Sarvajeet: Uncle, till now we have discussed various topics related to Share market. But uncle there is one more thing missing. i.e. Technical Analysis.  Many times I have heard terms related to technical analysis  such as support, resistance, ADX, MACD, Trend line, bar charts, candlestick, open interest, patterns, formations etc. and I always wanted to know to know how it works.

Amit:  Hey Sarvo, are you crazy? What are you talking about? All these terms are new to me and it is like they have come from another planet.  Technical analysis is too technical for me man. 

 Uncle: Relax Amit.  Don’t worry.  I have colleague in my office and he is very good friend of mine.…

In con­tin­u­a­tion of Part 2 

Profitability Ratio

The last group of financial ratios, more often used, is Profitability Ratios. Profit is the difference between revenue and expenses over a period, usually, one year.

Profitability ratios are to measure the operating efficiency of the company. Besides management, lenders and owners of the company are interested in the analysis of the profitability of the firm. If profits are adequate, there would be no difficulty for lenders, normally, to get payment of interest and repayment of principal. Owners want to get required rate of return on investment.

Generally, two major types of profitability ratios are calculated:

• Profitability ratios based on sales
• Profitability ratios based on investment

I] Profitability ratios based on sales

Gross Profit Ratio

The first ratio in relation to sales is gross profit ratio or gross margin ratio.…

In continuation of Part 1

Activity Ratio

Firm invests funds of outsiders (lenders and creditors) and shareholders in various assets in business to make sales and profits. The better the management of assets, more would be sales and higher would be the profit.

Activity ratios reflect the management of assets and their effective utilization. If assets are converted into sales, with speed, profits would be more. Activity ratios bring out the relationship between the assets and sales.

These ratios are called Turnover Ratios. For example, funds invested in inventories are converted or turned over into sales. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes the assets, in particular, debtors and stock.…

Amit: Uncle, we have discussed many topics on stock market/share market right from basics i.e. what is share market, key fac­tors affect shares/stock, How to read Balance sheet, P&L A/c then fundamental analysis, Macro economic analysis, industry analysis and finally company/corporate analysis. During discussing these topics, you said “RATIO ANALYSIS”. What is ratio analysis? How we use ratio analysis for analyzing company? Is it very difficult? I am scared actually.

Sarvajeet: Relax Amit. You were scared when we started discussing about share market. Ratio analysis is a yardstick for evaluating the financial condition and performance of a firm.…

In continuation of Part 1- Corporate/Company Analysis (Part 1)

Uncle:  Yes Amit, you are right. Now after you identified the right industry to park your money, you should lay your hands on the right company. As Peter Lynch says, “Identifying the right industry but the wrong company, is like marrying into the right family but the wrong girl.”

You should do the company analysis considering every aspect. For easy analysis, you may use following as your checklist. After understanding this, we will understand ratio analysis.

 So let’s start.

I] NON-FINANCIAL FACTORS

Management and promoters:  Management is the trustee of the shareholders’ funds and is responsible to run the business in the best interests of the shareholders.…

Amit: Uncle, now we discussed about macroeconomic analysis (The Big picture) and Industry analysis now it is Corporate/Company Analysis correct?

Uncle: Yes amit.

Sarvajeet: This means we will be picking real winners here. I mean great stocks for investment.

Uncle:  Yes. I am very happy you guys are excited to learn more because it was lengthy discussion till now. We started from basics. We learned about what is share market, how to open demat & trading account then about primary and secondary market, then key factors affecting the company. Also we discussed about fundamental analysis, macroeconomic analysis and industry analysis. 

So let’s go further and let’s start with Corporate/Company Analysis

So first what is corporate/company analysis?…

Amit: Uncle we just discussed about Macroeconomic analysis (i.e. The Big Picture) where factors such GDP, Employment indicators, Interest rate, exchange rate, inflation; BoP etc. need to be considered. Now Industry Analysis correct?

Uncle: Yes Amit, investors believe that they increase their chances of picking winning shares by finding winning industries. While the individual company is important, the industry in which it operates is likely to exert a profound influence on its share price, as sector share prices tend to move in tandem. Consequently, investors should look just as carefully at the industry framework in which a company operates as the company itself.…

In continuation of Part 1.

Interest rate:

An interest rate in simple term is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender.

For example, a small company borrows capital from a bank to buy new assets for its business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower.

 Interest rates are normally expressed as a percentage of the principal for a period of one year.

Interest-rate targets are a vital tool of monetary policy (Monetary policy is as process by which the monetary authority (Central Bank) of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.) and are taken into account when dealing with variables like investment, inflation, and unemployment.…

Uncle: So Amit & Sarvo, are you ready for journey of leaning more about fundamental analysis? This requires commitment, attention to details and lots of hard work.

Amit: Yes uncle. Absolutely.

Sarvajeet: We are excited to learn more about fundamental analysis.

Uncle: Great. I am glad that you want to learn more about fundamental analysis. So we will understand the same in step by step process.

First, we will focus on Macroeconomic analysis (i.e. the economic environment) it is nothing but looking the Big Picture of an economy. Then we will focus on Industry Analysis (i.e. Study of Demand-supply, entry barriers, technology trends) and company analysis which will involve in-depth study of company (management, market share, exports and other important factors etc.)

After all these, we will look into financial analysis of company (prof­itabil­ity ratios, liquid­ity ratios, stock mar­ket related ratios etc.) and valuation technique.…