Fundamental analysis....

Discussion in 'Money Matters' started by Shanvy, Nov 17, 2007.

  1. Shanvy

    Shanvy IL Hall of Fame

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    Fundamental Analysis

    Fundamental analysis is the process of looking at a business at the basic or fundamental level. This type of analysis examines ratios of a business to determine its financial health and gives you an idea of the value its stock.

    Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the stock.


    It’s all about earnings. When you come to the bottom line, that’s what investors want to know. How much money is the company making and how much is it going to make in the future.

    Earnings are profits. It may be difficult to compute , but that’s what buying a share of a company is all about isn't it. increase in profits generally leads to a higher stock price and,also a regular dividend.

    When there is loss, the market batters the stock. Every quarter, companies report earnings ..which is declared to the BSE also..so those who of you who dont have access to the report can always check at the Bombay Stock Exchange - BSE site for SENSEX, stock quotes and market trend.... we have to follow major companies closely and if they are falling in the negative of projected earnings for that quarter/year..it is time for you to take check...


    Sometimes there is more to a stock than proft. take the case of RPG cables that has been discussed last in the investment in stocks discussion......it is in the negative..but has a high recommendation...other factors also go with it...like new funds, new projects....

    What defines the company's fundamental..

    Revenues: Revenues (sales) are the total amount of money received by a company through the sales of its goods and services during a specific period of time. Revenues are one of the most important yardstick of the growth of a company


    Cash flows: Cash flows indicate the liquidity position (cash richness..) of a company.

    Net income: Net income, is the net off after all of the company's costs, such as operating costs, interest expenses, depreciation, taxes and other expenses associated with running the business.

    Balance Sheet: Balance sheet is the company's financial statement, which reflects its assets and liabilities. A company's fundamentals are said to be very healthy if its assets are greater than its liabilities...but the glitch is sometimes the companies have hidden liabilities..that are not actually understood as a layman (like me..)

    Return on Assets : ROA is an Indicator of a company's profitability, on the average of a year. so this considered by long term investors...
     
    Last edited: Nov 18, 2007
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  2. Shanvy

    Shanvy IL Hall of Fame

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    Since all of us know what is a share. Let us move forward to other tools…

    They talk about the earnings, growth, and value in the market.

    Earnings per Share – EPS
    Price to Earnings Ratio – P/E
    Projected Earning Growth – PEG
    Price to Sales – P/S
    Price to Book – P/B
    Dividend Payout Ratio
    Dividend Yield
    Book Value
    Return on Equity

    So let us discuss them one by one….

    Earnings per Share…ok you are looking into buying shares of a company x. now we need to know the number of shares of the company …Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public is called outstanding shares.

    If the company has more shares, the earnings will be divided into more parts.

    For example, companies x and y both earn Rs.100, but company x has 10 shares outstanding, so each share holder has in effect earned Rs.10.

    On the other hand, if company y has 50 shares outstanding and they too have earned Rs.100 then each shareholder has earned Rs.2. So you see it is important to know what is the total number of outstanding shares are as well as the earnings.

    Now EPS = Net Earnings / Outstanding Shares

    So if you are out looking at both x and y…which company would you choose.? Naturally X with Rs.10 EPS..right….
     
  3. Shanvy

    Shanvy IL Hall of Fame

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    P/E – Price to Earnings Ratios….

    Ok now we know one tool, eps…

    The P/E is the relationship between the stock price and the company’s earnings. The P/E is the most popular stock analysis ratio, though not a stand alone….tool…


    P/E = Stock Price / EPS


    A company with a share price of Rs.400 and an EPS of 80 would have a P/E of: (400 / 80) = 5

    What does p/e indicate….

    If the p/e is very high, it is called a overpriced stock..and the market has an impression that it is going great guns…

    If the p/e is less..a thumbs down from the market..or it has been overlooked..(an overlooked stock sometimes…could turn out to gold it has happened a lot of time)

    The P/E tells you what the market thinks of a stock. It tells you whether the market likes or dislikes the stock.
     
  4. Shanvy

    Shanvy IL Hall of Fame

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    Projected Earning Growth – PEG


    Projection is nothing but your expected estimation/earning. Here PEG is the Projection of price to the future growth…..

    PEG = (P/E) / (projected growth in earnings)

    If a stock with a P/E of 30 and projected earning growth next year of 10% would have a PEG of 30 / 10 = 3.

    So how to understand this ration and how it reflects on the stock and the market….

