Fundamental Analysis of Shares

Fundamental Analysis of Shares

By Gayathri Nair
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fundamental analysis of shares

Do you believe in luck? If yes, are you sure that you can always get lucky in share trading? If you still reply ‘yes’, then this article is not for you.

And if you are still reading, then I must say that you are among those people who believe that intelligent decisions is what makes you lucky in share trading. And in order to make an intelligent investment decision, one must be well-informed about this topic.

What is fundamental analysis of shares?

It is a process which ascertains a share’s value by concentrating on primary factors that affect a company’s current business and its future projections. In simple terms, fundamental analysis attempts to establish the value of a company which is also known as the Intrinsic value. It is assumed that in the long run, the stock price will manifest the company’s intrinsic value.

Major Aspects of Fundamental Analysis

Quantitative Analysis

It consists of all the factors that can be expressed or measured in numerical terms.

For example, an investor foresees a boom in software industry and is keen to buy some shares of major IT companies like TCS, Infosys, etc. He gets their annual reports and examines their revenues, earnings, assets and debts. These financial measures are combined to form the Financial ratios. The most common ratios often discussed are

He then uses various ratios to compare the company with other companies in the same sector, with the overall market and with the previous quarter results for the same company. After a comprehensive comparison, he gets a fair idea on the financial forte of the companies under his consideration.

Qualitative Analysis

These factors cannot be expressed or measured in numerical terms.

For example, an analyst can easily examine the ratios of say, Hindustan Unilever. But, do you think that the company’s quantitative factors are alone responsible for the share price? No. The company has a remarkable brand name and there will not be a single house-hold in India that does not have at least one product of this company.

Factors that contribute qualitative analysis are:

  • Business Model: Company’s products and all such information that can be gathered from the company website
  • Competitive Advantage: Brand names like Apple, HUL, Coca-Cola have an edge over their competitors that helps them reap profits.
  • Management performance and experience: Successful companies make sure that their top management are the best in the lot. E.g. Nandan Nilekani was once associated with Infosys, Sunil Mittal’s association with Bharti Airtel Group and so on.
  • Corporate Governance: For the benefit of the company’s investors and other stakeholders, the company complies with its governance policies and government regulations.

Other broader aspects include Industry growth, Market share, competition, Government regulations, etc.

It should be clear by now that all these factors contribute to the volatility in the share markets. A betting game can be very risky. An investor must be cautious enough to take calculated risks. If he can’t do it himself, he should definitely consult an expert.

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Gayathri Nair
Gayathri Nair holds a Management degree in Finance and has previously worked Ernst & Young & ICICI Securities. Gayathri quit her job to concentrate in writing. She writes for many popular financial websites. Apart from finance she has indepth knowledge in Financial accounting and Oracle financials.

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2 COMMENTS

  1. Today, I got an opportunity to hear to Mr. Raamdev Agarwal, Joint MD and Co-founder of Motilal Oswal Financial Services Ltd. It was my first lecture ever on trading and he explained various nuances of share markets. Your article was an icing on the cake. Especially the difference between price and value. In the words of Mr. Raamdev Agarwal, “Price is what you pay and value is what you get” (Pardon me if I am inaccurate). Your article is very clear. Really looking forward for such clarity of thoughts

    • It is one of the most famous quotes by Warren Buffett “Price is what you pay, value is what you get”. Actually intrinsic value is the discounted present value of future cash flows. So both price and value cannot be same.

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