Fundamental analysis as an article explains the importance of analyzing the financial position of a company before investing, so that you can derive considerable profits from your investments which serve the very purpose of investing the hard earned funds. It is said that good investors analyze the company before investing but the best investors analyze the company even after investing. Hence, this article contains various tools that can help you know the net worth of the company, the earnings derived from the share as well as the returns from equity
Fundamental analysis is a kind of stock evaluation method. This method involves the analysis of fundamental information such as financial reports of the company, demand for the product produced by the company, position of the company in the industry, changes that happens in the economy and in the government policies.
Fundamentals deal with financial characteristics of the company. In the process of fundamental analysis a detailed study of the financial statements of the company is carried out in order to find out the level of profitability, investments, turn over, amount of cash in hand, return on equity, return on assets and return on investments etc.
The main purpose of the fundamental analysis is to find out answers for many important questions like; is it worth investing on this company? What are the chances that this business is going to suffer losses or profits? How can I be certain that this stock will continue to pay dividends? What would be the position of this company in the market?
Analysis is all about earnings and the basic objective is to find out probability of getting profit from a company. The bottom line is to calculate how much money a company is making and how much is it going to make in the future.
Profits are called earnings. It’s difficult to calculate the earnings of a company but one has to do this home work before investing and that’s what buying a company is all about. Higher earnings always lead to increase in stock price and sometimes regular dividends. But when the earnings go down then definitely stock prices will fall.
Some of the widely used tools of fundamental analysis are :
Earnings per share- EPS are very important tool of fundamental analysis and it is the primary focus of every investor.
EPS = Net earnings of the company/ Outstanding shares.
One cannot decide which company shares to buy depending only on the basis of earnings.
For example: Company X earns 5 lakh and company Y earns Rs 10 lakh, but company X has 10000 outstanding shares whereas company Y has 100000 outstanding shares.
Let’s calculate EPS for both companies.
For Company X:
EPS = 500000/10000=50
For company Y:
EPS=1000000/100000=10
In fundamental analysis, earnings is not the only consideration, and one cannot decide which company shares to buy only on the basis of earnings.
In the above example company Y has higher earnings of 10 Lakhs and company X has 5 lakhs, both companies may be good but primary focus of investment is making profit. So along with earnings, total outstanding shares are also taken into consideration. In the above example company X has EPS of 50, but company Y has EPS of 10 despite earning more profit so company X shares will give more profit to investors
This ratio is calculated by dividing annual dividends per share by earnings per share.
DPR= Dividends per share/ earnings per share
For example: if company X paid 10 Rs per share as dividend and had 15 in EPS then the DPR would be 66%.
The percentage that is good and bad is subject to interpretation. Growing companies usually retain more profits for business expansion and pay lower dividends.
But in some mature industries there is very little room for growth and they pay higher dividends so as to stay ahead in the market.
It is the rate of return on shareholder’s equity. It indicates the firm’s or company’s efficiency of generating profits from shareholders equity. ROE is calculated by dividing net profit after tax by shareholders equity.
ROE= Net earnings after tax/shareholders equity.
Here net earnings of fiscal year are calculated after deducting preference shareholders’ dividends but not common stock dividends.
ROE is a very useful tool of fundamental analysis and it is widely used. But all companies with high ROE are best and good to invest. For certain industries ROE is high because they require no assets E.g.: consulting company and certain industries have low ROE just because they require large infrastructure so just on this basis of this one cannot come to the conclusion that consulting industry is better to invest than large refineries and iron and steel industry. So ROE works better for the comparison of companies belonging to same industry. And the company with higher ROE is better to invest.
ROE can be split into three components and is equal to net margin multiplied by asset turn over and financial leverage.
ROE= Net margin x Asset turnover x Financial leverage.
