Which stock has Rakesh Jhunjhunwala invested in?
You can find this out from somewhere
Maybe even I have told you in a video, which stock has Rakesh Jhunjhunwala invested in
But now, a lot of investors have asked me this question
That I found out that Rakesh Jhunjhunwala has invested in this stock
But what did he think, what parameters did he see
And what are the parameters that a good investors sees
And chooses a good stock
And if I talk about a retail investor
Like you and I
We don't have a lot of financial knowledge
But I have to choose a good stock
In which I can invest money
So, in this video I will cover
Those three things
Looking at which, you can choose a really good stock
And I will explain every parameter with one example
So that you can properly understand
That which parameter you have to look at in which industry
I, Jagdeep Singh, welcome you to the Groww channel
Let us start today's video
But before that a very important thing
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Friends, if you want to select a good stock, then you have to look at only three things
If you analyse those three things very well
Then the chances for you to ruin your money are very low
Now you must want to know what those three things are
So, the first thing is value
What is the value in that stock
The second is growth
That what is the growth potential in that stock
Third, risk
That if you're planning of investing in that stock then what are the risks you will have to take
Now, I told you on a very broad level that you have to look at three things
How will you quantify those three things
Now, you are a retail investor
You don't have much knowledge about finance
So now you have to see the value a stock has
What is the stock potential
What is the risk there
So, now I will drill it down
And tell you about some ratios in every parameter
I will tell you about some other parameters
That if you look at those parameters
Then you will find out how much value that stock has
To judge the value of any company, the commonly used ratio is
Which is used a lot in the industry
Whose name is P/E ratio
If I tell you the fullform, then it is Price earning ratio
First I will tell you the meaning that what is this ratio
Now consider that a company's share price is RS 100
And that company's earning, earning per share was
10 rupees
So the P/E ratio of this company becomes 10
So, here P/E ratio, the earning
Comes in the denominator
So the higher the earnings of the company, the P/E declines
And in the industry it is considered that
Whichever company's P/E ratio is slightly lower
That company is undervalued
And the company with a higher P/E ratio
That company is slightly expensive
Now you must be thinking
That if you go in the share market and choose a company
Whose P/E ratio is low, then it will give you a very good return
But that is not true
To judge any company's P/E
You have to see that industry's P/E
Because P/E ratio can never be seen in isolation
And you have to compare it to the industry's P/E ratio average, and see how much it is
If compared to the industry's average, the P/E ratio is lesser,
Then the company is cheaply available
If thr P/E ratio is higher
Then the company is a little expensive
If I give you an example
Then there's a company Hindustan Unilever
If I talk about this company's P/E ratio, then it is 73
Now you will be shocked to hear
That there are some companies whose P/E ratio is around 3 or 4
Here, Hindustan Unilever ltd has a P/E ratio of 73
So is this company very expensive?
But, no
I have always told you that you should compare the P/E ratio to the industry's average
As you can see on my screen I have shown you the real P/E ratios of some companies in the industry
So that you can get an idea
That in the actual industry, the P/E ratio is around 63
So, in comparison to that the P/E ratio of HUL is not very high
As you can see the P/E ratio of Dabur is 65
There, Colgate's P/E ratio is 52
And Gillette India has a P/E ratio of 89
If I talk about lower P/E ratio's then there is a company called JK Papers
You must have very commonly heard this name
It's P/E ratio is slightly more than 4
Now you must be thinking that its P/E ratio is very low
But no friends, if I have to compare the P/E ratio here
Then in the paper industry I will compare JK Paper's P/E ratio
As you can see on my screen
JK Paper's P/E ratio is slightly more than 4
There, the other company's also have a very low P/E ratio
If I talk about the industry average here
Then here, the industry average is a little more than 5.5
In comparison, the P/E ratio of JK Papers is not that low
So whenever you have to see any company's valuation
And you are comparing the P/E ratio
Then never compare it in isolation
Compare it to its industry average
The second important ratio in valuation is P/B ratio
Whose fullform is Price to book value
Now you must be confused as to what this book value is
Consider that a company has completely stopped its business operations
And after paying off all its liabilities,
The money that is left, they distributed it with their shareholders
Now for any shareholders, when he gets some money from a company on one share
That will be the company's book value
Now it is considered that lower the price to book value of a company, better it is
Now you must be wondering in which case should I look at the P/B ratio
We can look at the P/B ratio in any case
But in the banking sector, the P/B ratio becomes extremely relevant
Because in the case of banks, assets and liabilities are very high
Because of which the P/B ratio becomes very relevant
Even in the case of P/B ratio you have to pay attention that you can never look at P/B ratio in isolation
You should always compare the P/B ratio to the industry average
If I talk about any bank
Then HDFC Bank's P/B ratio is 4.48
Now I will show you in my screen that in the other banking sectors
What is the P/B ratio of other banks
As you can see on my screen
The P/B ratio of ICICI bank is 3.07
The P/B ratio of Kotak Mahindra bank is 6.75
Doing that I have shown the P/B ratio of 5 different banks
From which you can get an idea how HDFC bank's P/B ratio
Performs in comparison to the industry
Now you got to know a little about finding out valuation
