Fundamental Analysis Basics

If Technical Analysis is about the Price, Fundamental Analysis is about the Value. It answers the question: "Is this company actually good?"

The 3 Pillars of Fundamentals

To analyze a company, you need to look at three things:

1. The Business (Qualitative)
2. The Financials (Quantitative)
3. The Valuation (Price vs Value)

1. The Business (Qualitative Analysis)

Before looking at numbers, ask:

• Moat (Competitive Advantage): Does it have a brand (Titan), patent (Pharma), or network effect (Naukri)?
• Management: Are they honest? Do they have a criminal record? (Google "Company Name + Fraud").
• Growth Potential: Is the industry growing? (EVs vs Typewriters).

2. The Financials (Quantitative Analysis)

You need to read the Annual Report. Focus on these three statements:

A. Profit & Loss Statement (P&L)

Shows income and expenses over a year.

• Revenue (Sales): Top Line. Should be increasing.
• Net Profit: Bottom Line. Should be increasing.
• Margins: (Profit / Revenue) %. Higher is better.

B. Balance Sheet

Shows what the company owns and owes on a specific date.

• Assets: Factories, Cash, Inventory.
• Liabilities: Loans, Payables.
• Debt-to-Equity Ratio: Total Debt / Total Equity.
  • Less than 1: Good (Safe).
  • > 2: Risky (High Debt).

C. Cash Flow Statement

Shows real cash movement.

• Cash from Operations (CFO): Cash generated from main business. Must be Positive.
• Red Flag: If Net Profit is positive but CFO is negative, the company might be faking profits.

3. Valuation (Is it Cheap or Expensive?)

Just because a company is good doesn't mean the stock is a good buy. You shouldn't pay ₹1000 for a ₹10 chocolate.

Key Ratios

1. P/E Ratio (Price to Earnings)

   • Formula: Stock Price / Earnings Per Share (EPS).
   • Meaning: How much are you paying for ₹1 of profit?
   • Example: P/E of 20 means you pay ₹20 to get ₹1 profit.
   • Rule: Compare with Industry P/E. If Industry is 25 and Stock is 15, it might be undervalued.

2. P/B Ratio (Price to Book)

   • Formula: Stock Price / Book Value Per Share.
   • Useful for Banks and NBFCs.
   • Less than 1: Undervalued (usually).

3. ROE (Return on Equity)

   • Formula: Net Profit / Shareholders' Equity.
   • Meaning: How efficiently is management using my money?
   • > 15%: Good.
   • > 20%: Excellent.

The Checklist for a Multibagger

1. Revenue Growth: > 10% per year consistently.
2. Profit Growth: > 15% per year.
3. ROE: > 15%.
4. Debt-to-Equity: Less than 0.5 (Low Debt).
5. Promoter Holding: > 50% (Skin in the game).
6. Cash Flow: Positive CFO.

7-Day Action Plan

Day 1: Pick a favorite company (e.g., TCS or HUL).
Day 2: Go to Screener.in (best tool for Indian stocks). Search the company.
Day 3: Check Sales Growth and Profit Growth for last 5 years. Is it consistent?
Day 4: Check Debt-to-Equity. Is it zero or low?
Day 5: Check ROE. Is it above 15%?
Day 6: Check P/E Ratio. Compare it with its competitors (Peers).
Day 7: Read the "Pros" and "Cons" section on Screener.

Quiz

💡 Final Wisdom: "Price is what you pay. Value is what you get." — Warren Buffett. Don't chase price; chase value.