 on 2 May 2008 and a 52-week low of Rs 37.55 on 9 March 2009. The mid-cap bank stock had underperformed the market over the past one month till 25 March 2009, falling 3.17% as compared to the Sensex's 8.60% rise. It had also underperformed the market in the past one quarter, declining 33.94% as compared to the Sensex's 1.04% rise. The bank's current equ The current price of ...
Read more

Lok Housing & Constructions builds on fund raising plans

-
Lok Housing & Constructions jumped 6.99% to Rs 107.90 at 11:20 IST on BSE ahead of a board meeting to consider fund raising options from both foreign and local market, including an institutional placement. Meanwhile, the BSE Sensex was down 50.50 points, or 0.30%, at 15203.73. On BSE, 1.86 lakh shares were traded in the counter. The scrip had an average daily volume of 4.74 lakh shares in the past one quarter. The stock hit a high of Rs 115 and a low of Rs 102 so far during the day. The stock had a 52-week high of Rs 390.50 on 1 January 2008 and a 52-week low of Rs 96.25 on 12 June 2008. The scrip had underperformed the market over the past one month till 12 June 2008, falling 26.55% compared to the Sensex's 10.18% decline. It had also underperformed the market in the past one quarter, falling 31.39% compared to Sensex's 3.24% fall. The small-cap housing projects developer has an equity capital of Rs 42.88 crore. Face value per share is Rs 10. The current...
Read more

Griffin Chemicals surges on re-listing

-
Griffin Chemicals was trading at Rs 29, up 2220% on re-listing after six years on Bombay Stock Exchange (BSE). The counter saw miniscule volume of 4769 shares. The stock opened at Rs 23, up 1740% against its last traded price of Rs 1.25 on 8 August 2002. The Griffin Chemicals stock was highly volatile today. It opened at Rs 23 and then rallied ahead to Rs 50 but soon eased to a low Rs 22. The surge in Griffin shares reminds of unprecedented rise in stock prices of KGN Industries on its re-listing day. KGN Industries, run by Ahmedabad-based Memon family, had re-listed at Rs 100 per share after nearly seven years in May 2008 this year. The stock had risen to a high of Rs 55,000.
Read more