It is a common belief that people lose money in the stock market. However, people lose their money in trading due to poor financial decisions and lack of proper research. Due to lack of proper research and less knowledge about a company, they lose money in the stock market. Just as a farmer selects advanced and disease free seeds to take more production, in the same way, an investor should invest in a superior company to achieve future financial goals.
The fundamental analysis of a company can be called the squeeze of its financial data. Financial statements are helpful in conducting a company's fundamental analysis and show us a clear picture of the company. Fundamental observations are done using a company's financial data such as income, debt ratio, reserve ratio, increase in income, etc. Apart fTrom these, company management is also an area on which investors should pay special attention. As much as the company's management will be transparent and honest, the investment made in that company will be more secure and safe. So let's see, when performing a fundamental analysis of a company. which points we need to look at, and why?
Earning - Each company engages in business and runs it. The company’s profits earn from the business is called earning. Earnings play an important role in determining company's stock valuation. A company that has been increasing its earnings year after year for more than five years or more, such a company is considered to be the best investment choice. Every company has to show its earnings figures for investors three or four times a year. Good earnings figures point to the good performance of that company. This does not mean that low or negative earnings always indicate poor stock; For example, many young companies report negative earnings because they try to grow to a new market sufficiently fast, at which point they might otherwise be more profitable. To see the underlying data of the company's income on key financial statements and to use the low profitability ratio, it is to determine whether stock is a good investment or not.
Earning Per Share - The calculation of EPS (Earning Per Share) of a company is done by dividing the net earnings earned by that company, by no. of shares outstanding. The continuous increase in the earning per share of the company, indicates the growth of that company. For example, the net profit earned by the company is 10 lakhs and the number of outstanding shares is 5 lakhs, then the company's EPS will be Rs 2 per share. EPS are calculated from the following formula.
EPS= NET PROFIT/NO. OF SHARES OUTSTANDING.
P/E Ratio - EPS companies are a great way to compare earnings, but it does not tell you how the market values the stock. This is the reason why the fundamental analysts have used value-to-earning ratios, known as P / E ratios, to ascertain how much the market wants to pay for any company's earnings. You can calculate the P / E ratio of stock by dividing your price per share and dividing it by your EPS. For instance, assume that if the price of a share is 50 rupees per share and the EPS of the share is 5 rupees then its P / E ratio will be 10 rupees. You can also calculate company PE by dividing its total market capitalization with total earnings.
Book Value - The price-to-book value of a company is its total net worth, which is measured by its total assets minus its total liabilities. Suppose, a company is declared bankruptcy today. So the total outstanding liabilities to be deducted from its assest will be its book value. For this reason, value investors are more interested in book value compared to growth investors.
P/B Ratio - The price-to-book ratio of a company is determined by dividing the price per share by its book value. For example, a company that is trading at Rs 100 per share and its book value is Rs 5 per share, then it has P / B ratio is 20. This means that, the higher the ratio, the market is ready to pay as much premium for it. Value investor give more importance P/B ratio than growth investor.
Divided Yield - How much dividend has been given by a company to its investors by measuring the dividend yield. It is calculated by dividing the dividend per share given in one year by the share price. If a stock pays a dividend of Rs 2 during one year and 40 rupees is last traded price then it has 5% dividend yield. The mature, already established companies have high dividend yields. And the new growth oriented companies are low dividend yields. And small growing companies do not have any dividends yield because they do not give any dividends.
Return on Equity (ROE) - Return on Equity shows us how much profit a company is generate compared to the book price. This ratio is calculated by dividing the income after the tax deduction by book its value. It is used to show the company's efficiency. In other words, it is capable of gaining the benefits of generating the resources provided by its shareholders. Investors generally prefer to invest in those companies whose return on equity is high and rising.
So from the points pointed out above we have to know what the significance of a company's equity-related data is for the common investor. Using this, we can keep our investments simple and secure in a company. I hope this post will make your investment idea more broad and simple. If you have any questions related to the given point, then you can ask me from the comment box and I will be happy to assist you.
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