How to do fundamental analysis on stocks? Fundamental analysis of a stock is used to determine the health of a company. It’s recommended to do a proper fundamental analysis of the stock before investing if you are planning for long term investment.
Technical analysis is good to find the entry and exit time in a stock for Intraday or short term. You can book good profits using different technical indicators.
However, if you want to find a multi bagger stock to invest, then the fundamental analysis is the best tool that you can utilise.
To get multiple times return, you need to remain invested in a stock for long term. While the technical indicators will show you exit signs on short term downtrends, however you can remain invested in that stock if the company is fundamentally strong.
In such cases, you will be confident that the stock will grow and give good returns in the future. Short-term market fluctuations, external factors or mis-happenings won’t affect the fundamentals of the strong company in long term.
In this post, I am going to explain how to do fundamental analysis on stocks. Here, I will ellaborate few guidelines that if you follow with discipline, you can easily select fundamentally strong companies.
I have also written a similar post on ‘How to select a stock in Indian market for consistent returns’ that you can find useful in fundamental analysis of stocks.
How to do fundamental analysis on stocks?
Here are 6 steps that you need to follow to analyse the fundamentals of a company in Indian stock market:
1. Use the financial ratios for initial screening:
There are over 5,500 stocks listed in the Indian stock exchange. If you start reading the financials (balance sheet, profit-loss statement etc.) of all these companies, then it might take years.
For the initial screening of the stocks, you can use various financial ratios like PE ratio, P/B ratio, ROE, CAGR, Current ratio, Dividend yield etc.
I have written a post on how to do initial screening using the financial ratios here: 8 Financial Ratio Analysis that Every Stock Investor Should Know
For the stock screening using financial ratios, you can use different financial websites like
How to do screening of stocks using Investing.com?
Step 1: Go to screener
Step 2: From top menu select Tools -> Stock Screener
Step 3: Select the financial ratio and then edit criteria.
For example, if you want PE ratio between (5, 18) and dividend yield % between (1, 3), you can select the following criteria.
Screener will shortlist the stocks according to the criteria mentioned. Further, you can also add a number of financial ratios in your criteria like CAGR, ROE etc.
Also read: How to follow Stock Market?
2. Understand the company:
It is important that you understand the company in which you are investing. Because if you don’t, you won’t be able to decide whether the company is performing good or bad, whether the company is taking right decisions towards its future goal or not; and whether you should hold or sell the stock.
A simple way to understand the company is to visit its website.
Go to the company’s website and check its ‘ABOUT’, ‘PRODUCTS’, ‘PROMOTERS/BOARD OF DIRECTORS’ page etc. Read the mission and vision statement of that company.
If you are able to understand the products & vision of the company and find it attractive, then move further to investigate more. Else, ignore the company.
3. Study the financial reports of the company:
Once you have understood the company and found it appealing, you can check the financials of the company like Balance sheet, Profit loss statements and cashflow statements.
As a thumb rule, Compounded annual growth rate(CAGR), sales & net profit increasing for the last 5 years can be considered a healthy sign for the company. However, you also need to check the other financials like Operating cost, revenue, expenses etc.
The best website to check the financial statements of a company that I most frequently use is SCREENER.
Here are few steps to check the financial reports of a company:
Step 1: Go to screener
Step 2: Enter the company’s name in search box. The company’s details will open like charts, analysis, peers, quarters, profit and loss, balance sheet etc.
Step 3: Check the company’s financials.
You need to study the financials of the company carefully to select a good value or growth stock for long term investment.
4. Check the debt:
Company’s debt is one of the biggest factor to check before investing in a stock. A company cannot perform well and reward its shareholders if it has huge debt. In short, avoid companies with huge debt.
As a thumb rule, always invest in companies with debt/equity ratio less than 1. You can use this ratio in the initial screening of stocks or else check the financials on the Screener website.
If you want to learn stocks from scratch, I will personally recommend you to read the book: ONE UP ON THE WALL STREET by Peter Lynch- best selling book for stock market beginners.
5. Find the company’s competitors:
It’s always good to study the peers of a company before investing. Determine what this company is doing that it’s competitors aren’t.
Further, you should be able to answer the question that why you are investing in this company and not any of its competitor. The answer should be convincing one like Unique selling point (USP), future prospects, upcoming projects, new plant etc.
You can find the list of the competitors of the company on the Screener website itself.
Just enter the stock name in the search box and navigate down. You will find a peer comparison there. Study the details about the competitors minutely.
6. Analyse the future prospects:
Always invest in a company with a long future prospects. Select only those companies to invest whose product or services will still be used 20 years from now.
Moreover, there is no point in investing in a CD or pen-drive making company with no long term (say 20 years) prospects. If you are planning to invest for long term, then the long life of company’s product is a must criteria to check.
Here are 6 steps on how to do fundamental analysis on stocks for the beginners
- Use the financial ratios for initial screening
- Understand the company
- Study the financial reports of the company
- Check the debt
- Find the company’s competitors
- Analyse the future prospects
That’s all. I hope this post on ‘How to do fundamental analysis on stocks’ is useful to the readers.
Further, If you find this post helpful and want me to write more contents on similar topic, please comment below. Happy Investing.
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Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting