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What is The Meaning Fundamentals Analysis ?


In Indian share Market mostly there two types of Traders who do buying and selling in Nse segment. One is called as a Intraday Trader and second one is Long & short term trader. Generally Intraday traders follow the Technical Analysis and long & short term trader, who can also be called as Investor use's the Fundamental Analysis to take his decisions to buy or sell.

Fundamentals Analysis

To Trade in Nse Market, there are two types of analysis, Technical analysis and Fundamental Analysis, which need to be done before a trader / investors put his hard earned money in NSE and BSE share market.

In this section A1 Intraday tips has tried to explain the meaning of Fundamentals Analysis (FA). The analyst / or a Advisory that gives the tips on fundamentals basis is generally for short term or long term investment. The Stock tips give by doing research using Fundamentals Analysis will not work for Intraday trading.

Fundamental Analysis can be either top-down or bottom-up. An investor who follows the top-down approach starts the analysis with the consideration of the health of the overall economy. The bottom-up approach is primarily concentrated on various microeconomic factors such as a company's earnings and financial metrics.

Fundamental Analysis (FA) is a method of measuring a price of the stock by examining the economic and financial factors at that particular time. A Conclusion is drawn that a Stock/security is undervalued or overvalued. Fundamental analysis evaluates certain securities to create forecasts about its price in the future. Fundamental analysis uses specific indicators like EPS, P/E ratios, beta and more.

Fundamental analysis is a study of each and everything that can affect the price of value. A Analyst should study all the macroeconomic factors such as the state of the Indian economy, sector wise performance using Sector Analysis Industry conditions using Industrial Analysis and also the company's performance using Company Analysis. The management team its experience etc who take decisions for the company are also studied in this Analysis. The Study of the future Trend of market whether bullish or bearish etc is also to be done in Fundamentals Analysis. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

A Detailed study of Fundamental analysis.

Fundamental analysis is the study to forecasts the future price of the stock using the current available data. Fundamental analysis of the following things.

  • Study of Company financial statements.
  • News / Press releases of Company.
  • Political condition in the Economy.
  • Trade agreements and Global Events that could Impact.
  • Competitor analysis a Study of Other Companies in the Same Industry.

Any bad news of the above is likely to negatively reflect in share price, same way a positive new can boost price of the said company.


Key performance indicators in Fundamental Analysis

A Careful study of the following Key Performance Indicators are used in Fundamental Analysis.

  • Earnings per share (EPS)
  • Price-to-earnings (P/E) ratio
  • Price-to-book (P/B) ratio
  • Return on equity
  • Beta

Earnings Per Share (EPS)

EPS also known as Earning Per Share is a financial ratio, which divides net earnings available to common shareholders by the average outstanding shares over a certain period of time. The EPS formula indicates a company’s ability to produce net profits for common shareholders. A Higher EPS is an indication of the company’s is doing good a good returns are expected in the future too. The higher the earnings per share, the better it is for the investor. A higher EPS is a symbol of a healthy company.

Earning Per Share Formula

Price to Earning Ratio (P/E Ratio)

Our Technical Team at A1 Intraday Tips has given information about Price to Earning Ratio for day traders in Nse Market. The Price Earnings Ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share price to the company's earnings per share. This Ratio can be calculated for only listed companies. Its tells us how much we are paying for each Rupees of earnings. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.

Price to earning ratio is calculated by formula = Current Market Price/EPS

Price to Earning Ratio

In the above example the share price of a company listed in the Nse market is Rs 100 and the Annual Earning per share calculated is Rs 20, So the Price to earnings ratio will be equal to 100/20 i.e. 5.

If a P/E Ratio is low, it could mean that investors are loosing the confidence and are likely to sell the shares. A P/E ratio should always be compared with the other companies in that same sector.

Price-to-Book Ratio (P/B Ratio)

The Price-to-book ratio is an fundamental indicator that shows how much the stock is worth to the current book value of the company. If a company worth 10 Crore's and has 5 lakh shares outstanding, it will have a book value per share of:

10,00,00,000 / 5,00,000 = 200 book value per share

The P/B ratio = Market Price per Share ÷ Book Value per Share.

If the stock trades at Rs 400 per share, then the price-to-book ratio is:

400 / 200 = 2 is P/B Ratio.

Here the P/B ratio is 2, If the P/B ratio is more than 1, the investors believe that the stock is likely to grow in the future. Some investors often consider stocks with a P/B value under 3.0 as very good stock for investments. P/B Ratio analysis can vary by industry, and a good P/B ratio for one industry may be a poor ratio for another industry.

Return on Equity (ROE)

ROE is especially used for comparing the performance of companies in the same industry. As with return on capital, a ROE is a measure of management's ability to generate income from the equity available to it. ROEs of 15-20% are generally considered good. Return on Equity is an important indicator as we can compare the company with other companies in to same business. A Company that gives high return on its equity is can continued to give better results in the future.

The Return on Equity is a measurement that determines how efficient a company is when using the share holder's equity. You calculate the ROE by dividing the share holder's equity by the company’s net income. If a company has generated approx 1 Crore as net income and the shareholder equity is Rs 10 crore this means the ROE is:

Rs 10,00,00,000 (Share Holders Equity) / Rs 1,00,00,000 (Net Income)= 10%

Note that you should calculate the ROE result as a percentage.

The higher the ROE, you can say that the management is more efficient than the other companies in the same sector. If a company generates a less a ROE which is less than 10% this means that is less efficient than the other company.


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Beta (β)

Beta analysis can provide great insights into the movements of a particular stock relative to market movements. Before investing in a company’s stock, the beta analysis allows an investor to understand if the price of that security has been more or less volatile than the market itself.

A beta that is greater than 1.0 indicates that the stock price is more volatile than the market. For example, if a stock's beta is 1.3, its 20% more volatile than the Nse stock market. Generally firms with more growth opportunities tend to have higher betas. Technology stocks and small caps tend to have higher betas than the market benchmark. High-beta stocks are supposed to be riskier but provide higher return potential, i.e. A company with a higher beta has greater risk and also greater expected returns.

A Low-beta stocks pose less risk but also lower returns.

Taking decision based on a sound Beta Analysis will definitely enhance the portfolio performance.

We have tried to cover all the Important aspects of Fundamental Analysis, this information will be beneficial for all new traders as well as new investors who are planning to start trading in stock market.


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