Basics of Fundamental Analysis

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Fundamental analysis is the tool which investors can use to earn above average returns from stock market in the long run. Fundamental analysis basically answers the questions regarding viability, profitability, sustainability and competitive advantage of the business model any firm adopts. All these answers are hidden in the financial statements of the target firm. Although, fundamental analysis is a very big topic and hard to present in the word limit of a one page article, I have tried to summarise the key parameters investors should focus on while searching for portfolio winners.

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How to analyse Operating Profit of a company

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Operating profit or operating income is the amount left with the company after subtracting cost of goods sold and other day to day operational expenses such as employee cost, rent, electricity, transportation etc. from the revenues. It is basically the profit a company earns from its core operations (no other sources). For example, operating profit of Maruti Sujuki means the amount it gets from selling cars after subtracting cost of manufacturing and other recurring operating expenses. It is normally reported as the third highlighted line item after revenues and gross profit in the profit and loss statement (P&L statement) or the income statement.

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Analysis of Security Wise Delivery Position

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Security wise delivery position is the data related to price, total traded volume and delivered volume provided by NSE and BSE on daily basis for particular stock that trades on these exchanges (see the snapshot data of security wise delivery position data for HDFC bank in the figure below). NSE and BSE, also gives the figure of deliverable positions as a percentage of total traded volume (the last column in figure below) and from stock market investment perspective it’s quite interesting to interpret the relationship between price movement and delivery percentage.

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How to analyse Net Sales of a company

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Gross sale or sales or revenue is basically the amount a company receives against the sale of its products. When this amount is adjusted for company discounts, it becomes net sales. It is reported at the top of the company’s P&L statement and is also referred as company top line. From fundamental analysis perspective, the net sales figure is an important measure of company's ongoing growth and financial health. It is the starting point for calculation of many other important parameters such as operating profit and net profit.

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How to analyse ROE of a company

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ROE means the returns on equity. By equity we mean the shareholder’s equity, also known as net worth. Mathematically, ROE is nothing but net profit after tax divided by shareholder’s equity. When we define net profit and shareholder’s equity, we have to understand what it includes and excludes.  The net profit excludes dividends paid to the preferred shareholders, but includes the dividends paid to the common shareholders. We take net profit after tax because this is the money available to the common shareholders. Shareholder’s equity is assets minus the liabilities.

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Stock investment in high interest rate scenario

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Inflation and interest rates are negatively correlated, meaning when one goes up, the other goes down and vice versa. Interest rates are frequently referenced in the RBI monetary policy in order to tame inflation. Tinkering of interest rates (either moving up or down) affects stock prices of a bunch of stocks on the stock exchange. These stocks are collectively known as interest rate sensitive stocks and you might have heard analysts quoting them on business channel a number of times.

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