FUNDAMENTAL ANALYSIS OF A COMPANY
1.
Earnings Per Share (EPS)
Meaning:
Profit earned per share. Shows how profitable each outstanding share is. More the EPS more better is the company. It should be in increasing trend in past
few year, if it is decreasing, or same then there might be a problem or have
very low growth with the company.
Example:
A company earns ₹100 crore and has 10 crore shares.
EPS = 100 / 10 = ₹10
EPS TTM (12 months count) should be 80+.
2.
Revenue
Meaning:
Total income from sales before expenses. Also called Top Line.
Example:
If a company sells products worth ₹5,000 crore → Revenue = ₹5,000 crore
3.
Operating Profit (EBIT)
Meaning:
Profit earned from core business operations. Should be in increasing trend with atleast double digit performance
(more than 10%) year on year basis.
Example:
Revenue = ₹100 crore
Operating expenses = ₹70 crore
Operating profit = ₹30 crore
4.
Reserves
Meaning:
Accumulated profits retained in the company over the years (not distributed as
dividends). Company is in better position if it's reserves are increasing over years.
Example:
If the company has saved ₹2,000 crore from past profits → Reserves = ₹2,000
crore
5.
Total Debt (Long + Short Term)
Meaning:
All loans taken by the company. It should be stagnant or decreasing.
Example:
Long-term debt = ₹500 crore
Short-term debt = ₹200 crore
Total Debt = ₹700 crore
6.
Share Capital
Meaning:
Money invested by shareholders at face value. Rising share capital is generally negative. Stagnant share capital is good, while a decrease is very positive. A decreasing share capital shows the company is less reliant on shareholder funds and may return money to investors through buybacks.
Example:
Company issued 10 crore shares at ₹10 face value → Share capital = ₹100
crore
7.
Promoter Holding
Meaning:
Percentage of shares held by the founders/promoters. It should increase year over year. It should be above 40%.
Example:
Promoters own 55% of total shares → Promoter Holding = 55%
8.
Promoter Pledging
Meaning:
Promoters keeping their shares as collateral to borrow loans.
High pledging = red flag. It should be zero or decreasing.
Example:
If promoters pledge 10% of their 55% holding → Pledging = 10% of promoter
holding
9.
Other Income
Meaning:
Earnings outside core business operations (interest income, asset sale, rent,
etc.)
Example:
Interest from deposits = ₹30 crore → Other income = ₹30 crore
10.
Chart Performance
Meaning:
Stock price trend shown via charts (candlestick, line chart, etc.) for
different time frames.
Example:
A stock up 20% in 1 year → Positive chart performance.
11.
Sector Performance
Meaning:
How the stock’s industry sector is performing compared to the market. CAGR growth 9-10%. A stock's growth is dependent on sector's growth.
Example:
IT sector returns = 12%
Market returns = 8%
Sector outperforming by 4%
12.
Business Model
Meaning:
How a company makes money (operations, customers, revenue streams).
Example:
DMart business model:
✔ low-margin, high-volume retail
✔ private labels
✔ cost-cutting supply chain
13.
Market Capitalisation (Market Cap)
Meaning:
Total market value of the company. Generally investors tends to invest in small cap and mid cap as they
have more potential to become large cap in coming decade.
Small and good companies grow fast.Companies which have capitalisation of less
than ₹5000 Crore called Small Cap, ₹5000 - ₹20000 Crore are called Mid Caps and
more than ₹20000 Crore are called Large Caps.
Example:
Share price = ₹100
Shares = 10 crore
Market Cap = ₹1,000 crore
14.
PE Ratio (Price to Earnings)
Meaning:
Shows how expensive or cheap a stock is relative to earnings. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. It is arguable that a PE of 5 or less is not a remarkable bargain. While it might look as if the company's prospects are being viewed too negatively, it is not a bad rule of thumb to filter out companies with a PE below this level. A good PE ratio is less than 15%. it should be decreasing not increasing . it should be less than Industrial/Sector PE.
Example:
Price = ₹200
EPS = ₹10
PE = 20 (investor pays ₹20 for every ₹1 earnings)
15.
Face Value
Meaning:
Original value printed on share certificate.
Example:
Most companies have face value ₹1, ₹2, or ₹10.
16.
Book Value
Meaning:
Net asset value per share. It should not be too high.
Example:
Net assets = ₹1,000 crore
Shares = 10 crore
Book value = ₹100
17.
