Fundamental Analysis | Stockgeni

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Fundamental Analysis

What is 'Fundamental Analysis'?

Fundamental analysis help you to evaluate the value of stock and to judge current and future value of the company you want to invest in.​

Fundamental analysis is health check of a company. It is 360 degree check on various parameters like financial check, quality of management, overall economy and industry condition that might effect of the performance of the company.

Fundamental Analysis is the method to asses any securities basis on its financial, and other qualitative and quantitative factors which helps you to examine a company's current market stability and future probability of growth

Let’s understand some of the financial ratio to judge the health of the company.

The first thing you should focus on that is earning performance of a company. How has company delivered on earnings over the past few years?

You can measure company profitability by looking at EPS.

  • One of the most basic Fundamental parameters.

  • Used to judge the profitability of Companies.

 

Earnings Per Share - EPS

EPS is the portion of a company’s profit that is allocated to every
individual share of the stock.It is an important financial part which
indicates the profitability of a company.This value play an important role for investors and people who trade in the stock market.

Calculation of the Earbning per shar is very sipmle just divide the
company’s net income with its total number of outstanding shares. But It is
more advisable while caluclation EPS to use use the weighted ratio, as the number of shares outstanding can change overa period of time time.


Earnings per share can be calculated in two ways: 

1) Earnings per share: Net Income after Tax/Total Number of Outstanding
Shares

EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding
 

2) Weighted earnings per share: (Net Income after Tax - Total
Dividends)/Total Number of Outstanding Shares 

Weighted EPS = (Net Income – Preferred Dividends) / Weighted Average Shares
Outstanding

Lets understand with an example

If company has 100 crore profits and it has 10 crore outstanding shares then

 

Earning per share of the company is Rs 10.

Let’s compare two companies on the basis of EPS.

 

Company A has profit of 100 crore and outstanding shares are 10crore.

Eps of company A will be =Rs 10

 

Company B has profit of 200 crore and outstanding shares are 40 cr.

 

Eps= of company b will be =Rs 5.

 

Company A earning per share is more than B hence Company A will be considered more strong company than B basis of EPS.

 

PE Ratio:

PE Ratio is one of the very important financial ratios to judge the valuation of the stock. This gives an indication what price the market is willing to pay for company’s earning.

  • Compare Stocks Price to Earning

  • Crucial for Peer Comparison.

  • Lower the PE, Better the Valuation.

How PE Ratio is calculated:

 PE  =  Price of the stock/ Earning per share

         

Lets compare two companies with their PE Ratio.

if Stock Price of Company A and B is Rs.400 and considering the the eps as per the above explained in EPS For A=10 and for B=5 then PE ratio for both the company will be:

PE Ratio for A= 400/10 = 40

PE Ratio for B= 400/5 = 80

                                                         

                                               

For Company A Every 1 rupee earning Market is paying 40.                                         

 

For Company B Every 1 rupee earning  Market is paying 80.

 

  • High PE indicates that investor assuming high return in future.

  • Stock with lower PE and high earning visibility is considered a better investment.