Fundamental Analysis in Stocks

To determine a security's intrinsic worth, fundamental analysis looks at a company's financial statements as well as more general economic factors. This kind of study should yield an outcome that tells you the genuine value of the investment based on the market, economic conditions, and the financial health of the company. To determine whether or not to invest in a company based on its current and prospective worth, investors use fundamental analysis in stocks.

What is Fundamental Analysis?

The process of comprehending a company's operations at their most fundamental level—that is, its core financial level—is known as fundamental analysis. Several fundamental indicators and criteria are examined in order to do this. Understanding the fundamental idea that underpins a firm can be gained through fundamental analysis of that business.

Any stock investor's number one concern is that they are overpaying for a stock. Stocks do not have a set price, in contrast to groceries or restaurant dishes. Based on the current market price for the trade, you purchase a stock. What is a stock's actual value? For instance, are you paying more or less than the shares' actual value if you purchase HDFC Bank shares for ₹ 2200?

You can get the solution to these kinds of queries by performing fundamental analysis.

Fundamental analysis looks at a company's important ratios to assess its financial standing. Upon completion of the process, you will have a reasonable notion of the appropriate price for the company's stock. This indicates to you how much your buying price was. As a general rule, always keep in mind that the market price is always higher than fair value, thus you stand to win when you purchase a stock for fair value or less.
 

Is Stock Market Fundamental Analysis Important?

You are aware that the market price of a stock, such as Infosys, is ₹ 780 per share when you go to purchase it. This price is merely the going rate; in order to sell Infosys stock, a seller must want this amount. As a long-term investor, it is your responsibility to purchase the stock at a discount to its true worth. Thus, it makes sense to purchase Infosys stock at ₹ 780 if its real value is ₹ 900. However, purchasing Infosys shares at ₹ 780 is not a good deal if the stock's underlying value is ₹ 700.

Investors can learn the genuine or fair value of a stock through fundamental analysis and numerous stock fundamental reports. As a result, you are aware of whether the contract you are entering benefits the seller or the buyer. A firm or stock is considered undervalued if its current market price is less than its fair worth, which is sometimes referred to as intrinsic value. A corporation or stock is considered overvalued if its current market price exceeds its fair worth. This sums up the significance of a stock's fundamental study.
 

What are the Fundamental Analysis Components?

• The following are some components of quantitative fundamental analysis: debt-to-equity ratio, ROE ratio, P/E ratio, P/B ratio, and EPS. These are some of the few fundamental indicators that provide you with more detailed information about the stock or company.
• EPS stands for Earnings Per Share. This represents a profitability metric.
• EPS is the company's net profit divided by the total number of outstanding shares.
• P/E ratio stands for price to earnings ratio. This is a valuation metric.
• P/E is the division of stock price by earnings per share.
• P/B ratio stands for Price to Book ratio. This is a financial and banking industry valuation metric.
• P/B = Price of Stock divided by Stock/Company Book Value
• The D/E ratio stands for debt to equity. This represents the amount of debt.
• The company's total liabilities divided by the debt to equity ratio Total equity held by shareholders
• RoE stands for Return on Equity Ratio. It is a metric for profit that can be produced using the capital that shareholders have contributed.
• Net income of the business divided by equity held by shareholders equals return on equity.
   

Fundamental Analysis in Stocks Example

As an example of how to perform a basic company analysis, let's look at Infosys Limited, one of the top IT services providers in India. To assess their performance and inherent value, let's examine their financial statements and important financial statistics.

Statements of Finance:

The following are the condensed versions of Infosys's fiscal year 2024 financial statements:
 

Key Financial Ratios

Let's calculate and interpret some key financial ratios for Infosys:

1. P/E Ratio (Price-to-Earnings): To calculate the P/E ratio, we need the stock price and earnings per share (EPS).

As of 9-8-24 Infosys’s stock price is ₹1,771, and as of 31-3-24 the EPS is ₹ 63.20.

P/E Ratio= Stock Price / Earnings per Share
P/E Ratio= 1771 / 63.20
P/E Ratio= 28.02
A P/E ratio of 28.02 suggests that investors are willing to pay ₹28.02 for every rupee of earnings, indicating growth expectations.

2. P/B Ratio (Price-to-Book): Assuming the book value per share is ₹200:

P/B Ratio= Stock Price / Book Value per Share
P/B Ratio= 1771 / 200
P/B Ratio= 8.85

This ratio indicates that Infosys is trading at 8.85 times its book value, which could imply that the market expects high growth from the company.

3. Debt-to-Equity Ratio:

D/E Ratio= Total Debt / Total Equity
D/E Ratio= 39,300 / 88,116
D/E Ratio= 0.45

A debt-to-equity ratio of 0.45 shows that Infosys has a relatively low level of debt compared to its equity, indicating a strong balance sheet.

4. Return on Equity (ROE):

ROE= Net Income / Total Equity
ROE= 26,248 / 88,116
ROE= 0.30 OR 30%

An ROE of 30% signifies that Infosys is generating a return of 31% on the shareholders' equity, reflecting efficient management and profitability.
 

