TOOLS FOR FUNDAMENTAL ANALYSIS

1. Annual Report of company

2. Industry Related Data
3. Access to News
4. MS excel

NOTE: Read about Technical Analysis

Process of evaluating a fundamentally strong company includes study of “Qualitative aspects” and
“Quantitative aspects”

Qualitative Aspects
Understanding non numeric aspects of business. This may include such factors as

1. Management background
2. Business ethics
3. Corporate governance
4. Minority Stakeholders
5. Share t transactions – Is management buying selling shares of company through clandestine
promotors groups
6. Related party transactions – is company tendering financial favors to known entities such as
promotor’s relatives, friends, vendors at the cost of the shareholder’s funds
7. Salaries paid to promotors
8. Operating activity in stock
9. Shareholders – Who are the significant shareholders in the firm? Who are the people with above
1% of the outstanding share of the company
10. Political affiliation – Is the company or its promotors too close to a political party? Does the
business require constant political support
11. Promotors Lifestyle

Quantitative aspect
Matters related to financial numbers. Quantitative aspects includes many things, to name few

1. Profitability and its growth

2. Margins and its growth
3. Earnings and its growth
4. Matters related to expenses
5. Operating efficiency
6. Pricing Power
7. Matters related to tax
8. Dividends Payout
9. Cash flow from various activities
10. Debt – Short and Long term
11. Working Capital Management
 12. Asset Growth
13. Investments
14. Financial Ratios

How to Read Annual Report of a company

What to look for in an annual Report

1. Financial Highlights
Snapshot of the company’s performance. Usually represented in terms of financial ratios.
These are basically an extract from company’s financial statement. A brief look at this
section provides an overall idea

2. Management Section and Management Discussion & Analysis

These sections are quite important. Both these sections give insight on what the
management of the company has to say about their business and industry in general.
In the “Management Statement” sometimes called the Chairman’s message, the investor
gets perspective of how the man sitting at top is thinking about the business. Content here
gives broad sense on how the business is positioned. Look for how realistic the management
is? Also, observe if the management is transparent on discussing details on what went right
and what went wrong for the business

“Management Discussion & Analysis” is perhaps the most important section in the Annual
Report. This section includes macro trends in the economy, overall economic activity of the
country and business sentiment across the corporate world. This section may also include
talks about global economy and business sentiment.
This section also talks about the trends in the industry and what they expect for the year
ahead, we can perceive the threats and opportunities in the industry. It can be used to
compare the company to its peers for advantages and disadvantages

3. Financial Statement
There are three financial statement that company will represent
a. The Profit and Loss statement
b. The Balance Sheet and
c. The Cash Flow Statement

The financial statements comes in two forms

a. Standalone financial statement or simply standalone numbers and

b. Consolidated financial statement or simply consolidated numbers

To understand the difference between Standalone and Consolidated statement it is

important to understand structure of the company.
 Standalone Financial statement represents the standalone numbers of the company itself
and do not include the financials of its subsidiaries

Consolidated financial statement gives a better representation of the company’s financial

statement.

4. Schedules of Financial Statement

Schedule of financial statement is the detailed explanation of the statement
For example

Each particular in the financial statement (Balance Sheet) is referred to as the line item. For
example share capital details can be seen from
Understanding P&L Statement
Financial statement needs to be thought from two perspective

1. From Maker’s perspective – One who prepares the statement

2. From user’s perspective – User should be able to understand the statement i.e. to read what is
being stated and use it to make decisions

Profile and Loss statement is also popularly known as P&L statement, income statement, Statement of
Operations and statement of earnings.

The P&L statement reports information on

1. Revenue of the company for the given period

2. Expenses incurred to generate the revenue
3. Tax and Depreciation
4. The earnings per share number

Let’s understand each and every line item

Revenue
Revenue is also known as Top line of the company. The revenue side is the first set of numbers the
company present in the P&L. Revenue from operations is the main source of revenue for the company.

Other operating income includes revenue incidental to the business. Other income includes revenue
from non-operating sources.

The sum of revenue from operations, other operating income and other incomes gives the ‘Net Revenue
from Operations

Expense Details
Expenses are generally classified according to their functions, which is also called cost of sales method.
An analysis of the expenses must be shown in the P&L statement or in the notes.

1. Cost of materials consumed

This is the cost of raw materials that the company require to manufacture finished goods.