    If the PEG is low, it means that you are paying less for a stock with a good future earnings growth.

    A stock is strong even if the PE is high, when the earnings projection is equally high.

    When looking, we look at stocks with low PEG.

    if the PEG ratio is big (or close to the P/E ratio), it is probably because the “projected growth earnings” is very low. This is the kind of stock that market is not of much value.

    if the PEG ratio is small (or very small as compared to the P/E ratio), then the projected earnings is very high, then you know it is a fundamentally strong stock


    The first X with 20% annual growth in net income and a P/E ratio of 50. The second company Y has lower earnings growth at 10% and its P/E ratio is also relatively low at 15.

    So PEG of X = 2.25

    PEG of Y = 1.5

    The PEG ratio shows us the company X, doesn't have the growth rate to justify its higher P/E, and its stock price appears overvalued, particularly when this comparison is made.

    By providing a futuristic viewpoint, the PEG is a valuable evaluative tool for investors attempting to determine a stock's future prospects.

    A glitch…These projected earnings are not always accurate and so the PEG ratio may or may not be accurate.
     
  5. Shanvy

    Shanvy IL Hall of Fame

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    hi all,

    I would like to know if i am able to give an simple explanation that is easy for all ... Other wise there is no point in this exercise..right? ...Will continue after your comments....
     
  6. Anandchitra

    Anandchitra IL Hall of Fame

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    Dear Shanthi
    hats off to you Even makku like me can understand it. I thought i wasnt to comment so was reading keep posting love it. also its taking me to get the full grasp so I can use as reference Thanks so much for taking the time and putting in the effort
     
  7. Shanvy

    Shanvy IL Hall of Fame

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    hi AC,


    Thanks a lot.
    I was afraid of confusing somebody who knew the FA well..that is why had to ask....When I was trying to learn it, it was too confusing for me..too much material..so want to make it simple...

    The idea is to Find out if at the end of this whole FA ..can we all spot good Strong stocks.....so keep coming back....

    We can learn a lot with our discussions, and each ones views on the same....
     
  8. Shanvy

    Shanvy IL Hall of Fame

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    Price to sales ratio :

    The price-to-sales ratio looks at a company's market capitalization (market capitalization is the number of common shares multiplied by the stock price) divided by annual sales.


    Market cap = no.of share x stock price

    PSR = Marketcap/annual sales…


    Basically, this ratio shows how market values every sale. Obviously, a company that can generate a lot of profit from every sales is going to receive a higher valuation per sales than a company that generates very little profits from each sales.

    It is also important that you only use the price to sales ratio to compare companies in the same industry since there will be differences among industry groups. You have to compare two FMCG, two IT companies..not an FMCG with IT as the working, the sales everything differs..

    X’s price to sales ratio in this example is 1.6 and Y’s price to sales ratio is 2.1; the ratio for the industry group is 2.8. Both companies were selling under the same stock sector but X’s number is better than Y’s. Looking at their P/E, X’s P/E is 20 and X’s is 34.5, with the industry average at 33. Once again, X appears to be the better value. If the numbers here had conflicted, there is a very good possibility that something fishy had happened in one of the company’s books..making you wonder if there was something wrong and to watch closely to all news related to that company…..
     
  9. Saraswathipv

    Saraswathipv IL Hall of Fame

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    Hi Shanvy,

    Just started going thru this this.

    Right from my school days, I used to scan thoroughly, the newspaper, but just leave out the financial section.B,coz never understood it...or should I say I didn't care enough??? I could have easily caught it. bonkbonk..what with an experienced Company Secretary and Financial Mngr, as my Appa(who is a departed soul) and now my younger brother who is financial/business analyst, in Chennai, after completing his Masters in Financial Mgmt.

    Now,when I started getting interested to know what it is all about...ur post has come as a boon. :hatsoff Thanx Shanvy, will go thru it and bombard u with doubts, shortly.


    bye
     
  10. Shanvy

    Shanvy IL Hall of Fame

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    hi saraswathi,

    Basically i am an engineering person. dad was into finance and accounts. never took too much interest..but would keep an ear into all those discussions.

    Now with a little encouragement from my husband again in finance, he says i have to learn it on my own...(he is ACA,ACWA but will not teach or interfere..) kalla katti thanni la potta neechal thane varum..that is his argument....

    So i am learning..and sharing thats all...so you are welcome to read and come back with questions so that we learn together....
     

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