That what are the parameter you have to see to get judge the value of a company
But you cannot invest based on the value until now because you have to see how the company can grow in the coming time
How is the growth potential in that company
So how can you judge the growth of the company
So in that you can mainly look at two parameters
Under growth, the most important thing is sales growth
That how has the company's revenue increased in the past few years
And we can find out the growth potential that in the coming time, how can the company's sales increase
I will give you an example and tell you
That if you would've judged this company before
That in the coming time, its sales growth can be a lot
Then maybe you could've gotten a really good return
As you can see on my screen, that the name of this company is JK Papers
If I talk about the revenue growth of JK Papers
So, in March 2015, the revenue growth of JK Papers was
2171
Which has increased this year to become 3312
So you can see how well the growth has been in terms of sales
In the past few years
But if you want to invest now
Then you have to think about the growth in the coming time
So you have to see the growth potential in this company
For that you can use past data
But mainly you should have a bias about how the company will perform in the coming time
For any company it is extremely important for them to increase their sales
But the most important thing is profit
How much has the company's profit increased
So only because of sales it is not necessary that the company will grow a lot
So their profit has to increase really well
And the profit will increase only when the company's operating profit margin is good
Now what is operating margin?
If a company sells something for Rs 100
To make that, it spends Rs 80
Then the company operating margin is of 20%
If the company's operating margin has grown really well
The company's sales has grown really well
Then the growth potential in the company can be really good in the coming years
So, if I give you an example
If any company's operating profit margin has improved really well
The name of that company is IOL chemicals
This is a small cap company
Whose operating profit margin in March 2015 was only 3%
If I talk about this year
Then it's operating profit margin has increased to become 30%
But you should never make an investment based on one parameter
You should see all parameters
Only after that you should make an investment decision
Now any investor like you and I has seen the value of a company
On seeing that, they find out that the company's value is good
And they have also seen that the growth potential in that company is really good
Should you directly go and buy that company
No, there is a third component left
Based on which you have to take the final decision about what you should do
And the third important parameter is risk
That you have to see what all the risks can be of investing in that company
And to judge those risks what are the parameter we have to look at
If I talk about the most common risk that we face by investing in any company
Which a lot of company's are now facing
That is debt risk
That the debt in the company can be very high
So if you want to gauge the debt level of any company
So there's a ratio that you can use
Which we call debt by equity
Debt-equity ratio
Debt equity ratio tells us that if there is a 100 Rs investment in a company in equity
So against that, how much debt has a company taken
Consider in any company there is an equity of 100 and debt of 120
Then the company's debt equity ratio becomes 1.2
So every time you look at a company's debt equity ratio then you should always compare to the industry
Because in some industries it is very common to undertake debt
And in some industries, some companies take very little debt
If I talk about some companies whose debt equity ratio
Is almost 0
They are Infosys and Castrol
And one company whose debt equity ratio is very high
That is Vodafone-Idea
The second parameter to gauge risk is that, in that industry
The industry in which you have chosen a company
In which you are thinking of investing
How much is the regulatory risk in that
If I talk about India's equity market
Then here there is a sector where the regulatory risk is very high
Whose name is pharma sector
Because the pharma sector is very dependent on
The approval of US
If they have gotten approval in the US for their drugs or not
If there is even a little problem in getting approval
Then the share comes down
Like what happened with Aurobindo pharma in the recent days
The third parameter is industry related risk
Which means that if you selected one company
Which according to you is very good
But it belongs to such an industry
In which there is a chance of there being an overall problem
Consider that one year ago
You chose a stock in the auto sector
In which you thought you should invest
But there was a problem in the overall auto sector
Because of which all the companies went down
Then at that time you should question
When you think about investing in any company
Then you should which industry that company belongs to
And in that industry
What are risks that can come up in the coming time
So if any new investor comes, watches this video and thinks about investing in any company
So if he sees mainly three things
So he can make a good investment
First, value
For value you can see P/E ratio, P/B ratio
Second, growth
For growth you can see sales growth,
And operating margin
Third, what are the risks of investing in that company
Like, debt equity ratio
Regulatory risk and industry risk
If you chose a good company
If the value is good, growth is good and the risk is not high
Then you can invest there
But if in that, the value is not that high
The growth is not good and the risk is very high
Then you should avoid those companies
I will end this video with a question for you
That what is a stock in your portfolio
Or what is a stock that you're planning on buying
That fulfils all three criteria
And can be a very good investment option according to you
In the coming time
Because through the answer of this question
Our viewers can also learn a lot
You can write the logic and reason behind that as well
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Happy investing!