2. Purchase of stock trade

Refers to all the purchases of finished goods that the company buys towards conducting its business

3. Change in inventory of Finished Goods

Refers to cost of manufacturing incurred by the company in past, but the goods manufactured in the
past were sold in present/current financial year. A negative number indicates that the company
produced more finished goods than it managed to sell. The company deducts the cost of
manufacturing the extra goods from current year costs and add this cost when they manage to sell
these extra goods sometime in future.

The cost which the company adds back later, will be included in the “Purchase of stock in Trade”

4. Employee Benefit Expenses

This includes expenses incurred in terms of the salaries paid, contribution to PF and other employee
welfare scheme.

5. Finance Cost/Finance Charges/Borrowing Cost

Finance cost is the interest cost and other costs that an entity pays when it borrows funds.
6. Depreciation and Amortization
To understand depreciation and amortization it is important to understand tangible and intangible
assets.

A tangible asset is something which as a physical form and provides an economic value to the
company. An intangible asset is something that does not have a physical form but still provides
economic value to the company such as brad value, trademarks, copyrights, patents etc.

An asset (tangible and intangible) has to be depreciated over its useful life. Depreciation is instead of
showing an upfront lump sum expense (Towards purchase of the asset) the company can show
smaller amount spread across the useful life of an asset.

The depreciation equivalent for non-tangible asset is called amortization.

Actual outflow of expenses incurred towards purchase of an asset is captured in the Cash Flow
Statement.

7. Other expenses
Other expenses may include expenses incurred for manufacturing, selling. Administrative and other
expenses.

Profit and EPS

The Profile Before Tax

It refers to the net operating income after deducting expenses but before deducting tax and interest.
(PBIT i.e. profit before interest and tax) if there are exceptional items/extraordinary items that needs to
be deducted before arriving at actual picture of PBIT

PBIT = Operating Income – (Expenses + Exceptional items)

Net Profile After Tax

This is company’s operating profit after deducting its tax liability. This is also known as Bottom line of
the P&L Statement. Current Tax is the corporate tax applicable for the year.

PAT = PBIT – Applicable Taxes

Earnings per share

EPS serves as a purpose to assess the stewardship and management role performed by the company
directors and managers. EPS indicates how much the company is earning per face value of the ordinary
share.
UNDERSTANDING BALANCE SHEET
P&L statement gives us information pertaining to the profitability of the company, the balance sheet
gives us information pertaining to that assets, liabilities and the shareholder equity.

The P&L statement gives the company’s performance for the financial year; the balance sheet on the
other hand discusses how the company has evolved financially over the year’s right from the time it was
incorporated.

Assets – Assets are both tangible and intangible. An asset is a resource controlled by the company that is
expected to have an economic value in the future

Assets are of two types, Current and Non-Current

Liability – This represents company’s obligations. In simple words liability is the loan that company has
taken and is obliged to repay back. Typical type of obligations include short term borrowing, long term
borrowing, payment due etc. Liabilities are also of two types Current and Non- Current.

In a typical balance sheet the total assets of the company should be equal to the total liabilities of the
company
 Asset = Liabilities

Assets = Liabilities is called the balance sheet equation or the accounting equation. This is because
everything that a company owns (Assets) has to be purchased either from owner’s capital or liabilities

Owner’s capital is the difference between the assets and liabilities. It is also called the “Shareholders
Equity” or the “Net Worth”

Share Holders Equity = Assets – Liabilities

From company’s perspective the shareholders’ funds are an obligation payable to shareholders’, hence
this is shown on the liability side of the balance sheet

Liability Side of the Balance Sheet

This section lists all the liabilities of the company. Liability are divided into three sub sections

1. Shareholders’ funds
2. Non-Current Liabilities and
3. Current Liabilities

Shareholders’ Funds is combination of share Capital and ‘Reserves and Surplus’

Share capital = Face Value * Number of Shares or No. Of shares = Share Capital/Face Value

Reserves and Surplus – is usually money earmarked by company for specific purpose. Surplus is where
all the profit of the company resides

Reserves and Surplus can be further subdivided into

1. Capital Reserves – Usually for long term projects. This amount belongs to shareholders’ but
cannot be distributed to them
2. Securities premium reserve/account – This is where the premium over and above the face/par
value of the share sits
3. General Reserve – This is where all the accumulated profits of the company which is not yet
distributed to the shareholder reside. The company uses this money as buffer

Non-Current Liabilities

This represents the long term obligations, which the company intends to settle/pay off not within 365
days/12 months of the balance sheet. Long term liabilities can be of following types

1. The Long Term borrowing – This is one of the most important line item in the entire balance
sheet and it represents the amount of money that the company has borrowed through various
sources.
 If the debt of the company is high then ‘Finance Cost’ as a line item in P&L statement will also be
high
2. Deferred Tax Liability – This is basically provision for future tax payments. This is done if
company foresees a situation where it has to pay additional tax payments
3. Long Term Provisions – are usually money set aside for employee benefits such as gratuity; leave
encashment, provident funds etc.

