Before conducting the fundamental analysis of any company, either for the purpose of trading or investing, it is extremely vital to understand the various parameters associated with each listed company. By understanding and comparing these parameters, on a standalone basis, as well as with peer companies, investors can identify and select the stocks which present the right opportunities for considerable returns.
There are many parameters associated with each company’s stock. Let us examine each parameter in detail and the connotation, along with the impact of these parameters, to result in the selection of a stock.
The price of a single unit of any stock quoted on the stock exchange at any given time is termed as the Current Market Price (CMP) of the stock or simply, Stock Price. Based on the interest of the investors, these stock prices rise and fall in any trading session. Stock price is a representation of a company’s valuation on a per unit basis, and what the investors are willing to pay, to own a portion of that company.
Higher the stock price implies higher the valuation of the company on a unitary basis, and vice versa. Rising stock prices indicate a higher interest of the investors, and falling stock prices indicate poor confidence in those companies’ prospects.
There are 3 main categories encompassing the shareholding structure for a company, namely, Promoter and Promoter Group (A), Public Shareholding (B) and Non-Promoter & Non-Public Entities (C1, C2). The total number of shares issued by any company and available with the various public shareholders, including institutional investors are termed as Total Shares Outstanding. The details of shareholding by each class of investors is provided as part of the shareholding pattern, submitted by each company to the concerned stock exchanges.
To calculate the total number of outstanding shares, it is essential to add the total number of preferred and common shares outstanding, and subtract the number of treasury shares.
Total shares outstanding is useful in calculating the market capitalization of any company, and the dividend per share, to be distributed among investors. For more information, read the Shareholding Pattern in the earlier section.
Post listing, the total number of shares held by the promoters of the company is termed as the Promoter Shareholding. Stock market regulations prohibit the promoter and the promoter group from their holding to be greater than 75%. This is defined as the Threshold Holding of the promoter. On an average, most of the promoters hold above 50% of the total shares, to deter any hostile takeover of the company by other entities.
Also, if the promoter shareholding is less than the threshold, and if the stock price is at depressed levels even with good company performance or prospects, promoters can execute a creeping acquisition strategy, by buying shares from the stock market consistently, to increase their stake. In any particular year, the promoter cannot increase his holding by more than 5% of the total shares of the company.
Tracking the promoter shareholding helps in understanding the intent of the promoter group about their own company’s prospects.
The total value of all the shares outstanding for any company is called as the Market Capitalization of that company. Also called as Market Cap, it is a measure of the value of a company and helps in understanding the size of the company, either as a large cap company or a small cap company or a midcap company.
Market Capitalization is calculated by multiplying the current market price of the company by the total number of shares outstanding.
Market Capitalization is calculated as:
Market Cap = Current market price X Total no: of shares outstanding
In Oct 2017, market regulator, SEBI issued directives to classify (source) and define large cap, mid cap and small cap companies based on market capitalization, as follows:
Large Cap: 1st -100th company in terms of full market capitalization
Mid Cap: 101st -250th company in terms of full market capitalization
Small Cap: 251st company onwards in terms of full market capitalization
A critical financial parameter, Earnings per Share or EPS is an indicator of the profitability of any company. EPS is calculated by dividing the company's net profit by the total no: of shares outstanding. It is the most appropriate and critical indicator used by market participants to gauge the profitability of a company before investing in the company. Higher the EPS, higher is the profitability of the company.
Earnings per share is calculated as:
EPS = Net Profit / Total no: of Outstanding Shares
Example: If the annual net profit of the company is Rs. 100 cr. and the total no: of shares is 25 cr. then EPS (TTM) = Rs. 4.
Higher the EPS or EPS growth implies that the company is able to generate a higher profit per share from their business/operations.
When using EPS for evaluation of companies, investors have to reminisce that, companies with higher earnings are financially stronger as compared to companies with lower earnings. Also, companies that reinvest their earnings may pay low/ no dividends, to take advantage of better growth forecasts. On the other hand, companies with lower earnings and higher costs may be facing tough business prospects, making them risky from an investment perspective.
