Ultimate Guide To Fundamental Analysis of A Stock

There are two kinds of analysis for a stock: Fundamental analysis and technical analysis. Technical analysis is important for daily traders and short-term investors who have to take into account the volume traded and price movements. However, fundamental analysis is important to the value investors or long-term investors.

Why is fundamental analysis of stock important?

The fundamental analysis gives an estimate of the true value of a stock. If the fundamental analysis shows that the current market value of the stock is lower than the fair market value, then it’s recommended to buy the stock.

In the long run, the market reflects the ‘ Fundamental Values ‘. The long-run can be a few days or a few months. This is the foundation mantra of ‘Value Investing’.

Value investors like Warren Buffet, Seth Klarman and Rakesh Jhunjhunwala believe that the market over-reacts to good and bad news. The over-reaction gives an opportunity to buy quality stocks low.

Quantitative Parameters for Fundamental Analysis of Stock

All the major quantitative parameters are listed here. Click on each item to jump to the respective section.

  1. Debt to Equity ratio
  2. P/E value
  3. Return on Equity (ROE)
  4. Operating Cash Flow, Cash flow from Investing, Cash flow from financing
  5. Insider Trading
  6. Annual Dividend Payout
  7. Price/Book Value: If it is less, then the stock is undervalued.

Qualitative Parameters for Fundamental Analysis of a Stock

All the major qualitative parameters are listed here. Click on each item to jump to the respective section.

  1. Business Model
  2. Management
  3. Product Placement/ Competitive Advantage
  4. Shareholding Pattern

Shareholding Pattern

The shareholding pattern shows how the total number of equity shares of the company is distributed among various owners. The share of the promoters, employees/employee trustee and key public investors gives an idea about the working of a company.

Promoters of a company are the initial founders; people who incorporated the company.

Here is the shareholding pattern of Adani Green Energy Limited, an emerging stock in the Renewable Energy sector and PVR Ltd., a leading entertainment sector company in India, as of December 2019.

The shareholding pattern is important because it tells about the confidence and interest the promoters have in their own company. Moreover, it tells who takes the key management decisions.

Higher share of promoters is a good sign for public investors. If the promoters are selling their stake, keep your eyes open. It may mean that something is not right with the company.

However, this is not always true. Sometimes, big institutions take over the company or buy large chunks of promoter shares to get onto the management board.

Similarly, a higher stake of promoters doesn’t necessarily mean that everything is going good for the company. Sometimes, the promoters play dirty tricks to increase the share price by increasing their stake in the company.

In the case of PVR Ltd, you can see that the promoters own less than 20% of the company. However, this doesn’t mean that the company is performing poorly. In fact, it has shown consistent growth from 2014-2019.

Actually, promoters often sell their stake to enjoy some profit. PVR Ltd. sold 14% of its stake to Warburg Pincus in 2018.


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