In this article, we’ll explore some of the best ways to identify fundamentally strong stocks that have the potential to deliver long-term value for your investment portfolio. Companies with a solid financial foundation, strong management, and a track record of consistent growth are fundamentally strong.

Investing in the stock market can be a daunting task for beginners.

With so many companies listed on stock exchanges, it can be overwhelming to choose the right stocks to invest in. However, with the right tools and knowledge, anyone can become a successful investor.

In this blog, we will discuss how to analyze stocks and select fundamentally strong stocks using financial ratios, cash flow statements, income statements, and other key metrics.

Types of Stock Analysis:

Before diving into the details of stock analysis, it is essential to understand the two main types of stock analysis: Fundamental Analysis and Technical Analysis. Both methods of analysis have their advantages and disadvantages. Let’s take a closer look at both types of analysis:

Technical analysts use charts, graphs, and statistical analysis to identify patterns and trends in stock prices. They focus on short-term price movements and use technical analysis to make investment decisions.

Fundamental analysis is a method of determining a stock’s real or “intrinsic” value by examining various factors that could affect the stock’s price in the long run. It involves analyzing the company’s financial health, its management, its competitors, and the overall economic and political environment.

The aim of fundamental analysis is to identify stocks that are undervalued or overvalued by the market.

When should you buy?

If the intrinsic value is higher than the market price, then the stock is undervalued, and it is a good time to buy.

When should you sell?

If the intrinsic value is lower than the market price, then the stock is overvalued, and it is a good time to sell.

Financial Ratios – Health Check

One of the key components of fundamental analysis is analyzing financial ratios that provide a snapshot of a company’s financial health. Here are some financial ratios that are used in stock analysis:

Earnings per share (EPS)

EPS is calculated by dividing a company’s total earnings by its outstanding shares. The higher the EPS, the better the health of the company. Investors should draw a comparison with the EPS of peer groups to evaluate the company’s performance.

For example, if the total earnings of ABC Ltd are INR 1 crore and the number of shareholders is 1 lakh, then the EPS will be (10000000/100000)= 100 per share. This means that you will earn INR 100 by owning 1 share of ABC Ltd.

Price-earnings ratio (PE)

PE is the ratio of the market value of a company’s shares (share price) over its earnings per share.

How can you use Price-Earnings ratio?

Lower PE indicates better health of the company. If the PE ratio is less than the industry PE, then the stock is available at a cheap price, and it is a good time to buy.

For example, if the price of the stock of TCS is INR 500, and the EPS is INR 100, then the PE ratio is (500/100 = 5). This means that you will pay INR 5 to earn INR 1. If we compare it with the industry PE of IT, which is 10, then the PE of TCS is lower than its industry PE, making it an attractive investment.

PB is the ratio of the market price per share over its book value per share.

How can you use Price to book value ratio (PB)?

If PB is greater than 1, the share is overvalued, and if PB is less than 1, the share is undervalued.

For example, if the current market price of Indian Oil Corporation is INR 2000, and the book value per share is INR 1000, then the P/B ratio of IOC will be (2000/1000 = 2). Since PB is more than 1, IOC is overvalued.

However, it is worth noting that PB is not a reliable ratio to analyze service industries, such as IT companies.

Draw a comparison with a company in the peer group of IOC – Bharat petroleum corporation.

PE of Bharat Petroleum is at 1.50.

Here, it’s a wise decision to invest in Bharat Petroleum as
PB of Bharat Petroleum < PB of IOC

Annual Report Analysis

Annual report analysis gives a holistic idea about the company rather than analyzing quarterly reports. Quarterly reports may not help in the analysis as they fluctuate quarter on quarter basis.

For example, you can look at the financial statements, management discussion and analysis, and the auditor’s report in the annual report. This will help you understand the company’s financial health, its strategies, and its risks.

Cash Flow Statement:

A cash flow statement is a financial statement that shows how much cash a company generates from its operations, investing activities, and financing activities. It helps investors understand a company’s cash flow, which is crucial for its financial health.

Income Statement:

An income statement is a financial statement that shows a company’s revenues, expenses, and net income. It helps investors understand a company’s financial performance over a particular period.