Current Liabilities

These are company’s obligations which company intends to settle with 365 days/12 months of balance
sheet. Current liabilities may include

1. Short term borrowings – These are short term obligations of the company usually undertaken by
the company to meet day to day cash requirements i.e. working capital requirements
2. Trade Payables – These are the obligations payable to Vendors
3. Other Current liabilities – These are obligations associated with the statutory requirements and
obligations that are not directly related to the operations of the company
4. Short Term Provisions – This is similar to long term provisions and deal with the employee and
related benefits

Conclusion

 Total Liability = Shareholders funds + Non-Current Liability +Current Liability

 Asset = Liabilities + Shareholders’ equity
 Surplus is where the profit of the company reside and dividends are paid out of surplus

The Asset Side of Balance Sheet

The asset side shows all the assets owned by the company right from its inception. The Asset side has
two sections Non-current Assets and Current Assets

Non-Current Assets

Fixed Assets:

Within non-current assets “Fixed Assets” section lists assets (Tangible and intangible) which the
company owns and which cannot be converted to cash easily or which cannot be liquidated easily.

An asset is depreciated over its useful life, keeping this in perspective when the company acquires an
asset it is called the ‘Gross Block’. Depreciation should be deducted from Gross Block, after which we
can arrive at the ‘Net Block’

Net Block = Gross Block – Accumulated Depreciation

Next line items under fixed assets are Capital Work in progress and intangible asset under development.
Capital work in progress (CWIP) includes building under construction or machinery under assembly at
the time of balance sheet preparation. This amount is usually mentioned under Net Block section.
Intangible asset under development is similar to CWIP and could be patent filing, copyright filing, brand
development etc.

Other Line Items in Non-Current Assets:

This section includes other non-current assets of the company which may include non-current
investments, long term loans & advances and other non-current assets

Current Assets

These assets can be easily converted to cash or can be liquated. These assets are used by company to
manage its day to day operations and ongoing expenses

The most common current assets are cash and cash equivalents, inventories, receivables, short term
loans and advances and sundry debtors

Connecting P&L and Balance Sheet

CASH FLOW STATEMENT

Cash flow statement revels how much cash the company is actually generating. For understanding cash
flow statement it is important to understand “Activities of a company”

Activities of a company can all be classified under three heads

1. Operational Activities (OA) – Activities that are directly related to daily core of business
operations. Typical activities include sales, marketing, manufacturing, technology upgrade,
resource hiring etc.
2. Investing Activities (IA) – Investments that company makes with an intention of reaping benefits
at later stage. Examples include investment in shares, investment in land, plant, equipment’s
etc.
3. Financing Activities (FA) – Activities pertaining to all financial transactions of the company such
as distributing dividends, paying interest to service debt, issuing corporate bonds etc.
Every activity that a company undertakes impacts cash flow. Cash flow and liabilities are directly related
and assets and cash flow are inversely related

When a company presents cash flow statement is divided in above three sections i.e. operational,
investing and financial activities

A Company which has a positive cash flow from operating activities is always a sign of financial
wellbeing. Closing balance of last year become opening balance for this year

FINANCIAL RATIO ANALYSIS

Financial ratios can be ‘somewhat loosely’ classified into different categories

1. Profitability Ratios
2. Leverage Ratios
3. Valuation Ratios
4. Operating Ratios

Profitability Ratios – helps in analyzing profitability of a company. They tell how well the company is
able to perform in terms of generating profits.

