Fundamental Analysis of stocks Part 3 - Tools required for fundamental analysis

What's the difference between qualitative and quantitative fundamental analysis of stocks?

 In the previous article, a basic introduction to fundamental analysis is discussed.This article it is getting into the topic in detail.

What are the tools required for fundamental analysis?

1. Annual report - It is a document that provides all the information of a company for the year under review.
2. Finance news - Daily updation of share market news boost your ability to pick good companies. There are lot of websites that shares recent share market news, like Economic times market and magazines Dalal street investment journal.
3. Industry related data - Basic data on what updations are occurring in each sector. This information will be available on sector-wise websites.

What is the Compounding effect ?

Compounding is the simple concept that the gain of an investment is reinvested for another gain. Compounding is said to be the eighth wonder of the world. Over  years the power of compounding will multiply the amount that you invested at an initial phase. The chart below will show you how compounding works.

 

From the chart, you can see that, For a CAGR of 15 % an amount of Rs.1000 you invested will get multiplied to 4 times in 10 years. What if you had invested 1 lakh rupees for 10 years with a CAGR of 20% ? Calculate by yourself and see the magic of compounding.

How do we select stocks for long-term investment?

The primary tool we use to select stocks for long-term investment is fundamental analysis. As I mentioned in the previous article, the important material needed for doing fundamental analysis is the annual report of the company. In this article, we are starting the study on How to read an annual report ?

Where you can find the annual report of a company?

You can either find it on the official websites of the companies or rather you can find it on third party websites like screener. Here I provide the link to SCREENER where you can find the annual report of a company. In the screener you can also find studies made by them. It will be helpful for newbie investors.

Fundamental Analysis of stocks

The figure below shows each and every study while doing fundamental analysis.

 What are the two types of studies in Fundamental Analysis ?

1. Qualitative Analysis of a business involves the study of quality of a business apart from the numeric aspects.
2. Quantitative Analysis of a business evaluates the values of the company like profitability and growth.
   

Qualitative Analysis in terms of understanding

1. Management's Background - Who runs the business? What's their background? Experience? Do they have the ability to run the business?
2. Business Ethics - It is checking whether the company has been involved in any scams or unfair business.
3. Corporate Governance - Governance by the management, structure of the organization, etc.
4. Minority shareholders - Does the management consider the interest of its minority shareholders?
5. Related party transactions - Checking whether the company doing any financial favors to their promoter's friends, vendors etc.
6. Salary paid to promoters - If the management pays themselves a huge salary under a situation of low revenue then it is against the shareholder's interest.
7. Shareholders- Who all are the major shareholders of the company?
8. Political affiliation - Political view of the management and promoters.
9. Promoter's Lifestyle - What type of lifestyle are the promoters leading?

Before investing in a firm, we have to check whether these qualitative factors are in the right condition. For example, If the management itself paid a huge salary compared to the profit of the company. It is not favorable for the investor.

Related article : Fundamental Analysis Part 4 - fundamental analysis of stocks

Terms related with quantitative analysis will include in the next article. Check the label FUNDAMENTAL ANALYSIS on this page for reading all articles related with this topic.

Read : Multibagger in Infrastructure sector- NCC Ltd - Annual Report 2021-22.

 

Amazon ads :Fundamental Analysis Shares : Become An Intelligent Investor

 

"Earn an extra income from writing" - No additional qualifications required. Complete guidance will be provided here. The only thing you care about is your writing skills . Click here for registration.

To know about our terms and conditions read the disclaimer page