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5 Things To Consider In Fundamental Analysis Of A Company
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
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
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
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.