Leverage Ratios – Also known as Solvency/gearing ratios measures company’s ability to sustain day
to day operations. They measures the extent to which company uses the debt to finance growth.
Helps us in understanding company’s long term sustainability

Valuation Ratios – compare stock prices of the company with either the profitability of the company
or the overall value of company to know how cheap or expensive the stock is trading. Thus it helps
us in understanding if the current share price of the company is perceived as high or low

The Operating Ratios – Also known as ‘Activity Ratios, measures the efficiency of the company to
convert assets into revenues. It helps us in understanding how effective the management of the
company is. These ratios are also known as Management Ratios

Profitability Ratios

1. EBITA Margin (Operating Profit Margin)

2. EBITA Growth (CAGAR)
3. PAT Margin
4. PAT Growth (CAGR)
5. Return on Equity (ROE)
6. Return on Asset (ROA)
7. Return on Capital Employed (ROCE)

EBITDA Margin
This Ration indicated the efficiency of the management and tells us how profitable company’s
operating model is. Comparing the ratio with competitors to get the sense of the Management’s
efficiency in terms of managing their expenses

EBITDA = Operating Revenues – Operating Expenses

Operating Revenues = Total Revenue – Other Income
Operating Expenses = Total Expense – Finance Cost – Depreciation & Amortization

EBITDA Margin = EBITDA / Operating Revenues

Understanding EBITDA and EBITDA Margin

For Example
For Company XYZ, EBITDA is Rs.560 Crores and EBITDA Margin is 16.3 %
EBITDA indicates company has retained Rs.560 Crores from its operating Revenue in other terms
company retained 16.3% of the revenue at operating level for its operations and spent 83.7%
towards its expenses

For Understanding EBITDA Margin, comparison with previous years is required

From above figures it can be inferred that company has average EBITDA of 15% and is on
increasing trend. This is a good sign as this indicates consistency in the management operational
capabilities.
In order to find if this EBITDA margin is best this needs to be compared with its competitors

PAT Margin
PAT margin is calculated at final profitability level while EBITDA is calculated at operating level.

PAT Margin = PAT/Total Revenue

Increasing PAT Margin trend is good and needs to be compared with competitors for findings if
it’s best in the industry

Return on Equity (ROE)

This is a very important Ratio and its helps investors assess the return the shareholders earn for
every unit of capital invested.
This ratio calculates company’s ability to generate profile from shareholders capital. Higher ROE
better it is for investors.
Average ROE for top Indian companies is 14-16%. Look for a company which as ROE of 18% or
higher for investing

ROE = Net Profile/Shareholders Equity *100

Above Calculation of ROE has a drawback, as the debt increases the ROE also increases and ROE
figure is misleading for investing when company has very high debt
To overcome above problem of high ROE when debt is high use “DuPont Model” also called
DuPont Identity
In DuPont model ROE is broken into three components, each part representing a certain aspect
of business. This model uses both P&L and balance sheet for the computation

Return on Equity = Net Profit Margin * Asset Turnover * Financial Leverage

 Net Profile Margin = Net Profit/Net Sales *100

This represents company’s ability to generate profit

 Asset Turnover = Net Sales/Average Total Assets

This ratio depicts efficiency of company in using assets to generate revenue. Higher
Ratio means company is using assets more efficiently. Lower Ratio could indicate
management problem.
For calculating Average Total Asset take average of the asset value of two financial year

 Financial Leverage = Average Total Assets/Average Shareholders’ Equity

This Ratio gives for every unit of shareholder’s equity, how many units of assets the
company has. Higher Ratio indicates the company is highly leveraged and hence investor
should exercise caution
For Calculating Average Shareholders’ equity, take average of shareholders’ equity of
two financial year
 Return on Asset (ROA)

This Ratio evaluates the effectiveness of company to generate profits from assets i.e. how
effectively assets are utilized for generating profit.

ROA = [Net income + Interest*(1-Tax rate)]/total Average Assets

Return on Capital Employed (ROCE)

Indicates the profitability of company taking into consideration the overall capital it employs.
Overall capital includes both equity and debt

ROCE = Profit before interest and taxes/Overall capital employed

Overall capital employed = short term debt + Long term debt + equity

THE LEVERAGE RATIOS

Leverage ratios mainly deals with the overall extent of the company’s debt and help us understand
the company’s financial leverage better

Leverage Ratios

1. Interest Coverage Ratio

2. Debt to Equity Ratio
3. Debt to Asset Ratio
4. Financial Leverage Ratio

Interest Coverage Ratio

Interest coverage Ratio is also referred to as ‘Debt Service Ratio’ or ‘Debt Service Coverage Ratio’.
The ratio helps us to understand how much the company is earning relative to the interest burden
i.e. how much easily a company can pay its interest payments

Low interest coverage ratio means higher debt burden and a greater possibility of bankruptcy

Interest Coverage Ratio = Earnings before interest and tax/Interest Payment

For example a company has Interest Coverage ratio of 1.29, which suggests for every Rupee of
interest payment, company is generating EBIT of 1.29 times

