SHARE MARKET: FUNDAMENTAL ANALYSIS
Fundamental analysis is the study of interpreting and analyzing a business based on certain key factors like financial standing and financial health of a company. This will help us to arrive at the best value of a stock with a reasonable level and gives us the price range. However this is to be understood that the market value of the stock may vary slightly or significantly from the value we arrive at.
Some stocks sell at a premium while others sell at a discount .In general investors want to buy a stock that has good value and gives a long term return.
Following factors are considered for fundamental analysis:
• Market Capitalization
It is the size of a company as evaluated by the stock market .It is the share price multiplied by number of shares on issue.
Generally termed as the sale of products and services over the years, these are the company’s revenues from its business activities. However this won’t include additional income from other sources like investments, bank interest or sale of assets.
• Profits After Tax (PAT)
It is the company’s profit after the payment of tax and also after deduction of minority interests.
Profit after taxes for the financial year is calculated for a company to understand the financial position of a company.
• Long Term Share Price Return
This is the total return you receive from the stock in the last five years. It includes reinvested dividends, bonus stock and rights issues and capital gain from the stock’s appreciation.
It is expressed as a compounded annual rate of return
• Price Earnings Ratio (PER)
PER is one of the most popular measures of whether a share is cheap or expensive.
Obviously the share price is continually changing .It is calculated by dividing the share price by earning per share
• Dividend Yield
It is the latest full year dividend expressed as a percentage of share price.
Like the share price, it changes as the share price moves. It is a useful figure especially for investors who are buying shares for income because it enables you to compare this income with bank term deposit, investment property or with alternative investments
• Earnings Per Share
EPS is after tax profit divided by number of shares. This figure is provided by company in its annual report and its results announcement.
• Earnings Before Interest And Tax
This is the company’s EBIT expressed as a percentage of its revenues. It is a measure of company’s efficiency. A high EBIT margin ensures that company is achieving success in keeping its costs low
• Debt Equity Ratio
It helps in analyzing the company’s debt levels. It is total borrowings minus the company’s cash holdings, expressed as a percentage of shareholders equity. This ratio is one of the best known measures to analyze the worth of a company.
All the above factors are used to analyze the company in general but one should consider the picture in whole and not make decisions based on only one or two factors in isolation.
To gain rich dividends over a long time, be cautious in your analysis and actions on investments.
Kishan Soni is the writer of this article and the faculty of Future Wings Media that provides Share Market Course In Delhi and many other professional courses.