How to analyse stocks before investing.

 

There are more than 5000 companies listed in Indian stock market which is a very big number. And out of those companies only a couple hundreds are going to give above average or extra ordinary returns and the rest of the companies will either incur loss or will give average returns at most.

I was able to generate a return of 100% in the duration of 2 years which is high above good. Though some of the returns are result of bull run but my strategy for picking good stocks helped me to invest in companies which did very good during the bull run and so, 95% companies in my portfolio are now giving me a return of at least 40% to 300%.

Whenever I used to hear about a stock from instagram, telegram, youtube etc. I would check its financials through a website called SCREENER. I have been using this website for 2 years and find it a great tool for a overview of a company's financials. Let's say the company is SAIL so, I would search SAIL screener in google & it would take me to SCREENER's SAIL's financials page.

Following are the things to consider in a stock:-

1. P/E of the company should be less than its sector, otherwise the stock would be considered overvalued.

2. The 200 DMA must be in an uptrend which shows that the company's price is increasing in the long term and if the current market price is below 200 DMA then it would be a great point to create a position for long term.

3. If the company's CMP is below its book value then it would be a plus point, however CMP upto 3X of its book value is also fair. CMP More than that indicates overvaluation of stock in current market.

4. ROCE and ROC tends to change a lot in the short term due to market sentiments but a minimum 8 to 10% criteria must be set.

5. Sales and profit is the most important part of analysis. Company's sales must be in an increasing order over the quarters of 3 years. Variation over some quarters is manageable but over the years it must in ascending order and expenses should not be increasing as a fixed proportion of sales. Operating profit should also be in an increasing order.

6. For the balance sheet part, borrowings should always be less than reserves. Borrowings being 1/2 or less of reserves is standard but upto 3/5 to 4/5 is also fair. For banking & finance companies this criteria would be different since they are highly involved in borrowings and advances.

7. For the Asset side, more money should be in the form of Fixed assets, CWIP, Investments and less in trade receivables, advances because those may not get recovered in future.

8. For the cash flow part, Cash from operating profit should be positive which indicates that company is earning profit & generating cash from its operations. Cash from Investing activity should be negative which would mean that the company is purchasing more fixed assets instead of selling it. Cash from financing activity should also be negative which would mean that the company is repaying its borrowings and interests instead of taking new ones.

9. Shareholding pattern is also a crucial part of analysis. Over the years promoters holding should be increasing or atleast be stable. This would mean that the promoters who know every in-and-out about the company have faith over the company's performance in the future. Little dilution of holding is okay but a descending order would show the sign of a weak company no matter how good its financials are.

Stake of FIIs & DIIs in the company is also important since they have more resources, experienced researchers, analysts and algorithms with them. An increasing order in their shareholding pattern would also be a great plus point. I would prefer a company where promoters are holding more than 50% of the company and public is holding less than 40%. It is not a good sign that public is holding more stake than promoters.

For the conclusion part, a little flexibility in the analysis is okay while considering to invest but some factors like sales, cash flow and shareholding pattern should be monitored strictly. For companies like CDSL, Zomato, IRCTC more flexibility can be given since they are in a monopoly business or strictly under government control which they have no intention to convert private anytime soon.

For a proper fundamental analysis and finding multibagger stocks more time and information is required. For studying the background and experience of its management, profile of its suppliers & Customers, compliance with legal laws and regulations, connection with political parties, its sector's future growth prediction.

But with the help of above mentioned strategy I avoided investing in bad companies and was able to generate an outstanding return in less than 2 years.