Debt to Equity Ratio

This measures amount of total debt capital to Equity capital. Ratio of more than 1 indicates high
leverage hence caution is required
Debt to Equity Ratio = Total Debt/Total Equity

Total Debt includes both long and short term debt

Debt to Asset Ratio

This ratio helps us in understanding financing pattern of the company. It gives us how much of total
asset are financed through debt capital

Debt to Equity Ratio = Total Debt/ Total Assets

For example, a company has debt to Total Assets ratio of 4.9 or 49% i.e. 49% of assets of company
are financed through debt. Higher number indicates higher leverage and Risk

Financial Leverage Ratio

Financial Leverage ratio gives us an indication to what extent the assets are supported by equity

Financial Leverage Ratio = Average Total Asset/Average Total Equity

Higher the number, higher is the company’s leverage and more carful the investor needs to be

OPERATING RATIOS

Operating Ratios are also known as Management or Activity Ratios and indicates the efficiency of
company’s operational activity to some degree the operating rations revel the managements
efficiency as well.

Some Popular Operating Ratios are

1. Fixed asset turnover ratio

2. Total Assets Turnover Ratio
3. Working Capital Turnover Ratio
4. Inventory Turnover Ratio
5. Inventory number of days
6. Receivable Turnover Ratio
7. Days Sales Outstanding

Go get how good or bad the ratios are they must be compared with peers/competitors or should be
compared over the years for the same company

Fixed Asset Turnover Ratio

The Ratio measures the extent of the revenue generated in comparison to its investment in fixed
assets.
It tells us how efficiently company is using its plant and machinery/Equipment. Higher the Ratio it
means the company is effectively and efficiently managing its fixed assets

Fixed Assets Turnover = Operating Revenues/ Total Average Assets

Working Capital Turnover

Working capital is capital required by the firm to run its day to day operations. Difference between
Current Assets and current liabilities gives us the working capital of the company

Working Capital = Current Assets – Current Liabilities

Positive working capital means company has working capital surplus and can easily manage its day
to day operations. Negative figure means working capital deficit and company seek a loan to
manage day to day operations

Working capital Turnover ratio is also referred as ‘Net Sales to Working Capital’ and indicates how
much revenue company is generating for every unit of working capital. Higher the number better it
is. Ratio should be compared with competitors/peers and with own past to get deeper insight to
performance

Working Capital Turnover = Revenue/ Average Working Capital

Average working capital is average of current and previous financial year. Alternate way to look at
financial ratio is ‘it indicates how much sales is being generated by company in comparison with the
money it uses to fund the sales’

Say for example the ratio is 5.11, which indicates for every Rs.1 of working capital the company is
generating 5.11 in terms of revenue.

Total Assets Turnover Ratio

It indicates the company’s capability to generate revenues with the given amount of assets. Here
Assets include both fixed and current assets. A higher total asset turnover ratio compared to its
historical data and competitors data means the company is using its assets well to generate more
sales

Total Asset Turnover Ratio = Operating Revenues/ Average Total Assets

Inventory Turnover Ratio

Inventory turnover means how frequently company is replenishes its inventory

Inventory Turnover = Cost of Goods Sold/Average Inventory

Cost of goods sold needs to be calculated from P&L statement of the company.
Cost of Goods Sold = Cost of material consumed + Purchase of Stock in Trade + Stores and Spares
consumed + Power and Fuel

Average Inventory is calculated from company’s Balance sheet

Average Inventory = Average of current and Previous year inventory

One should compare this number with its competitors to get the accurate picture of company’s
inventory Turnover Ratio

Inventory Number of Days

Gives the sense how many days a company takes to convert its inventory into cash. Lesser the
number better it is. A short number of days means the products are fast moving.

Inventory number of days = 365/Inventory Turnover

Note: High inventory number of days should always ensure to check the production figures as well
because high inventory number of days might indicate problem with production capacity

Accounts Receivable Turnover Ratio

This ratio indicates how many time in a given period the company receives cash from its
debtors/customers. High number indicates company collects cash more frequently.

Accounts Receivable Turnover Ratio = Revenue / Average Receivables

Average Receivable = Average of Receivable of current and previous year

Revenue = Operating Revenue for current year

Days Sales Outstanding/Average Collection Period/Day sales in receivables

This ratio indicates average cash collection period i.e. the time between billing and collection.

