Fundamental analysis help us to get details about company. There are two types of people are present in stock market first one is trader and second one is investor. Trader need technical analysis for picking stocks but investor need fundamental analysis because they invest into stock for long term and so technical analysis works in short term but in long term stock behave on the basis of their fundamentals. So how to do fundamental analysis.
Basic Steps for Fundamental Analysis
A ) Profit and Loss Statement
1) Revenue :- In first step analyze companies profit and loss statement so you get details about companies financial condition. We use Groww for this step. In yearly profit and loss statement first you saw revenue year by year. Good companies always have increase in revenue year on year basis. For example Larsen & Toubro Infotech ( LTI ) Have 12,370 Cr revenue in 2021 and 15,699 Cr in Fy 2022 that is good sign for company because income increases on year basis.
2) Expenses :- After revenue, expenses section there. Expenses by company for their employees salary, tax, salary bonus, etc. Expenses not increases exponentially like in Fy 2021 it has 250 Cr then in Fy 2022 it becomes 750 Cr that is no good sign for company. Best company always have slow growth in expenses. In case of LTI in fy 2021 it have 9,920 Cr and in Fy 2022 it is 12,958 Cr.
3) EBITDA :- EBITDA is Earning Before Interest Tax Depreciation Amortization. This is a company’s earning before any taxes paid to government this is overall earning into company’s hand. This is very good because for company because this section told us that company is generating good revenue. LTI case in 2021 it have 2,450 and 2,711 Cr respectively.
4) EBIT :-EBIT is Earning Before Interest Tax. This section told that after removing depreciation and amortization company have this much amount. Lti Fy 2021 2,117 and 2,,356 Cr.
5) Profit Before Tax :- After removing Interest from EBIT we get PBT means we get Profit Before Tax. 2,588 and 3,097 Cr in LTI .
6) Net Profit :- This is the actual profit company is generated from revenue. After paying and removing all taxes and expenses. This is very important like revenue net profit also increasing on year basis. Lti have 1,936 Cr of net profit in Fy 2021 and 2,297 Cr in 2022 that is good sign because company’s revenue and net profit also increases. Bad companies have negative net profit and very unstable.
B) Balance Sheet
1) Total Assets :- Current Asset + Non Current Asset is equal to Total Asset. Current asset are those asset that can be convert into cash within one year of time span. Good company’s total asset always greater than total liability.
2) Total Liability :- Total Liabilities also have Current Liability and Non Current Liability.Non Current Liability means company have long term debt which company need to pay after one year of time.
3) Total Equity :- Total Equity is Shareholders money. Total Asset = Total Liability + Total Equity. Common Stock means company have currently how much total shares in market. Debt to Equity ratio told us that company takes how much loan as compare to total shares. Usually DER is less than one is best for companies.
C) Cash Flow Statement :-
1) Cash Flow From Operating Activities :- This is the actual amount company is generated for the period. Increasing cash flow year by year is good sign for company also compare cash flow from operation to net profit for the period. If net profit is shown higher and cash flow is less then company have problem in generating cash from sales.
2) Cash Flow From Investing Activities :- Company have make investment into bonds, FD, real estate, etc last year but sold those investment then this cash is shown in cash flow from investing activities. Negative cash flow means company invest into assets and positive cash flow means company sold its asset.
3) Cash Flow From Financing Activities :- If company paid dividend to shareholders, Insurance of stocks, buying asset all this transaction shown in this.
How compounding works in stock market ?
we complete first part of fundamental analysis remaining points we will discuss in next post. After following this steps you get an overview of company’s financial statement and idea is this company is good or not.This is not detail analysis of any company for detail analysis you need to read annual reports of companies.