All those who wish make big money from stock markets remains a die hard fan of fundamental analysis generally. The basic belief remains that the strength of the company and business will be realized by the market sooner or later. Often people spend a lot of time reading newspaper, magazines, data on websites, annual reports etc. However, it becomes a little confusing activity with circular path with literally no starting or ending point.
Going by the definition, fundamental analysis involves evaluating intrinsic value of a security by examining related economic, financial and other qualitative and quantitative factors. Different methods used to calculate the intrinsic value are cash flow method, IRR method or just comparing P/E ratio with peers. It is important to understand that what should be the approach to use fundamental analysis just before investing. What I have witnessed with couple of investors is that they rush into stocks as and when any positive news comes in and expects immediate returns. However in most of such cases, either they exit in loss or suddenly becomes long term investor.
So, let us discuss on how some of the successful investors use fundamental analysis practically
Fundamental analysis should involves following steps
1. Selection of Industries
It is very important to be in the right industry in the times to come, if you are expecting economical changes or environmental changes then industries should be chosen as such to be on the favourable side of such changes. Keep looking for newer avenues or emerging industries as such newer industries are expected to have high growth rate. If upcoming developments in the world should create more and more opportunity for these industries, then your choice is perfect.
2. Selection of Stocks or Stocks screening
Once the selection of an industry is completed, it is the time to pick and choose stocks for investments. Sometimes, investors also opt for Industry specific mutual fund or ETFs for broad based investing. While other try to find the best of the lot to maximize returns. Typically, the stocks may be chosen which might be optimally valued and better growth expectations.To ensure the same, you may have a look to ratios like Book Value to Market value along with Price Earning ratio.
Low book value to Market value ratio suggests that the company does have the adequate resources or assets to sustain the growth however high Price earning ratio suggest high growth expectations. Such type of combination gives a reason to enter such a stock. Another way is to look for low asset turnover ratio with high Net margin. This suggest that company despite of running at low capacity still been able to maintain higher margin. Such company grows very rapidly when industries starts growing.
3. Study about Company and Management
The Promoters play the key role in the growth of any company. Whether it is an individual or another company, without a serious efforts it is difficult to sustain in the business, what to say about the growth. The professional management or family with decent track record suggest the kind of strategic and financial capabilities which may be deployed for the growth of company.
The companies with conflict in interest with other businesses of the same family or between promoters should be strictly avoided. A fair track record with consistent performance always ensure seamless investment flows and proactive implementation.
4. Financial Health check
It is a must exercise before any investment. Normally companies keeps lending / borrowing money and as such their financial situation keep changing. A good company will always borrow within limits and will be prompt in repayments. Also the liquidity can make or break the business. Apart from this, Capital adequacy, Gross margins, Asset turnover ratio and other such ratios will tell you about the financial health of the company. These ratios are readily available on various websites and magazines so can be easily tracked.
5. Past & Current news
Last but not the least, is to look for past and current news items related to company, promoters or its business. Any bad news like Govt. policy changes, promoters issues, disputes, business competition etc can wipe off your investments. On the other hand, good news may increase in your returns and make your smiles little longer.
If you are a true investor, then it is important to do your own research. This not only gives you more confidence while investing but also help you better understand and track your investments logically.
Happy Investing !!!!