How To Get Fundamental Data On Stocks

Chapter seven.5: How to Perform Fundamental Analysis of Stocks

In the previous section, nosotros tried to understand what fundamental assay means and how it is unlike from technical analysis. In this section, we will get down to understanding the essential components of fundamental assay. Equally described in the previous section, in key assay, we endeavour to assess a visitor's future prospects based on a scrutiny of its fiscal statements. We try to project its futurity earnings and based on them, estimate its value. Nosotros will take upwardly these concepts individually in this department.

However, we will first explain a concept called efficient market hypothesis, which seeks to explain why investors line up to buy stocks of companies that are expected to perform well and push their values up.

What is efficient market hypothesis?

Equity investors, like you, like to invest in companies that they believe volition achieve high earnings growth in the future. This is because high growth companies come with a higher future dividend paying potential. This, in turn, invites more investors to buy them. It ultimately leads to an appreciation of the stock price.

Assumptions of Efficient Market Hypothesis

Efficient Market Hypothesis by Kotak Securities

This philosophy is based on three assumptions: other investors in the market place have all the relevant data to grade an opinion most the future prospects of the company; they human activity upon this information, and this information gets reflected in market prices.

A market that displays these characteristics is called an efficient market. In such markets, all investors are privy to all the information pertaining to a company. They all use the aforementioned fix of information to make their investment decisions. As a result, nobody tin make more profit than the other and all the relevant information is reflects in market prices. This was the cardinal thought of Eugene Fama'south efficient market hypothesis of the 1960s.

Primal analysts utilize three categories of data—historical data, publically known information about the market (such as announcements fabricated by the management in the media and the annual reports released by it) and private data (or the information known merely to a select few, owing to their position with the arrangement).

According to Fama, in an efficient market, there is no individual information. All the information is available for free and known to all. As a result, all investors human action on this common gear up of information and brand equal profits. No ane is able to 'beat the market' or earn 'abnormal profits' based on special information or assay. Besides, there is no fourth dimension lag between the release of the information and its influence on prices.

Fama's theory has earned widespread disrepute considering what it proposed appears to be a fantasy. No two investors achieve the aforementioned returns in a market. Every year, a horde of investors earn greater returns than criterion indices, such as the BSE Sensex. Further, not all information is available to everybody. There are people, such as top employees of the company that are privy to classified data, not known to all. They sometimes utilise information technology unethically to brand greater profits than other people. This do is called insider trading. It is punishable past law. Further, institutions like investment banks and stock brokerages, deduce vital information from the analysis of companies. This is simply bachelor to their clients for a price. Thus, data is not free either. It is clear that Fama's treatise regarding markets beingness efficient is therefore questionable. Even and so, his theory is appreciated because information technology paints a moving-picture show of what could happen if market place weather condition were perfect. Just that probably, current market conditions aren't perfect.

Introduction to stock valuation

Now that we have established that the market place weather we operate under are not perfect, it is articulate that disinterestedness analysis can generate superior returns for you compared to the marketplace. Permit's then go along towards the process of analyzing companies. This portion deals with the approaches to calculating the tfair or intrinsic value of a stock.

Fair or intrinsic value of a stock is the price the stock should actually be trading at according to your assay. You lot can compare it with its current market price to ascertain whether information technology is overvalued, undervalued or fairly valued. Y'all would like to purchase a stock that is undervalued, considering its price should capeesh to your estimate of fair value, earning yous a profit in the procedure. If you own a stock that you recall is overvalued, you sell it. As for fairly valued stocks, you'd best leave them lone.

At that place are iii techniques used for the valuation of disinterestedness shares:

Techniques of Stock Valuation by Kotak Securities

Nowadays value models :

Present value models are based on the principal that since shareholders are joint-owners of the company, its hereafter earnings belong to them. The combined value of these earnings, in terms of today'south money, should therefore be the value of these equity shares.

The value of money changes with time. Rs 100 will not be worth the same in ten years' fourth dimension every bit information technology is today. Similarly, the value of future income projected for a futurity catamenia will be unlike today.

To business relationship for this, future incomes are divided past a specific discount rate to calculate their value equally of today. This is known equally fourth dimension value of money. The present value model has different variants. Each of them uses a unlike concept of future income for discounting. These include dividend, residual income and costless cash flows. The model that uses dividends is the most straight forward and commonly used. We volition explain this in a afterward section.