Technical and Fundamental Analysis Difference

Making wise stock market investment selections requires knowing the distinction between technical and fundamental analysis in stocks. These two strategies provide different techniques and perspectives for assessing equities.

1. Foundational Examination: The goal of fundamental analysis is to determine a company's intrinsic value by examination of its economic, industry, management, and financial aspects. This method entails looking over financial accounts, assessing important ratios like ROE and P/E, and taking into account qualitative elements like industry trends and competitive advantage.

For instance, to assess Tata Consultancy Services (TCS)'s long-term investment prospects, a fundamental analyst may look at the company's revenue growth, profit margins, and market positioning.

2. Technical Analysis: Technical analysis, on the other hand, forecasts future price movements by using past price and volume data. Technical analysts use tools like moving averages, MACD, and RSI indicators to analyze charts and patterns in order to spot trends and patterns in stock prices.

To make short-term trading decisions, a technical analyst could, for example, utilize Infosys' historical price charts to pinpoint support and resistance levels, trend reversals, and momentum indicators.

Stock Market Fundamental Analysis Types

The two distinct categories of fundamental analysis types are qualitative and quantitative. The foundation of qualitative fundamental analysis is the quality of a given entity, such as the board, financial performance, products, management, or brand. Subjective opinion characterizes qualitative analysis. For instance, you believe Bajaj Auto's goods to be superior to TVS Motor Co.'s. This viewpoint is qualitative. Numbers are added in quantitative fundamental analysis. The financial statements are the primary source of quantitative data. It is not arbitrary. It is imperative to conduct a qualitative and quantitative basic study of a company. You can't prioritize one above the other.

Additionally, there are two methods for performing fundamental analysis in stocks: top-down and bottom-up. When performing a top-down fundamental study of a company, investors first examine macroeconomic variables before delving into specific stocks. Before delving into the company's characteristics, for example, if they are examining Maruti stock, they will examine the auto industry and the passenger car segment. But in bottom-up fundamental analysis, a stock portfolio is constructed by first examining individual companies and then based on their unique advantages.
 

What are the steps to do Fundamental Analysis?

The process of analyzing a company's fundamentals involves six steps.

1. Get to know the business;

2. Perform preliminary screening using the financial ratios

3. Carefully review the company's financial reports.

4Identify and research the company's rivals and competitors.

5. Examine the company's debt and contrast it with competitors.

6. Examine the company's potential for the future.

7-You start out well by looking at these basic signs.
 

Pros and Cons of Fundamental Analysis in Stocks

1. Fundamental analysis has the following benefits: 

• It is highly beneficial for long-term investment strategies 
• Offers a comprehensive understanding of a company's financial characteristics

2. The following are the drawbacks of fundamental analysis: 

• Financial data is necessary and cannot be analyzed by everyone is a drawn-out and intricate procedure, so patience is essential. 
• Open a demat account to begin receiving investing recommendations and fundamental reports directly to your inbox.
   

Where to Find Fundamentals for a Company

The following are some of the most popular and trustworthy sources for information about a company's fundamentals:

1. Company filings: Public corporations must submit Form 10-K (annual report), Form 10-Q (quarterly report), and Form 8-K (current events report) to the SEBI on a regular basis. Comprehensive financial statements, management talks and analyses, and other significant company information are included in these filings. These filings are available for free on the databases and websites of the NSE and BSE.

2. Company website: The majority of publicly traded companies have an investor relations area where shareholders and prospective investors may access financial statements, earnings announcements, investor presentations, and other pertinent data. Transcripts of earnings reports are especially useful because company executives usually feel compelled to touch on sensitive corporate issues with reporters.

3. Financial platforms: Financial news, analysis, and fundamental data about publicly traded firms, such as financial statements, important ratios, and analyst ratings, are offered by Yahoo! Finance, Google Finance, and MarketWatch, among others.

4. Broker research studies: A lot of brokerage firms provide research reports, frequently including thorough fundamental analysis and investment recommendations, on the companies they and their affiliates cover.

5. Sources of financial data: Financial data subscription services like FactSet, Bloomberg, and Morningstar give a wealth of fundamental information and analysis on businesses, sectors, and markets. Professional investors and analysts are more likely to use subscriptions because they are frequently expensive.

6. Industry trade journals: Trade journals that focus on a particular industry can offer insightful information about competitive dynamics, company-specific advancements, and industry trends that can help you with your fundamental research.

Recall that in order to obtain a comprehensive understanding of a company's financial prospects and to be mindful of any potential biases or conflicts of interest in the information you're receiving, it is imperative that you do fundamental research using many sources.

Conclusion

Stock market fundamental analysis involves evaluating a company's financial statements, management, industry position, and market conditions to determine its intrinsic value. By conducting stock market fundamental analysis, investors can identify whether a stock is undervalued or overvalued. Mastering stock market fundamental analysis helps investors make informed decisions for long-term investments.