ROE is split into parts to clearly understand the changes that happen in the same. For example if the net margin hikes then every sale increases and the net income resulting in increase is overall ROE. If the assets turnover ratio increases, it means that the company is generating more income on every unit of asset it owns which in turn means increase in ROE. Financial leverage of the company indicates the capital structure of the company and by higher financial leverage it means more proportion of debt financing than equity financing. This increase in financial leverage is beneficial for any company as interest on debt is tax deductible but not dividends on equity. So a higher debt financing means higher ROE but increase in debt financing positively contributes to ROE only if the firm’s return on assets is more than interest on debt
P/E relates to the stock price and the earnings of the company. And it is one of the most popular tools of stock analysis used in fundamental analysis.
P/E calculated by dividing share price by earning per share of the company.
P/E = stock price/EPS
Assume that company X has EPS of 5 and its share value is 50 so the P/E ratio is 10.
Some investors think that high P/E means over priced stock and it also indicates the high hopes on the stock’s future. And it also means that investor is paying more money for every unit of net income of the company which indicates stock is expensive.
By using the price per share and earnings per share one can easily evaluate the stocks of different companies. Stocks with higher forecast of the growth of earnings will usually have higher P/E, and stocks with lower forecast of earnings growth rate will usually have lower P/E.
PEG ratio takes into consideration the projected growth in earnings. It is calculated by dividing P/E ratio by projected growth in earnings.
PEG=P/E / Projected growth of earnings.
Example: consider a company has a P/E ratio of 50 and its projected growth in earnings is 10% then the PEG value becomes 5.
In technical language PEG indicates how much you are going to pay per each unit of future earnings growth, the lower the value of PEG is the lesser would be the amount you are going to pay per each unit of future growth of earnings.
So if the PEG ratio is higher (close to P/E value) this makes sense that projected growth in earnings is lower, so kind of stocks are usually neglected by stock market.
If the PEG ratio is smaller (much smaller when compared to P/E value) then that means that projected growth in earnings is higher and the stock is said to be fundamentally strong.
Now that you have read this article, we believe that this would help you to know the value of the company and to choose the best company to invest and earn adequate profits in this highly volatile market. For more information feel free to contact IndianMoney.com.
"On ur article "Why ULIPs are better than FD....? (Revised)" u only tallked about the ULIP allocation charges. U never talked about the other charges like mortality charges, fund management charges which are generally debited on monthly basis from customers account. I hv even seen some funds which hv allocation charges upto 55% (about which the insurance agent never tells), means u invested Rs.10000, and only Rs. 4500 is working for u in the market, rest Rs. 5500 goes to insurance company. U also never talked about the involvement of risk. The arithmetic is very simple, ULIP insurance company will take their charges first, and if market is booming and it can negotiate all the charges, U will see some positive return, If the market is rising but not enough to negotiate the charges of the company, U will see negative returns, and in case market start falling, switch ur fund to govt. debt and just sit and watch that growth of ur govt debt fund is not enough to negotiate the charges of the company. ULIP is one of the worst investment option, and a death trap. One will find the same equity portfolio in mutual fund as well, where u hv only entry load of 2.25%, and no other charges. So why to go for ULIP? ULIP agents say that u r getting the insurance benefit, but with the total accumulated mortality charge u pay through ur ULIP period, with the same amount u will get a 5 times the sum assured in the traditional insurance. So keep ur investment and insurance separate."
- Amritendu Bhattacharya, 26th June 2009, Friday" Good One,"
- renuka malik, 26th June 2009, Friday"Need more article on ulip comparison"
- Arnab Gupta Majumdar, 26th June 2009, Friday"it is very much thankful to u it is very use ful to investers even layman also can understand difference of FD's & ULIP's"
- Arjun, 26th June 2009, Friday"u compare with LIC Schemes"
- Arjun, 26th June 2009, Friday"useful"
- sathyaprathap.d@jrg.co.in, 26th June 2009, Friday"I guess a combination of term insurance & an sip would give far better returns than ulip's."