Relative value (multiplier) models :

A company can also be valued relative to the value of other, similar companies. In this example, the market price of its rivals is compared with one of their fundamentals, such as sales, book value of equity and net income. The ratio is then applied to the concerned visitor to gauge its value. The ratios used for this purpose are chosen toll multiples.
Nugget-based valuation :

In this model, the value of a company is based on the marketplace value of its assets and liabilities. The market place value of liabilities (not including equity) is subtracted from the market place value of assets to arrive at the value of disinterestedness. For the model to work, most of the assets of the company should exist tangible long-term assets. This model is rarely used.

Introduction to financial statement analysis

The financial performance of a visitor is organized and reported in the course of financial statements. There are three important statements presented in the almanac and quarterly reports of a company: the income argument, the balance canvas and the cash flow statement. A brief clarification of each of these is present below.

Different Types of Financial Statements

The income statement :

The income statement deals with the incomes and expenses of a visitor during a given financial year. It classifies them into various parts based on their nature. Expenses are subtracted from incomes to arrive at the profit for the year.

When analyzing the income statement, y'all should be concerned most the stability and time to come growth potential of incomes and expenses. Companies are evaluated on the basis of income from their 'cadre businesses'. Although companies also earn acquirement from other sources from time to time, these sources are not considered stable and truly representative of the efficiency of the company's operations.

Expenses-wise, you lot are once again interested in looking at the categories of expenses, their criticality to the concern, prospects of their recurrence and their role in increasing future earnings.
The cash flow argument :

This statement specifically talks well-nigh the cash position of a company. It divides the company' activities into three categories—operating, investing and financing, and gives an business relationship of the cash flowing in and out of the business on account of these.

The importance of the cash flow statement dwells on the fact that while a visitor earns and spends a lot of funds, as accounted for in the income statement, a lot of these flow are non-greenbacks. A lot of these flows inspire the hope of receiving or paying cash in hereafter, whereas others don't entail a flow at all. The statement removes this confusion by specifically stating the sources and uses of cash in the electric current period. Ideally, companies would be all-time placed if they generate enough cash from operations to finance their investing activities. Bringing in cash from financing activities to fund the other two implies an increase in the level of liabilities.

The remainder canvas :

This is the other nigh critical financial statement. It talks about the assets and liabilities of the business. Unlike the income statement, the residue canvass reflects the state of the assets and liabilities of a business at a particular point in time and non over a period of time.

A company needs certain assets to run its business smoothly. These are financed past certain liabilities—debt and equity. For a visitor to exist profitable, the revenue generated from these assets should exist greater than the amount required to repay the liabilities incurred to acquire them.

This is what yous should try and ascertain from the balance sheet. You lot are concerned about the nature of the assets and their future revenue generation potential. At the same fourth dimension, y'all are also concerned about the sustainability of debt. Also much debt will pressurize the company to earn beyond its potential to repay this debt. This is a dangerous and unsustainable proposition.

What next?

We accept looked at the basics of performing fundamental analysis. Going frontward, we volition look at information technology in detail. Equally described above, the starting point of a fundamental assay is always manufacture analysis. But before we jump to assay, is information technology important to understand the structure of an industry. This is what nosotros shall look at in the adjacent section. click here.

Revenue & Expense Analysis	Financial Statement Assay	Intrinsic Value of Stocks
Fundamental Analysis of Indian Stocks	What is Accounting	Understanding Stock Marketplace Trends
Asset & Liability Analysis	Greenbacks menstruum Statement	How to Identify Market Trends
Fundamental and Technical Analysis	Balance Sheets	Stock Charts in Technical Analysis
Fundamentals of Industry Analysis	Relation betwixt Stock Price and Dividends	How to Read Stock Charts
Concern Models	Income Statements	Intraday Trading Guide for Beginners
Fundamentals of a Company	Visitor Almanac Reports	Difference Between Intraday and Delivery Trading
Stakeholder Rights	Stock Valuations through Financial Ratios	How to choose stocks for intraday trading
How Companies and Industries Work	Introduction to Technical Analysis of Stocks	Intraday Trading Tips
Fundamentals of Stocks Technical Analysis	Intraday Indicators and Techniques	Price of Intraday Trading