Fundamental Analysis Course

The three phrases that you must engrave in your mind are: good businesses, right valuations, and long-term focus. Ignore short-term volatility and base your investment decisions on these principles.

Stocks compete with many other asset classes, starting from a rudimentary bank account to other advanced asset classes like currency futures. While diversification across asset classes is a good idea, no other asset class is more rewarding than equity. Bank deposits and debt instruments (bonds and bond funds, Public Provident Fund, post-office deposits, etc.) give fixed returns and hence look safer than
stocks, which can be highly volatile. Debt instruments were the previous generation’s pet. Many of us still vouch by the sanctity of fixed income. The only problem is that you can’t create wealth with debt.

How to make money in the stock market? This is a classic question that most investors ask. And the answer to this question depends upon whom you are asking. There are a number of styles of stock investing and their adherents vouch for the efficacy of their respective styles. How do you know then which style is good? Here is some quick help.
Broadly, all styles of stock investing can be categorized into two: fundamental investing and technical investing. While a fundamental investor studies financial details and other company-related information to pick his stocks, technical investor studies price patterns, trends, mathematical models and other graphical data to pick stocks

Value investing is a real form of investing. It requires you to find good companies available at a bargain.

Value investing is essentially long-term investing as the realization of value happens over the long term. This is why you should have a time horizon of at least five years when you invest in stocks.

The balance sheet is called so because it always balances according to this relation:
Assets = Liabilities + Owners’ equity

A balance sheet that doesn’t balance is simply wrong. The balance sheet shows the assets that a business owns, the liabilities that it owes and the funds contributed by its shareholders. Assets include land, equipment,
inventory, goodwill, patents, brand value, etc. Liabilities include debt (long term and short term) and any other payables that a business has. Shareholder funds are in the form of equity and reserves.

As its name suggests, the P&L statement tells you about
the profitability of a company. The simple formula to
calculate profits is as follows:
Profit (loss) = Revenue – Expenses

The head ‘revenue’ generally has two entries: revenue from sales and other income. Other income is the revenue from the sources other than the core area of the company’s operations. For instance, it could be income from investments, dividends, royalties, etc.

The cash-flow statement shows the movement of cash in a business. While businesses can misstate their profits through accounting jugglery, they can’t fudge the movement of hard cash. Hence, a cash-flow statement provides a true picture of a company’s financial health. However, for banks and finance companies, the cash-flow statement is of limited use as these businesses have a different business model
than other types of businesses.

If you are not one who likes to dig deep into a company’s financial statements but still wants to make sense of its financials, financial ratios come to your rescue. They are readymade tools to interpret
what’s happening in a company. Most financial ratios can be derived from the three major financial statements: balance sheet, profit-and-loss statement, and cash-flow statement.

Companies take debt to run their business operations. Their shareholders also put money, called equity, in the business. The debt-toequity ratio tells us about this balance. A high debto-equity is not desirable. But to know what is ideal, you must see the industry-wide trend.

Also called the return on equity (ROE), this ratio tells us what returns a
company is generating on its equity part. A high RONW is desirable. Good companies have more RONW than their peers.

This ratio tells us how much a company makes from its core operations. It is derived by dividing the operating profit by the total revenues.
A high operating margin is a good sign, but do see the industry trend.

This ratio indicates how fast a company is growing its revenues over a period of time. High revenue growth is a positive sign and shows that the company is expanding.