- Sagar Bhambri, 26th June 2009, Friday"nice and superb even a layman can understand this article and i am also working for an insurance company . we use to tell the customer just look the ULIP as an long term plan"
- senthil kumar, 27th June 2009, Saturday"Comparetive calculations you shown above between FD and ULIP plans. You shown maximum retuns in ULIP plans. But now these days we got compound intrest in FD plans. Kindly explain this to me."
- Sunita Verma, 27th June 2009, Saturday"Good one, but needs more corrections in there in the figures. thanks. Need to verify as well. good luck"
- vipin, 27th June 2009, Saturday"its good article,i come to know about ULIP products and please compare with LIC....thank you"
- chandrashekhar, 28th June 2009, Sunday"its good article,i come to know about ULIP products and please compare with LIC....thank you"
- chandrashekhar, 28th June 2009, Sunday"which ulip scheme u suggest having single premium and giving maximum ouput pl. advise"
- sanjiv kapur, 5th July 2009, Sunday"hi, Its a nice article, but i found it a bit biased, it only covered the positive side of ULIP, it takes 4-5 years for ULIP to breakeven n apart from this ULIP return is not fixed depends on the market performance......can u plz eleaborate on the same"
- prachi, 9th July 2009, Thursday"there is a mistake in fd return column.after 5 yrs and 4 yrs you have mentioned all as 5 years.but the projection may not be same as you have shown in the comparison.because you have taken a flat calculation as 12.5%.but it differs fromc aompany to company , plan to plan , the fund option and the economic conditions.So a proper knowledge should be gained to make nthe comparison"
- subhrajyoti mishra, 10th July 2009, Friday"Dear Writer, Thanks for your very informative article. I am planning to invest a lump sum amount in the near future in ULIP. Can you give more info on customer benefiting plans and agent benefiting plans. Also please advice which Financial Institution can give me max returns over next 10 yrs. "
- Hari Prakash, 11th July 2009, Saturday"why did not the actual return of ulip is considered in this article. let us say if u invest 100 Rs, your actual money getting invested will be around Rs 70 after all the charges...to gain a break even,ulip may have to earn a 50 % profit which can drag ur money from Rs 70 to Rs 100. At 12% ,it will take 4 yrs. AFTER THAT 4 YRS ONLY U WILL START EARNING..WHICH REDUCES UR EFFECTIVE EARNING..."
- RANJEET, 31st July 2009, Friday"Now, more clarity on ULIPs with examples. Can you pls guide us about Customer benefiting Plans of ULIPs available in the market"
- Ananthan, 7th August 2009, Friday"It is an informative article. But somehow I burnt my fingers at ULIP, given the market conditions at present and the long waiting period in ULIP. Could you please compare ULIPs with MFs similarly and highlight their returns in 6-10 years?"
- Arindam Sen, 17th August 2009, Monday"Hi, I think FDs n ULIPs are the products with different objectives. One offers security with very low risk n other offers returns with high market risks. So it is mistake to compare both. If u want to compare then u can compare combination of Mutual funds & insurance with ULIPs. "
- Paresh, 26th August 2009, Wednesday"hello, Govt has proposed a new tax code. can U tell us, if it get implemented how it will impact money invested in ULIPs.?"
- Paresh, 26th August 2009, Wednesday"Really Interesting subject and need more article on new tax policy and how to plan for a good investment."
- Prashant Dash, 1st September 2009, Tuesday"ulips are tax free. does it applicable in the new tax code proposed by the govt"
- manishatandon, 1st September 2009, Tuesday"Are ulips free from charges. I feel there are charges. Could u plz explain the charges/ fees levied on ulips Could u please explain which are customer benefitting/agent benefitting"
- Manisha tandon, 1st September 2009, Tuesday"On what basisi have you taken 12.5 % return on ULIP for fIRST fIVE YEARS"
- Pankaj, 1st September 2009, Tuesday"Thank for given the difference between FD and ULIPs "
- C.DHINESH, 2nd September 2009, Wednesday"Good analysis, Most of the people know about FD and its transparency. Can we have transparency on UILIP as agent decide in this matter."
