Technical Vs. Fundamental Analysis: Strategic Choices For La Traders – A Beginner’s Guide to Fundamental Stock Analysis: Stock fundamental analysis is used to determine the financial and business health of a company. It is always recommended to do a complete fundamental analysis of a stock before investing if you are planning a long-term investment.
If you are involved in the market, you might also come across the term “technical analysis”. Well, technical analysis is a good way to find entry and exit timeframes for intraday or short-term trading. Here we look at charts, trends and patterns. You can make good profits by using various technical indicators effectively. However, if you want to invest in a multi-bag stock that can give good returns year after year, then fundamental analysis is the actual tool you need to use.
Technical Vs. Fundamental Analysis: Strategic Choices For La Traders
This is because in order to get multiple returns (eg 5x or 10x), you need to stay invested in stocks for the long term. Although technical indicators will show you exit signs in the short term whenever there is a downtrend or minor setbacks, you still need to stay invested in that stock if the company is fundamentally strong. In such cases, you should trust that the shares will grow and give good returns in the future and avoid short-term underperformance. Short-term market fluctuations, unavoidable factors or error situations do not affect the fundamentals of a strong company in the long term.
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In this post, we’re going to discuss how to do fundamental analysis on stocks (how to check a company’s fundamentals). Here are a few guidelines that, if followed with discipline, you can easily choose fundamentally strong companies.
Here are the six essential steps you need to take to analyze the fundamentals of a company in the Indian stock market. They are really simple but effective in finding fundamentally sound companies. Here it goes:
More than 5,500 stocks are listed on the Indian stock exchange. If you start reading the financial statements (ie balance sheet, income statement, etc.) of all these companies, it could take years. The annual reports of most companies are about 200-300 pages long. And it’s not worth spending time reading every company’s report.
A better way is to first select a few good companies based on a few criteria. And then research these screened companies one by one to choose the best one for you.
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For the initial screening of stocks, you can use various financial ratios such as price-earnings (PE) ratio, price-to-book value (PBV) ratio, ROE, CAGR, current ratio, dividend yield, etc. If you want to know more about the best financial ratios for screening, you can find article 8 about the analysis of financial ratios that every stock investor should know. In short, you need to use various financial ratios for initial screening.
Next, you can perform stock screening using financial ratios using the Trade Brains Screener. I will give you an example of stock screening with Trade Brains Screener.
For example, if you want to filter companies with a PE ratio of 8-20 and a dividend yield of 1-3% and an average ROE over the last three years of more than 12%, you can choose the following criteria. Trade Brains Screener lists stocks according to the mentioned criteria and gives you a list of companies.
In addition, you can also add several financial ratios to your criteria, such as ROCE, Current Ratio, ROA, P/Book value, etc. In addition, you can use any other financial ratio that you want to screen stocks that suit your needs.
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Once you have screened the companies based on the criteria above, the next step is to research them. It is important that you understand the company you are investing in. Because if you don’t, you can’t decide whether the company is doing well or poorly, whether the company is making the right decisions towards the future goal or not; whether its competitors are performing well or poorly compared to them, and most importantly, whether you should hold or sell the stock.
That’s why it’s important that you understand the company. Questions like what are its products/services, who runs the company (founders/promoters), management effectiveness, competitors etc., you should know.
A simple way to understand the company is to visit its website. Go to the company website and check it’s INFORMATION, PRODUCTS, PROMOTERS/BOARD page etc. Read the mission and vision of that company. Also, if you can find the company’s annual report, download and read it. This report provides in-depth information about the company.
Also, if you can understand the company’s products, services and vision and find it attractive, move on to the next step. Otherwise, ignore that company.
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Once you have understood the company and found it attractive, the next thing you need to do is review the company’s financial information, such as the balance sheet, income statement, and cash flow statement.
As a rule of thumb, turnover/sales, net profit and margin growth over the past five years can be considered a healthy sign for the company. After that, you also need to check other financial details such as operating costs, expenses, assets, liabilities, etc.
Now where can you find the financial information of a company you are interested in investing in? One of the best websites to review a company’s financial statements that I would definitely recommend checking out is the Trade Brains Portal. Follow these steps to check your company’s financial results on the Trade Brains portal:
Step 2: Enter the company name in the search field. Company information opens, such as key figures, income statement, balance sheet, cash flow statement, quarterly reports, peer competition, etc.
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It is required that you carefully study the company’s finances in order to choose a good stock for long-term investment. If you don’t know how to read a company’s financial information, you can check out this financial statement and ratio analysis course for beginners.
A company’s total debt is one of the biggest factors to check before investing in stocks. A company cannot perform well and reward its shareholders if it has a huge amount of debt. They have to pay back the debt and also the interest on the borrowed money before anything else. In short, avoid companies with large debts.
As a rule of thumb, always invest in companies with a gearing ratio of less than one. You can use this ratio for initial stock screening or otherwise check it when reading the company’s financials.
In addition, other red flags of the company can also be a constantly decreasing profit/margin, low liquidity and pledging of shares.
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It is always good to get to know the company’s peers before investing. Find out what this company does that its competitors don’t.
In addition, you should be able to answer the question why you are investing in this company and not in any of its competitors. The answer should be persuasive, such as unique selling point (USP), competitive advantage, affordable products, brand value, future prospects (future projects, new factory), etc.
You can find a list of the company’s competitors on the Trade Brains portal itself. Just type the name of the stock in the search field and navigate down. There you can find a peer comparison. Otherwise, you can do a google search to find the company’s competitors. Research competitors in detail before investing.
Most of the good investments are based on the company’s future perspectives/opportunities and not much on the current situation. Investors are interested in how much return they can get from their investments in the future. Therefore, always invest in a company with strong long-term prospects. Choose to invest only those companies whose product or service will still be used twenty years from now.
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Also, it makes no sense to invest in a CD or pen manufacturing company that has no long-term (say, 10 years from now) outlook. With cloud drives evolving so quickly, these products become obsolete over time.
If you plan to invest in the long term, the long life of the company’s product is definitely a criterion to check. Also, check future prospects, expansion opportunities, possible sources of income in the future, etc.
Fundamental analysis is an old and proven method for finding strong companies for long-term investment. In this post, we discussed how to review a company’s fundamentals.
The six steps described in this article to perform fundamental stock analysis are: 1) Use financial ratios for initial screening, 2) Understand the company, 3) Study the company’s financial reports, 4) Check for liabilities and red flags, 5) Find the company’s competitors 6) Analyze future prospects.
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