Fundamental analysis is a method of analysis used for a business’s financial statements, health, competitors, and markets; that impacts the intrinsic value of the stock. Gathering and analyzing all this information for every security to find the correct stock is a tedious
task and requires an understanding of the financial statements of the company and businesses concerning the industry in which it operates.
Fundamental analysis is a method of calculating a stock's real or "fair market" value. Fundamental analysts search for stocks that are lately trading at prices that are higher or lower than their real value. If the fair market value is greater as compared to the market price, the stock is going to be undervalued and a recommendation to buy it is given. In contrast, technical analysts ignore the fundamentals in favor of studying the historical price trends of the stock.
Nowadays, due to a lack of knowledge and time, most people hold back on investing in the stock market and miss out on opportunities to grow their wealth. We IIFL Securities provide you with all the contextual information you need to make your decision. You don’t require any prior expertise in finance to understand our analysis; we do it for you, providing the analysis in simple terms on IIFL’s Marketplace App. Time is the most valuable asset you possess, and we respect that. We have tried to provide you with the information in such a way that you can absorb all the relevant information in minimum time, giving you an edge over the market.
Different sections are displayed on our App in the fundamental tab of the company details page are as follows.
- SWOT Analysis [Strengths, Weakness, Opportunities, Threats]
It gives brief info about Strengths, weaknesses, opportunities, and threats that might impact the price of the stock. SWOT Analysis in the world of stocks is one of the most widely used tools that is used for performing the ‘qualitative’ study for a company. It helps us to understand the company’s position in the market and competitive advantages.
The strength of a company varies from industry to industry. Let’s say, a low non-performing asset (NPA) can act as a strength when you talk about the banking sector company. However, cheap suppliers or cost advantages can be a big strength for an automobile company.
Here are a few other strengths of a company that you should take notice of while performing a SWOT analysis of stocks:
The opposite of every ‘Strengths’ can be the weakness of a company. For example- Weak financials, inefficient management, poor brand recognition, unskilled workforce, non-repetitive clients, un-scalable business and disloyal customers.
Besides, there are a few other weaknesses that may affect the company:
Lack of capital
A company with a lot of opportunities has a lot of scopes to succeed and make profits in the future. Here are a few points that you need to consider while evaluating opportunities for a company:
Internal growth opportunity- (New product, new market, etc)
External growth opportunity (Mergers & Acquisitions)
Expansion (Vertical or horizontal)
Relaxing government regulations
New technology (Research & Development)
In order to survive (and moreover to remain profitable), it’s really important for a company to analyze its threats. Here are a few of the biggest threats to a company:
- Key fundamental statistics:
Market Capitalisation - is defined as the total market value of all outstanding shares.
Market cap helps investors to increase the size of a company on the basis of how much of value the public perceives it to be. The greater the value, the "bigger" the company. The size and value of a company can affect the level of risk you can expect when investing in its stock. Higher Market Cap generally means low risk.
In general, small-cap stocks hold greater potential for growth in price, since the companies themselves have room to grow. However, they may also be riskier investments, because future performance is always unknown.
Large-cap stocks have less growth potential but are thought to be safer investments because of their longer success records. Mid-cap stocks typically fall between small caps and large caps for their growth and safety guidelines.
PE TTM - Price to Earnings(Trailing Twelve Months) ratio is the ratio for valuing a company that measures its current share price relative to its EPS. A high P/E ratio could mean that a company’s stock is overvalued, or else that investors are expecting high growth rates in the future.
Companies that have no earnings or that are losing money do not have a P/E ratio.
A company’s P/E ratio can be benchmarked against other stocks in the same industry or against the broader market such as NIFTY50
PEG - Price/Earnings-to-growth ratio is a stock’s P/E ratio divided by the expected growth rate of its earnings for a specific period. The PEG ratio is used to determine a stock’s value while also factoring in the company’s expected growth. A lower PEG may indicate that a stock is undervalued and hence good to buy.