- Manish Srivastav, 2nd September 2009, Wednesday"i want to know how is my investment in bajaj allaiance ulip will perform in near future"
- drgiriver, 2nd September 2009, Wednesday"please let me know about various customer benefiting plans available in the market"
- Praveen Singal, 3rd September 2009, Thursday"I want all the question-answer given in the web site to b e-mailed to me pl"
- santosh, 3rd September 2009, Thursday"Its amazing, specially FDs negative performance. It easy to understand in a easy way."
- Neeraj Kumar, 3rd September 2009, Thursday"Why comparison of ULIP plans offered by SBI LIFE, LIC etc are not considered along with other. Are they for better than all these."
- Jatinder Mohan, 4th September 2009, Friday"thanx"
- shambhu, 6th September 2009, Sunday"please let me know about various customer benefiting plans available in the market and risk factor on it."
- Deep , 9th September 2009, Wednesday"its a very good presentation, i just want to know how nav of ulips is calculated by insurance companies in case of ulips."
- pankaj, 18th September 2009, Friday"there r ULIP's of other companies giving better returns like SBI Life, just check it up....."
- rajagopal.r, 20th September 2009, Sunday"nice one"
- kiran, 21st September 2009, Monday"please conatc me as soon as possible. i have 15 lakhs to invest regularly."
- Avoy Ranjan Banerjee, 26th September 2009, Saturday"now it become easy for us to make the things clear abt fd's and ulips to the customer some more articles should be there on diffrent major comparisons"
- neeru choudhary, 27th September 2009, Sunday"Good Article !"
- prakash jhurani, 28th September 2009, Monday"hi, Its a nice article, but i found it a bit biased, it only covered the positive side of ULIP, it takes 4-5 years for ULIP to breakeven n apart from this ULIP return is not fixed depends on the market performance......can u plz eleaborate on the same and also inform which Ulip provides good returns. "
- Sunil, 3rd October 2009, Saturday"very good artical its help for me . but full benifit not illastrat . its show only posetive thinks . give us also negetive thins"
- rauf shareef, 5th October 2009, Monday"Please get in touch for an investment in ULIP"
- Major Raveendran, 5th October 2009, Monday"plz call i want to invest in MF and ulip"
- Punit, 8th October 2009, Thursday"I want part tme work as financial Advisiour,Which Company I prefered to join so I can convinence people eassily with minimum follow up, pl repply as soon as possible. Thank you. SUNIL PIPADA,INDORE(M.P.) INSULATIONS ADVISIOUR ( SPECILATION IN CERAMIC FIBRE ) B.E.(ELECTRICAL),MBA(OPERATIONS)"
- SUNIL PIPADA, 23rd October 2009, Friday" Dear Writer, Thanks for your very informative article. I am planning to invest a lump sum amount in the near future in ULIP. Can you give more info on customer benefiting plans . Also please advice which Financial Institution can give me max returns over next 05 yrs. "
- K K yadav, 29th October 2009, Thursday"compare to f d ulip is better"
- somasundaram, 1st November 2009, Sunday"Please clarify how to indentify customer benefiting plan and agent benefiting plan while buying ULIP or mutual fund"
- parshuram , 6th November 2009, Friday"Can u clarify / list out which are all the customer benefiting plans available in the market with its performance details..??"
- R.Sudarson, 9th November 2009, Monday"Can u clarify / list out which are all the customer benefiting plans available in the market with its performance details..??"
- R.Sudarson, 9th November 2009, Monday"A quite interesting article........ Effort to clear doubts..most commendable.. This is the MAIDEN article viewed by me.. Bye the bye..please let me know HOW TO differentiate between (1)customer benefiting plans and (2) agent benefiting plans... As u said, NO agent will disclose his benefit......... Will u please.........clarify it....."
- ashok rao, 24th November 2009, Tuesday"important article"
- Narasimha Rao, 25th October 2010, Monday"good one"
- payday loans online, 4th August 2012, Saturday
