Fundamental analysis is the comparison of the current value with the trading value of stocks. It gives the overall information helps in understanding the business model of the company, how good is the working management is. This is an essential factor before making a prudent investment decision.
For example:
Shravan is a newbie investor and he is looking to make an investment. Shravan notices that a stock is trading at Rs. 50/share. He comes to this informative portal, Stock forecast. Reading fundamental analysis, he wants to know the current value of the stock and starts reading the company’s financial reports, earnings ratios, and overall health.
He realizes that the stock has the potential to grow more in the next upcoming years. He then decides to add stock and build his portfolio. The fundamental analysis made him take his investment decision.
Fundamental Analysis infographics by Kamlesh Rode
Image Credits: www.figma.com
The purpose of fundamental analysis
The purpose is to evaluate a stock by getting the intrinsic value and then analyzing whether the stock appears to be overvalued or undervalued. It deals with the financial as nonfinancial aspects of the company as a whole.
Screw it, Let’s do it!
–Richard Branson
Intrinsic Value: Intrinsic value refers to the true or real value of the company.
Example: If Shravan wants to buy a stock. He will check the intrinsic value of whether the stock is overpriced or undervalued. If it is overpriced, he will not invest in it or if it is undervalued, he can go for more details about the stock.
Types of fundamental analysis
There are two types of fundamental analysis people mostly searched for
- Quantitative Analysis
- Qualitative Analysis
Quantitative analysis (QA) in the stock market is a way that emphasizes mathematical and statistical analysis to help get the value of a financial asset that can be a stock or option. This analysis is related to numbers.
The company’s financial statements give the idea about quantitative analysis. The elements used in this analysis include price to book (P/B) ratio, price to earnings (P/E) ratio, debt-equity ratio, etc.
People do two types of analysis fundamental and technical. The qualitative analysis comes under the fundamental analysis of the company.
This analysis is to check what type of company it is? Which sector does it belong to? Business model? Policy? The future expansion plan of the company, how good is the management of the company?
All information related to companies that are not in numbers comes under qualitative analysis. Qualitative analysis will give you a clear picture of the health of the company.
Example:
Shravan will go through every aspect of quantitative and qualitative analysis. In quantitative he will read about ratios and values such as Intrinsic value, ROA, ROE, ROA, etc to make a decision on investment. In qualitative analysis, he will check how is the company managed, how the company performing in the sector, future expansion, the goal of the company.
It will help him understand the company working and how it is good for him emotionally.
Fundamental analysis is the most important factor in digging into a stock. This is where you understand the company’s performance, its strength, future outlook, so forth, and so on. But let us be practical here.
Instead of watching the ratios, please go through the company’s performance in terms of profit, margins, promoters holding, Foreign investments and compare them with the other peer companies of the same industry.
Fundamental analysis looks at various factors that affect the price of a particular share such as-
- Business model
- Industry in which company operates
- Competition the company faces
- Management
- Financial Statements
- Economy
The center of all these factors is finding the value of the company and in the end, decides the price of the stocks.
How it helps investors?
Fundamental Analysis helps understand investors to have an understanding of the company’s growth prospects. In the short run, it is the Technical Analysis that can help you to earn profits while in the long run Fundamental Analysis is more helpful for the investors.
What is ROI, ROE and ROA in fundamental analysis?
These all the factors show how past investment appears in present. It is a deciding factor to choose among thousands of stocks in the stock market. ROI is known as return on investment. ROE is the return on equity and ROA is the return on asset.
ROE is equity while ROI is the cost of investment.
You can finance your investment with your own money (equity) or you can ask for a loan (debt).
In ROE you calculate the ratio between your return and your invested own money. To know in detail about ROE, click here the return of equity
In ROI you calculate return over the total investment (debt + equity). Click here to know more about ROI
Return on asset(ROA) is the profit generated on the investments. The higher the value of ROA, the more efficient the management is in generating profit. A detailed post on ROA with infographics.
EPS is the portion of a company’s profit that is distributed to each outstanding share of common stocks. It indicates serves as an indicator of a company’s profitability.
Formula:-
EPS = Net Profit ÷Total number of Shares
How it works
Let’s assume that Company XYZ Ltd. reported a net profit of Rs. 400 lakhs. During the same time frame, the company had a total of 10 lakhs shares outstanding. In this particular case, the company’s quarterly earnings per share (or EPS) would be Rs. 40, calculated as follows:
Rs. 400 lakhs / 10 lakh shares = Rs. 40
Read detailed post with infographics on Earnings per share(EPS) link
The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period. Read more about CAGR with infographics.
Dividends and splits in the stock market
The dividend is a cash payment given to the holders of company stock and distributed among the shareholders in the form of cash or stocks. The dividend is a way of sharing profits with the shareholders.
In simple terms, people start contributing to the companies by buying shares. They directly help companies to get manifold growth. In return for this favor, the company gives dividends in the form of cash or stocks. Read detailed post on dividend with infographics.
Stock split
Stock split means splitting one share into many, say, one share of Rs.500 into 5 shares of Rs.100. Stock splits are a tool used by the companies to regulate the prices of shares i.e. if a share price increases beyond a limit, it may become less tradable, e.g. suppose a company’s share price increases from Rs.50 to Rs.1000 over the years, it is possible that it might go out of range of many investors. Read detailed post on the stock split with infographics.