Price Movements and Trends:

Price movements and trends are critical indicators that can help investors identify buying and selling opportunities. Technical analysts use price charts to analyze trends and predict future price movements. Investors should always keep an eye on the price trend of the stock they are interested in.

Long-term vs. Short-term investing:

When analyzing stocks, it is essential to distinguish between short-term and long-term trends. Short-term price movements are often influenced by market speculation, economic events, and news, while long-term price movements reflect the company’s financial performance and industry trends.

based on the belief that stock price movements follow a pattern, and that by understanding these patterns, traders can make profitable trades.

Example – Moving Averages

One common technical analysis tool is the moving average. The moving average is calculated by taking the average price of a stock over a certain period of time. For example, a 50-day moving average would be the average price of a stock over the past 50 trading days. Traders use moving averages to identify trends and to signal potential buy or sell opportunities. If the stock price is above the moving average, it is considered a bullish signal, while if it’s below the moving average, it is considered a bearish signal.

How to buy fundamentally strong stocks?

You can buy stocks with strong fundamentals just like you purchase any other stocks. One of the easiest and most efficient ways to practice buying/selling stocks is StockPe. From filtering stocks and evaluating their feasibility of investing to placing stock orders, StockPe supports the end-to-end process of placing stock orders. Let’s take a look at how to place a buy order for stocks on StockPe using StockPe Tournaments.

Once you shortlist the stocks that you want to buy, add them to the Basket and execute a single buy order to add the stock to your portfolio. Thanks to these features, you don’t have to jump platforms to research your investments and practice how to place buy orders.

Before starting a transaction on StockPe, make sure that you have registered on StockPe.

Once done, follow these steps:

Pick fundamentally strong stocks
Head on to StockPe’s Play Feature and choose stocks with strong fundamentals using ratios and key metrics.

Analyze stocks

Evaluate each of these stocks on the respective StockPe Tournaments. StockPe Feeds and Market Today feature in StockPe app -> Home, give comprehensive details on the company’s financials, peers, corporate actions, and more that can help you buy the stocks real time.

Add stocks to Portfolio

On shortlisting stocks to buy, click on ‘Buy’ in StockPe Tournaments. Select between buy or sell type. Click on the ‘Add to Basket’ button to add the stock to your Basket.

Build your Portfolio

After adding all the fundamentally strong stocks to the Portfolio, Sell the stocks which are no longer fundamentally strong.

Check your Rank

Verify your portfolio and make necessary changes, if any before the tournament ends. Compete, Make it to the leaderboard and win exciting prizes!

Buying multiple stocks on StockPe Tournaments is really that simple.

Why fundamental analysis of stocks is important?

The importance of fundamental analysis of stocks is not limited to one reason. Here are a few reasons why:

It helps to determine the fair value of a stock.
You can evaluate the health and performance of a company by looking at its financials and macroeconomic factors.
It helps an investor to gauge whether a stock is overvalued or undervalued.
An investor can understand the company’s strength and capability to stand out from its competitors.
It also helps the investor understand the business model of a firm.

Cash Flow Statement

One of the most important financial statements that investors should look at when performing fundamental analysis is the cash flow statement. The cash flow statement shows how much cash a company generates from its operating activities, investing activities, and financing activities. This statement gives investors an idea of how much cash a company has on hand and how it is being used.

Financial Performance

When analyzing stocks, it is important to look at a company’s financial performance. This can be done by looking at its revenue growth, profit margins, and return on equity. A company that consistently shows strong financial performance is likely to be a good investment opportunity.

Income Statement

The income statement is another important financial statement that investors should look at when analyzing stocks. This statement shows a company’s revenue and expenses over a specific period of time. Investors can use this statement to determine a company’s profitability and its ability to generate earnings.

Price Movements

Another important factor to consider when analyzing stocks is their price movements. Investors can use technical analysis to analyze a stock’s price trend and volume to predict future price movements. Technical analysis involves using charts, graphs, and statistical analysis to identify patterns and trends in stock prices.

Conclusion

Investors should consider a company’s potential for future growth when analyzing stocks. Look for companies with a proven track record of growth or those in industries with high growth potential before making any investment decision. Fundamental Analysis of Stocks plays a key role in this.

