Directory Image
This website uses cookies to improve user experience. By using our website you consent to all cookies in accordance with our Privacy Policy.

5 Things To Consider In Fundamental Analysis Of A Company

Author: Nirav Singhaniya
by Nirav Singhaniya
Posted: Aug 02, 2019

There are many different investment strategies you can pick while investing in the stock market. Whether you’re a short term investor or a long term investor, you must choose a share based on research. This will ensure you pick the best shares to buy India and grow your investment.

When it comes to picking the best shares to invest, there are two research methodologies you can adopt to pick shares:

  • Technical analysis
  • Fundamental analysis
Technical analysis is a type of analysis which is based on the price movements of the share. This type of research is generally used for short term bets that you may want to exit within the next 1 to 2 years or even shorter.

However, fundamental analysis focusses on qualitative analysis of company parameters to decide whether the company is the right pick for your portfolio. If you’re looking to analyse the company’s fundamentals, you need to do thorough research into every aspect of the company.

Here are 5 things to consider in fundamental analysis of a company:

Sales performance of the company:

Sales distinguishes the best shares to invest from others. Having sales is an indication that the products of the business have buyers. Simply looking at the sales performance is not enough. It is also important to analyse the sector fundamentals or the industry that the company is operating in. This is necessary so that you don’t invest in a share that has a temporary demand for its products.

Another thing to consider is the profitability of the company. It is worthwhile to compare quarter on quarter profits and expenses to check whether the expenses have inflated without explanation.

Company growth rate:

A lot of factors impact the company’s growth rate and not all of these are external. While analysing the best stocks for 2019 India, it is important to find out whether their growth rate is influenced by external factors or because of the strength of the business. It is recommended to invest in a company that has a robust demand for its products. The important thing that you must remember is it is not just the numerical growth rate that matters, but the factors behind the growth rate. This information can be found in the Management Discussion and Analysis section of the annual report.

Financial health:

Financial health means the health of the balance sheet of the company. This can be checked through different ratios such as:

  • Current ratio
  • Quick ratio
  • Asset turnover ratio
  • Return on capital employed
It is important to verify the composition of working capital of the company. If majority of the working capital is tied up in illiquid assets such as receivables and inventory, then it can indicate potential problems for the company in terms of cash management in the future.

You must compare these ratios to peers to check how the company is performing vis-à-vis its competitors. Having favourable ratios means it is best share to invest in.

Company’s debt:

A company having debt per se is not problematic. However, the company not being able to manage its debt is problematic. You must check the debt to equity ratio of the company and compare it against the prescribed debt equity ratio of 2. It is also important to check whether there have been any defaults in payment of interest or principal and the purpose of debt.

Stock performance:

You need to calculate the intrinsic value of the share which is the total net assets divided by number of issued equity shares. If the market price is above the intrinsic value, it means the company is undervalued and there is scope for growth. You need to analyse the P/E ratio against the industry and peers.

Investing in the stock market becomes easier when you open a demat account and trading account with a reputed stock broker like IndiaNivesh who can help you with your investments

About the Author

Nirav Singhaniya is a Financial Advisor and Share Marketer with 10 years of experience. In his free time, he likes to research on stock trading and share market trends.

Rate this Article
Leave a Comment
Author Thumbnail
I Agree:
Comment 
Pictures
Author: Nirav Singhaniya

Nirav Singhaniya

Member since: May 08, 2019
Published articles: 10

Related Articles