What are Beta Value and PE Ratio in the stock market?
Beta value is also used as a measure of an asset’s risk relative to that benchmark. The beta of a stock tells an investor how much a stock moved compared to the general stock market it trades in.
PE Ratio
Basically, it is an economic ratio usually expressed as a ratio of profit to price. It is basically a technical analysis indicator used by investors to choose whether to buy or sell shares of a company.
Should we know everything about Fundamental analysis? | Process of fundamental analysis
If you are a long-term investor, you are buying a part share of a company. Unless you know the company, why are you buying it? The fundamental analysis enables you to get insights into the economics of the company’s business. The answer to the question is no but you should know the affecting ratios in the company. The important information on stock can help you make the decisions.
Importance of fundamental analysis
The importance of fundamental analysis are the following:
• Helps in making a better investing decision
• Helps in the determination of fair value
• Evaluation of the performance of the stock
• Helps in the prediction of future price movements
• Helps in understanding the company’s strength
Example of Fundamental analysis of company: Bajaj Finance|BAJFINANCE
Bajaj Finance:
Bajaj Finance Limited is a non-banking finance company (NBFC). The Company is engaged in the lending and allied activities. Bajaj Finance is a subsidiary of Bajaj Finserv headquarters in Pune. It is an NBFC (Non-Banking Financial Company)
The company deals in consumer finance, SME (Small and medium-sized enterprises), and commercial lending, and wealth management.
Fundamental analysis
This company is the topmost market leader in consumer finance in India. Its revenue and profits are constantly growing at a rate of 30% CAGR(Compound annual growth rate) and its stock price increased approx. 77000% in the last 11 years.
The major reason for the success
- Strong leadership of Mr. Rajeev Jain
- Deployment of a long term borrowed funds to short term loans
- Huge client base acquired through consumer financial services
- Huge PAN India presence
- Products ranging from consumer durable finance, digital products finance, ECOM finance (Flipkart, Amazon), two-wheeler finance, SME loans schemes, and mortgages loans
I have myself invested Rs.21650 for 10 Shares and now the price is touching Rs.7000 and expected to touch Rs.7700. Look at the below table with respect to my investments.
Fundamental analysis of Bajaj finance stock helped me in investment
| BAJAJ FINANCE | ROI% | current ROE% | ROA% |
| The year 2020-21 | 202 | 11.77% | 202 |
Currently Bajaj Finance stock is giving ROIC-2.88%, ROE-11.77%, ROA-2.88%
Look at the recent dividends given by Bajaj Finance company
| Past Dividends | Dividends per share | Ex-date |
| Cash Dividends (Final) | Rs.10 per share | Jul 8, 2021 |
| Cash Dividends (Final) | Rs.10 per share | Mar 3, 2020 |
| Cash Dividends (Final) | Rs.6 per share | Jul 11, 2019 |
| Cash Dividends (Final) | Rs.4 per share | Jul 5, 2018 |
| Cash Dividends (Final) | Rs.3.60 per share | Jul 6, 2017 |
The below table denotes the split and bonus given to the stockholder.
| Past corporate actions | Ratio | Ex-Date |
| Bonus 1:1 Bonus issue of equity share | 1:1 | Sep 8, 2016 |
| Share split Face value change from 10 to 2 | 1:5 | Sep 8, 2016 |
| Rights issue 3:19 Rights issues of equity shares | 3:19 | Jan 23, 2013 |
As per my view, this much information is very useful to select a stock before investments
Thanks for reading!
Conclusion
In the share market, it is very much possible that a stock may be technically not sound but fundamentally, the company is quite strong.
Fundamental analysis helps in identifying such companies which have a high potential for growth and returns in such investment are also very high. So, if you want to hold your investment in a company for a long period of time, then it is important to understand whether your investment in that company is safe or not.
Fundamental analysis helps a lot in filtering out companies that are financially strong and will continue to stay so for a long period of time.
Frequently asked questions | FAQ’s
Ans: There are few important steps for the fundamental analysis of a stock. Check the company’s management, who is heading the company. Quantitative and qualitative analysis of company stocks. Understand the past history includes dividends, splits, ROE, ROI, ROA, EPS, CAGR, and Beta value. Which will help investors in future investments.
Ans: Of course at this portal, www.thestockforecast.com portal
Ans: Investors will go through every aspect of quantitative and qualitative analysis. In quantitative he will read about ratios and values such as intrinsic value, ROA, ROE, and ROA, etc to make a decision on investment. In qualitative analysis, he will check how the company management is, how the company performing in the sector, future expansion, the goal of the company. It will help him understand the company working and how it is good for him emotionally.
• Helps in making a better investing decision
• Helps in the determination of fair value
• Evaluation of the performance of the stock
• Helps in the prediction of future price movements
• Helps in understanding the company’s strength
Ans: The top-performing and stable company in fundamental analysis with good EPS, CAGR, and better ROI, ROE, ROA are very fundamentally strong. Fundamentally strong offers good dividends to the shareholders.
Can you teach this in marathi?
Yes, I do have a plan about launching in Marathi native language in the future.