How To Analyze Stocks – Best Ways To Select Fundamentally Strong Stocks

Investing in the stock market can be a daunting task for beginners. With so many companies listed on stock exchanges, it can be overwhelming to choose the right stocks to invest in. However, with the right tools and knowledge, anyone can become a successful investor. In this blog, we will discuss how to analyze stocks and select fundamentally strong stocks using financial ratios, cash flow statements, income statements, and other key metrics.

Types of Stock Analysis:

Before diving into the details of stock analysis, it is essential to understand the two main types of stock analysis: Fundamental Analysis and Technical Analysis. Both methods of analysis have their advantages and disadvantages. Let’s take a closer look at both types of analysis:

Technical analysts use charts, graphs, and statistical analysis to identify patterns and trends in stock prices. They focus on short-term price movements and use technical analysis to make investment decisions.

Fundamental analysis is a method of determining a stock’s real or “intrinsic” value by examining various factors that could affect the stock’s price in the long run. It involves analyzing the company’s financial health, its management, its competitors, and the overall economic and political environment.

The aim of fundamental analysis is to identify stocks that are undervalued or overvalued by the market.

When should you buy?

If the intrinsic value is higher than the market price, then the stock is undervalued, and it is a good time to buy.

When should you sell?

If the intrinsic value is lower than the market price, then the stock is overvalued, and it is a good time to sell.

Financial Ratios – Health Check

One of the key components of fundamental analysis is analyzing financial ratios that provide a snapshot of a company’s financial health. Here are some financial ratios that are used in stock analysis:

Earnings per share (EPS)

EPS is calculated by dividing a company’s total earnings by its outstanding shares. The higher the EPS, the better the health of the company. Investors should draw a comparison with the EPS of peer groups to evaluate the company’s performance.

For example, if the total earnings of ABC Ltd are INR 1 crore and the number of shareholders is 1 lakh, then the EPS will be (10000000/100000)= 100 per share. This means that you will earn INR 100 by owning 1 share of ABC Ltd.

Price-earnings ratio (PE)

PE is the ratio of the market value of a company’s shares (share price) over its earnings per share.

How can you use Price-Earnings ratio?

Lower PE indicates better health of the company. If the PE ratio is less than the industry PE, then the stock is available at a cheap price, and it is a good time to buy.

For example, if the price of the stock of TCS is INR 500, and the EPS is INR 100, then the PE ratio is (500/100 = 5). This means that you will pay INR 5 to earn INR 1. If we compare it with the industry PE of IT, which is 10, then the PE of TCS is lower than its industry PE, making it an attractive investment.

PB is the ratio of the market price per share over its book value per share.

How can you use Price to Book value ratio (PB)?

If PB is greater than 1, the share is overvalued, and if PB is less than 1, the share is undervalued.

For example, if the current market price of Indian Oil Corporation is INR 2000, and the book value per share is INR 1000, then the P/B ratio of IOC will be (2000/1000 = 2). Since PB is more than 1, IOC is overvalued.

However, it is worth noting that PB is not a reliable ratio to analyze service industries, such as IT companies.

Draw a comparison with a company in the peer group of IOC – Bharat petroleum corporation.

PB of Bharat Petroleum is at 1.50.

Here, it’s a wise decision to invest in Bharat Petroleum as
PB of Bharat Petroleum < PB of IOC

Annual Report Analysis

Annual report analysis gives a holistic idea about the company rather than analyzing quarterly reports. Quarterly reports may not help in the analysis as they fluctuate quarter on quarter basis.

For example, you can look at the financial statements, management discussion and analysis, and the auditor’s report in the annual report. This will help you understand the company’s financial health, its strategies, and its risks.

Cash Flow Statement:

A cash flow statement is a financial statement that shows how much cash a company generates from its operations, investing activities, and financing activities. It helps investors understand a company’s cash flow, which is crucial for its financial health.

One of the most important financial statements that investors should look at when performing fundamental analysis is the cash flow statement. The cash flow statement shows how much cash a company generates from its operating activities, investing activities, and financing activities. This statement gives investors an idea of how much cash a company has on hand and how it is being used.