A measure of the net asset build-up of a company on an accumulated basis, Book Value of a company is the sum of the assets after deducting the accumulated depreciation. Simply put, it is the total value of the company's assets that shareholders would theoretically receive, if a company went bankrupt and was liquidated in entirety.
Also, termed as the Net Asset Value of a company, it is the amount of assets (market value) left after paying all its liabilities. This helps in determining the net worth of the business, which is basically the equity value.
Book Value is calculated as:
Book Value = Shareholder’s Equity = Total Assets – Total Liabilities
Normally expressed as Book Value per Share, it is calculated as:
Book Value per Share (BVPS) = Shareholder’s Equity / Total Number of Shares Outstanding
While book value is an accounting value on the balance sheet of the company, it is different from market value, which is a value assigned by the stock market. The difference between the book value and market value can sometimes be assumed as the indication of the stock being overpriced or under-priced. In most instances, consistently profitable companies will have market value greater than the book value.
Companies which are able to generate net profit from their business operations, often pay a certain portion of the profits to the shareholders on a periodic basis. This is termed as Dividend or Dividend Income. Dividend is paid either on an interim basis (in the middle of a financial year) or on a final basis (paid at the end of the year). Based on the time of announcement and payment, dividends are termed as either interim dividend or final dividend.
The shares of each company are traded (bought and sold) on a daily basis. Out of the total traded volume, a certain number of shares account for intraday trading, while the balance shares are bought by other investors for a holding period beyond the trading session. This is referred to as taking delivery of the shares. The percentage of the delivery volume with respect to the total traded volume is termed as Delivery Percentage or Deliverables (%).
Deliverable percentage is calculated as:
Deliverables (%) = No: of shares marked for delivery / Total no: of shares traded
A rise in deliverables along with a rise in stock price indicates demand from the buyers and vice-versa. A higher percentage of deliverable quantity to traded quantity is considered better, as it would indicate that most buyers are expecting the share price to move up further, in case the stock in on an uptrend and fall more, if it is in a downtrend. If the percentage of deliverable quantity is high and the stock is declining, it is a warning signal that the downtrend may continue.
At the same time, 100% delivery indicates that the shares of that company are categorized as part of the Trade-to-Trade segment (T2T), where intraday squaring off is not allowed and buyers have to mandatorily take delivery of the shares.
A graphical representation of the stock price movement across various time periods is termed as a Stock Chart. Each stock’s price movement is represented on a 2-axis chart, between price and time period as the parameters. Additionally, trading volumes over the same time periods can be superimposed, to get a detailed view of the price and volume changes over time.
Viewing a stock chart helps in understanding the movement and performance of the stock over several time intervals. A stock chart assists in assessing the previous returns provided by that particular stock over numerous time frames, starting with the daily movement and extending all the way back, to the listing of the stock on the exchange. There are many types of charts used for any analysis and the most widely used charts are Line Chart, Bar Chart, Candlestick Chart and the least used, point and figure chart. For better understanding, these charts are explained in detail in the technical analysis section.
As described earlier in the balance sheet section, Net Worth is the sum of all liabilities deducted from the sum of all available assets. It is also referred to as Book Value or Shareholder’s Equity.
Net worth is calculated as:
Net Worth = Total Assets – Total Liabilities = Book Value = Shareholder’s Equity.
If the net worth is positive, it implies that the sum of all the assets is greater than the liabilities and vice versa. In the initial stages of setting up of the business, the assets are comparatively lesser than the liabilities. Hence, many start-ups have a negative net worth, which can turn into positive over a period of time. Net worth helps in quantifying the financial position and an evaluation/assessment of the financial progress over time.
Financial Ratios & Analysis
Introduction & importance of financial ratios in understanding the health of companies.
It discusses the basics of Profitability Ratios before diving into each of them in further detail.