Days Sales Outstanding = 365/Receivable Turn Over Ratio

For Example, if a company has Days Sales Outstanding of 45 days meaning it takes 45 days from the
time it raises invoice to the time it collects payments against the invoice
VALUATION RATIO

Valuation dictates the price paid to acquire a business and valuation ratio helps us to understand
how stock price is values by the market participants and helps us to understand the attractiveness of
the stock price from an investment perspective.

Valuation ratio compares the price of stock to the benefits of owning it and these ratios should be
compared with company’s competitors

Three important Valuation Ratios are

1. Price to Sales (P/S) Ratio

2. Price to Book Value (P/BV)
3. Price to Earning (P/E) Ratio

Price to Sales (P/S) Ratio

This Ratio compares the stock price of the company with the company’s sales per share

Price to Sales (P/S) Ratio = Current Share Price / Sales Per Share

Sales per share = Total Revenue / Total number of Shares

For example a company has Sales per share of Rs.206, meaning for every share outstanding
company does sales of Rs.206

For example, a company’s current stock price is Rs.661, therefore P/E ratio is 661/206 = 3.20

Figure of 3.20 indicates for every 1 of sale the stock is valued at 3.20 times higher. High number
indicates high valuation of the firm.

P/S ratio should be compared with competitors to get the sense how expensive or cheap the stock is

Note: Whenever it appears the company has higher P/E ratio, profit margin needs to be looked. For
example Company A and Company B both has revenue of Rs.1000 and company A retains Profit of
Rs.250 after PAT and company has PAT of Rs.150. This indicates company A has higher profit margin
of 25% which justifies higher P/E valuation of company A

Price to Book Value (P/BV) Ratio

‘Book Value’ is the minimum value the company receives upon liquidation. The ‘Book Value’ is
simply the money left on the table when company has paid all its obligations in other terms Book
Value is the Salvage value of the company

Book Value (BV) = (Share Capital + Reserves (Excluding revaluation reserves)/ Total number of shares

This Ratio i.e. BC gives the rupees value per share what the shareholders can expect if the company
is liquidated
P/BV value indicates how many times a company share is trading over and above book value of the
company. Higher the ratio more expensive the stock is i.e. firm is overvalued relative to equity/book
value of the company

P/BV = Share price/BV

Price to Earning P/E Ratio

P/E ratio is calculated by dividing price of share by Earnings per share

EPS i.e. Earnings per share measures the profitability of the company on a per share basis. For
example a company with 1000 shares outstanding generates a profit of Rs.250000.

Then EPS = 250000/1000 = Rs.250

Hence EPS gives the profit generated on per share basis, higher the EPS better it is for shareholders.

If current market price of share is divided by EPS we get price to earnings ratio i.e. P/E ratio. The P/E
ratio measures the willingness of the participants to pay for the stock for every rupee of profit the
company generates.

For example, if the P/E ratio of company is 15 meaning for every unit of profit the company earns
the market participants are willing to pay 15 times. Higher the P/E ratio more expensive the stock is.

One should not invest in stock for which P/E is more than 25 or 30

INDEX VALUATION

Just like stocks, stock markets also publishes ratios like P/E, P/B and Dividend yield. The index
valuation is generally published at daily basis, these valuations gives us indication on how cheap or
expensive the market is trading currently.

Tracking the P/E ratio gives the sense of current state of market as perceived by market participants.

One need to be cautious when market P/E ratio is high say 22X.

Link for NIFTY valuations

https://www.nseindia.com/products/content/equities/indices/historical_pepb.htm
THE INVESTMENT DUE DILIGENCE

1. Taking Stock
To use fundamental analysis to identify stocks to invest. Each investor has to create his own
check list based on his experience.

2. Generating the stock data

Few methods to identify the stock are

 General Observation
Keep eyes and ears open and observe the products around you that are getting
consumed
 Stock Screener
Define the parameters and select the stocks that passes the screener parameters for
example, identify stocks that have ROE of 25% and PAT of 20%. There are many stock
screeners available for example, Google finance Stock screener and screener.in
 Sectoral Trends
This is sector specific. One needs to track sectors to identify emerging trends and
companies within the sector that can benefit from it.
 Special Situation
This is slightly complicated way of identifying stock for investment. One has to follow
companies, company related news, and company’s events etc. to identify based on
special situation
 Circle of competence
This is highly recommended technique for newbie investors. This method requires
identification of stocks within owns professional domain

3. The Moat
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