Income Statement:

An income statement is a financial statement that shows a company’s revenues, expenses, and net income. It helps investors understand a company’s financial performance over a particular period.

The income statement is another important financial statement that investors should look at when analyzing stocks. This statement shows a company’s revenue and expenses over a specific period of time. Investors can use this statement to determine a company’s profitability and its ability to generate earnings.

Price Movements and Trends:

Price movements and trends are critical indicators that can help investors identify buying and selling opportunities. Technical analysts use price charts to analyze trends and predict future price movements. Investors should always keep an eye on the price trend of the stock they are interested in.

Another important factor to consider when analyzing stocks is their price movements. Investors can use technical analysis to analyze a stock’s price trend and volume to predict future price movements. Technical analysis involves using charts, graphs, and statistical analysis to identify patterns and trends in stock prices.

Long-term vs. Short-term investing:

When analyzing stocks, it is essential to distinguish between short-term and long-term trends. Short-term price movements are often influenced by market speculation, economic events, and news, while long-term price movements reflect the company’s financial performance and industry trends.

based on the belief that stock price movements follow a pattern, and that by understanding these patterns, traders can make profitable trades.

Example – Moving Averages

One common technical analysis tool is the moving average. The moving average is calculated by taking the average price of a stock over a certain period of time. For example, a 50-day moving average would be the average price of a stock over the past 50 trading days. Traders use moving averages to identify trends and to signal potential buy or sell opportunities. If the stock price is above the moving average, it is considered a bullish signal, while if it’s below the moving average, it is considered a bearish signal.

How to buy fundamentally strong stocks?

You can buy stocks with strong fundamentals just like you purchase any other stocks. One of the easiest and most efficient ways to practice buying/selling stocks is StockPe. From filtering stocks and evaluating their feasibility of investing to placing stock orders, StockPe supports the end-to-end process of placing stock orders. Let’s take a look at how to place a buy order for stocks on StockPe using StockPe Tournaments.

Once you shortlist the stocks that you want to buy, add them to the Basket and execute a single buy order to add the stock to your portfolio. Thanks to these features, you don’t have to jump platforms to research your investments and practice how to place buy orders.

Before starting a transaction on StockPe, make sure that you have registered on StockPe. Once done, follow these steps:

Pick fundamentally strong stocks

Head on to StockPe’s Play Feature and choose stocks with strong fundamentals using ratios and key metrics.

Analyze stocks

Evaluate each of these stocks on the respective StockPe Tournaments. StockPe Feeds and Market Today feature in StockPe app -> Home, give comprehensive details on the company’s financials, peers, corporate actions, and more that can help you buy the stocks real time.

Add stocks to Portfolio

On shortlisting stocks to buy, click on ‘Buy’ in StockPe Tournaments. Select between buy or sell type. Click on the ‘Add to Basket’ button to add the stock to your Basket.

Build your Portfolio

After adding all the fundamentally strong stocks to the Portfolio, Sell the stocks which are no longer fundamentally strong.

Check your Rank

Verify your portfolio and make necessary changes, if any before the tournament ends. Compete, Make it to the leaderboard and win exciting prizes!

Buying multiple stocks on StockPe Tournaments is really that simple.

Why fundamental analysis of stocks is important?

The importance of fundamental analysis of stocks is not limited to one reason. Here are a few reasons why:

It helps to determine the fair value of a stock.
You can evaluate the health and performance of a company by looking at its financials and macroeconomic factors.
It helps an investor to gauge whether a stock is overvalued or undervalued.
An investor can understand the company’s strength and capability to stand out from its competitors.
It also helps the investor understand the business model of a firm.

Financial Performance

When analyzing stocks, it is important to look at a company’s financial performance. This can be done by looking at its revenue growth, profit margins, and return on equity. A company that consistently shows strong financial performance is likely to be a good investment opportunity.

Conclusion

Investors should consider a company’s potential for future growth when analyzing stocks. Look for companies with a proven track record of growth or those in industries with high growth potential before making any investment decision. Fundamental Analysis of Stocks plays a key role in this.