Friends, many people ask on how to analyze a stock fundamentally
To be honest, it's a long process to fundamentally analyze a company
in which you will have to look from the company financials to current intrinsic value to its annual reports
after which you may get an idea of how strong the company is fundamentally
But are there things to see and study quickly in order to help us get some idea on how the company is?
So I am going to talk about the top 5 things to study in order to see how the company is performing
Those 5 things may help you choose a better company
If you were going to invest in shares with anyone's advice, these 5 things can help you analyze red flags
I, Jagdeep Singh, Welcome you to Groww's Youtube Channel
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The first key is to look at the Revenue of a company
You should watch and study the growth rate in revenue in the past some time
It is possible that the company has shown a 25% increment in revenue in the last year
but before that in the past few years, the company had only shown a growth of 2 to 3%
You should focus on the fact that there is a growth in revenue of the company
If the growth rate is consistent, it is better for the company
If a company gives a revenue growth of 50 years in one year, better than that
is the continuous growth rate of 15 to 20% in the last 5 to 10 years
The company which gives a continuous growth rate is better for investment
Revenue can show you how the company had performed in the past
but for the future, you will have to look at the annual report, growth prospects and understand the business
But yes, the past revenue growth can give you a sense of how the company performed in the past
With revenue, even Net Profit is very important for the company
With revenue, you can even study the net profit it gave to its shareholders
The most important thing to check in net income is, how much of Net Income is coming from other incomes
To conclude it in easy manner, you should check how much revenue growth has the company shown
The other thing is to study the Net Profit in the Net Profit its important to study the other income of the company
cause other income is the income which is generally one time and is not driven by the company's core business
Other than this, if you have to check the cyclicity. If you want to see the growth in the past
there is cyclicity in many companies, a lot of companies have more revenue in March than in June
If you keep these points in mind and study Net Profit and Revenue then it will help you choose a good company
in order to check these factors, you many look in the Profit & Loss statement
If you want to check the profit & loss statement of any company then you can go to Groww and check
Friends, you saw the Revenue and Net Profit which tells you about the growth of the company
Now we are going to talk about the second parameter which tells you about the company's efficiency
It is more important than the Net Profit and the Revenue, its called Operating Profit Margin
Now let's talk about how to figure out a company's operating margin
If we take the revenue and minus the cost, the cost of producing the goods then
you will get a company's operating profit margin
Operating Profit Margin tells us how efficiently it is using its raw materials
You should make sure, the company you are going to invest in should have a constant operating margin
or should have good improvements
If the company's operating margin is improving, it means that the company is streamlining its operations well
and is using its resources efficiently
thus you should focus heavily on the company and its operating profit margin
You can see the operating profit margin from the company's Profit & Loss statement
you can figure out Operating Profit Margin from there
I will tell you a trick here, say if you are analyzing a company's operating profit margin and it stands at 20%
You won't understand if 20% is good or not
thus you should compare with different companies from the same industry
in order to understand the average operating profit margin of the industry
and in comparison how is the operating profit margin of the company, you have chosen
If the operating Profit Margin is good in comparison, then you should go ahead and invest
otherwise, you should do a deeper investigation
Let's talk about the third point which will tell you about the strength of a company's balance sheet
This important parameter is to assess a company's debt
You should look out for the debt level of a company and usually a company with a good debt level
should be avoided
but a debt level of a lesser amount can be good for a company as it helps in expanding the company
Other than this, If you want to check anything related to debt
then you can see how much of debt has been lessened or increased in recent times
If the debt level of a company is continuously increasing still it is not expanding then it can be a red flag
If you want to study the debt of the company, then you may check the profit of the company
Say if the company's profit is of Rs. 10 but then the debt on it of Rs. 1000
then it's a red flag cause company won't be able to pay back this amount
In order to pay this amount of debt, the company will have to sell off its assets or will get liquidated
You should see how strong a company's balance sheet is as it tells you how well the company's performance is
Pay close attention to debt as we have noticed companies with high debt rate has not performed well
Debt is not always bad, the right amount of debt helps the company expand
Other than this you can check the debt to equity ratio, and compare the company with its industry
that in comparison to the industry whether the company has taken heavy debts or lesser
cause in some industries a lot of debt is required and in others, lesser in order to streamline its operations
Let's get to the fourth most important point, the name of which is Operating Cash Flow
It tells us that from the operations, how much cash is being generated
Its important that the operating cash flow is positive. If you want to see this information then you can check
in the company's cash flow statement, there you can see three statements
First is Operating Cash Flow, Second is Cash flow from investing activities
The third is Cash flow from financing activities
These statements show different parameters but if you want to analyze quickly then
you can check how is the company's operating cash flow
which tells you from the company's operations how much company it gets and gives it out
and if it is positive and growing on a constant basis then it is a good thing for the company
You should analyze it really well, as it is difficult for any company to manipulate its operating profit margin
Thus it is said more important than analyzing the profit & loss statement is to analyze the cash flow statement
Let's talk about the last parameter which many investors pay attention to
The name of this factor is Price to Earnings ratio
If you try to understand Price to Earning ratio in detail then
It tells you if the company is earning Rs. 1 then how much are you spending against it currently
Say if any company's PE Ratio is of 30, it means if the company earns Rs. 1 for one share
against it, you are ready to pay a price of Rs. 30
Thus before investing in a company you can look at its PE Ratio
While analyzing the PE ratio, you should always compare it with its industry
cause its normal to have a PE ratio of 40 in some industries and there are industries
wherein a PE ratio of 10 is considered high
in order to get a fair idea, compare the PE Ratio of a company with its sector
other than this, there is another ratio called the Forward PE ratio
which tells you how much the company earns in the future and against it how is the company's PE Ratio
so you can focus on it
If you don't want to focus on it
then the company's current PE ratio can be compared with the average PE Ratio of the industry
If in comparison if the PE Ratio is lesser then it is a positive point to invest
If the PE ratio is more then you must do a deeper investigation there
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