Fundamental Analysis: Building a Strong Investment Portfolio


Fundamental Analysis: Building a Strong Investment Portfolio

Welcome to an in-depth exploration of fundamental analysis – a potent tool to decipher a company’s financial and business health. If you’re eyeing a long-term investment, conducting a thorough fundamental analysis of the stock is essential.
Fundamental Analysis: Building a Strong Investment Portfolio
In this blog post, we’ll delve into the intricacies of performing fundamental analysis on stocks. Follow these six steps diligently, and you’ll be better equipped to spot companies with strong fundamentals, setting the stage for well-informed investment decisions.

**Step 1: Initial Screening through Financial Ratios**

With a multitude of stocks listed on the Indian stock exchange, reviewing the financials of each company is a colossal task. Instead, establish a set of criteria to create a watchlist of promising stocks.
Utilize financial ratios such as Price to Earnings (PE) ratio, Price to Book Value (PBV) ratio, ROE, CAGR, Current ratio, and Dividend yield for this initial screening. The Trade Brains Screener is a handy tool for this process.

Consider these financial ratios for stock screening:

  1. Market cap > Rs 500 Cr
  2. ROE (3 Yrs Avg) > 20%
  3. Debt to Equity < 1
  4. Current Ratio > 1
  5. Sales Growth 3 Yrs > 15% (CAGR)
  6. Profit Growth 3 Yrs > 15% (CAGR)
  7. ROCE (3 Yrs Avg) > 15%

Remember, you can adjust these figures based on your investing style.

**Step 2: Get Acquainted with the Company**

A profound understanding of the company you’re considering is vital. Grasp the nature of its products/services, leadership (founders/promoters), management efficiency, and its competitive landscape.
The company’s website is a treasure trove of information – explore sections like ‘ABOUT,’ ‘PRODUCTS,’ and ‘INVESTOR RELATIONS’ to glean insights.

**Step 3: Delve into Financial Results**

Once you’re intrigued by a company, delve into its financials – Balance sheets, Profit loss statements, and cash flow statements.
A consistent increase in revenue, net profit, and margin over the past five years indicates a robust company. Dive into other financial aspects like Operating costs, expenses, assets, and liabilities.
For accessing a company’s financials, the Trade Brains Portal is your go-to resource.

**Step 4: Assess Debt and Identify Red Flags**

A company’s debt is of paramount importance. Excessive debt can impede a company’s growth and shareholder rewards. Lean towards non-banking companies with a debt/equity ratio of less than one.
This ratio can guide your initial screening or act as a checkpoint while studying financials. Additionally, stay alert for red flags like dwindling profits/margins, low liquidity, and pledged shares.

**Step 5: Analyze Competitors**

Understanding a company’s competitors offers a holistic view. Analyze what sets the company apart and why you’re choosing it over its rivals. The Trade Brains Portal conveniently provides a list of a company’s competitors.

**Step 6: Anticipate Future Prospects**

Successful investments hinge on a company’s future potential. Investors seek returns down the line. Therefore, favour companies with strong long-term prospects – those with products or services that will remain pertinent years from now.
Embrace the journey of fundamental analysis as you embark on constructing a robust investment portfolio. Remember, knowledge is your compass, and informed decisions will steer you towards financial success. Happy investing!

Leave a Comment