While a low P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratio may tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its future earnings expectations. Adding a company's expected growth into the ratio helps to adjust the result for companies that may have a high growth rate and a high P/E ratio.
The PEG ratio provides useful information to compare companies and see which stock might be the better choice for an investor's needs, as follows.
Assume the following data for two hypothetical companies, Company X and Company Y:
● Price per share = Rs. 460
● EPS this year = Rs. 20.9
● EPS last year = Rs. 17.4
● Price per share = Rs. 800
● EPS this year = Rs. 26.7
● EPS last year = Rs. 17.8
Given this information, the following data can be calculated for each company.
● P/E ratio = Rs. 460 / Rs. 20.9 = 22
● Earnings growth rate = (Rs. 20.9 / Rs. 17.4) - 1 = 20%
● PEG ratio = 22 / 20 = 1.1
● P/E ratio = Rs. 800 / Rs. 26.7 = 30
● Earnings growth rate = (Rs. 26.7 / Rs. 17.8) - 1 = 50%
● PEG ratio = 30 / 50 = 0.6
Many investors may look at Company X and find it more attractive since it has a lower P/E ratio
between the two companies. But compared to Company Y, it doesn't have a high enough growth
rate to justify its P/E. Company Y is trading at a discount to its growth rate and investors
purchasing it is paying less per unit of earnings growth.
PB - Price to Book value ratio. It's calculated by dividing the company's stock price per share by
its book value per share (BVPS)
P/B ratios under 1 are typically considered solid investments.
A lower P/B ratio could mean the stock is undervalued. However, it could also mean something
is fundamentally wrong with the company.
Analyst recommendations: Showing the average target given by analysts. Showing how many analysts recommend Buying, Holding, Selling.
Bulk deal - Trade of more than 0.5% of the Company’s shares, in a single transaction or multiple transactions made in a single client code.
Block deal - A trade of more than 5 Lakh shares or more than Rs. 5 Crores value of shares. Can only be conducted in the Special Trading Window. NSE - 8:45am to 9:00am ; BSE - 9:15am to 9:50am
These Bulk & Block deals help in understanding sudden spikes in the volume which might be misinterpreted as a potential sale by the promoter or an increased interest from the institutional investors.
The reason for the introduction of Bulk Deals and Block Deals by SEBI is to increase greater transparency in bulk/block deals and to prevent rumors and speculation.
Before these guidelines for disclosure of Bulk deals and Block deals were issued, such transactions were completed in secrecy. Apart from the parties involved i.e. the buyer and the seller, no information on block deals was available to retail investors, and rumors about the size of the deal used to drive up the stock price on subsequent days. Such Block Deals and Bulk deals are usually done by FII’s, DII’s, Mutual Funds, and in some cases by very high net worth individuals as well. Such block deals may not necessarily mean that the price is expected to go up or down.
It shows the distribution of shares across Promoters, Mutual Funds, FII, Public, etc. You can also check how the shareholding pattern has changed in the past quarters.
A high shareholding by Promoters, FII, MFs is favorable because it means that these entities trust the company to generate attractive returns.
Companies with very high promoter stakes should be viewed as a red flag because a concentrated stake gives promoters the right to make important decisions at their discretion that might hurt other investors. As such, a diversified shareholding is a better alternative.
You should compare the shareholding pattern of multiple quarters to spot considerable changes. If the promoters or foreign investors are divesting, it might indicate a loss of confidence in the company. A consistent decrease in the proportion of promoter shareholding or offloading by promoters is also a cause of concern. On the other hand, increased investment by promoters or other entities is a positive sign for you to invest in the company.
If you want to look at the financial statements to analyze on your own, click on View More and go to the Financials tab where you can see P&L, and Cash Flow statements.
By now you would have got a fair idea of fundamental analysis basics and how you can easily avail the services through the IIFL Markets App. Basically, get a quick analysis at your fingertips and experience the swift, hassle-free process.
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