Market Value (Share Price)
Meaning:
Current price at which share trades in the market.
Example:
If a stock trades at ₹245 today → Market value = ₹245
18.
Debt-to-Asset Ratio
Meaning:
Shows how much of assets are funded by debt. It should be less than 1%.
Example:
Debt = ₹200 crore
Assets = ₹1,000 crore
Ratio = 0.20 (20%)
19.
Debt-to-Equity Ratio (D/E)
Meaning:
Shows leverage risk. Higher D/E = higher risk. It should be less than 1.
Example:
Debt = ₹300 crore
Equity = ₹600 crore
D/E = 0.5
20.
ROE (Return on Equity)
Meaning:
How much return company generates from shareholders’ money. ROE is a gauge of a corporation's profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits. Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. It should be greater than 20%.
Example:
Net profit = ₹100 crore
Equity = ₹500 crore
ROE = 20%
21.
ROCE (Return on Capital Employed)
Meaning:
Profitability considering equity + debt.
Better measure for capital-heavy businesses. If the return on capital employed (ROCE) is less than 9%, investing in the company is not justified. The most important factor is how the association plans to develop in the future. When marketers raise money all the time, the value diminishes. It should be greater than 20%.
Example:
EBIT = ₹200 crore
Capital employed = ₹1,000 crore
ROCE = 20%
22.
Current Ratio
Meaning:
Liquidity measure showing ability to pay short-term debts. Should be more
than 1.
Example:
Assets = ₹500 crore
Liabilities = ₹250 crore
Current ratio = 2.0 (healthy)
23.
Equity vs Reserves & Surplus
Meaning:
Breakdown of company’s net worth:
- Equity (Share Capital) = money invested by shareholders
- Reserves
= accumulated profits
Higher reserves indicate financial strength. - In this ratio equity should be stable or decreasing and Reserve & Surplus should be increasing over long periods.
Example:
Equity = ₹100 crore
Reserves = ₹900 crore
Net worth = ₹1,000 crore (high reserves = financially strong)
24. PB Ratio:
The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value. The lower a company's price-to-book ratio is, the better a value it generally is. This can be especially true if a stock's book value is less than one, meaning that it trades for less than the value of its assets. Buying a company's stock for less than book value can create a "margin of safety" for value investors. A PB ratio of 1 is a good PB ratio for stocks. However, PB ratio up to 3 is acceptable.A PB ratio of below 1.0 is an indicator of undervalued stock in the IT industry. In contrast, it could be regarded as negative for the oil and gas industry. Therefore while comparing the metric for a specific industry an investor must be well aware of its ideal p/b ratio. Traditionally, any value under 1.0 is considered a good P/B for value investors, indicating a potentially undervalued stock. However, value investors may often consider stocks with a P/B value under 3.0 as their benchmark. It should be between 1-3.
25. Piotroski Score:
this score is indexed from 0-9,while 0 is worst and 9 is best. it is scored 1 for every aspects/questions about company's performance, hance adding up it's performance on different apects gives us a score up to 9. Fields like profitability 4 points(return on assets,cash flow, net income, cash flow>net income), leverage liquidity funding 3 points (decreasing debt, increasing current ratio,no new shares) and operating strength(increasing gross margin, increasing asset turnover ratio). It should be greater than 6.
26. Peg Ratio:
pe ratio/earnings growth. it tells about the actual position of company's valuation. measured as <1 undervalued, =1 normal/balanced, >1 overvalued. It should be between 0-1.5.
27. Graham Number:
It combines EPS (Earnings Per Share) and Book Value per Share into a single fair-value estimate.
It is designed for conservative, long-term, value investors. It should be less(undervalued).
Interpretation of Graham Number
| If Market Price < Graham Number | If Market Price > Graham Number |
|---|---|
| Stock is undervalued (good) | Stock is overvalued (expensive) |
| Good margin of safety | Little margin of safety |
| Attractive for value investors | Risky for buying |
Suppose a company has:
-
EPS = ₹ 20
-
Book Value per Share = ₹ 100
Step 1: Multiply
Step 2: Square root
⭐ Graham Number ≈ ₹ 212
If market price is below ₹ 212, stock is undervalued.
If above ₹ 212, stock may be overvalued.
These are large foreign entities (institutions) that invest money in the Indian stock market.
They are not individuals — they are big organizations.
It should be above 15%.
29. Dividend:
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