How to do fundamental analysis of stock or business ?

 First of all, welcome everyone to the blog of Financialsnap where we try hard to make financial knowledge easy for you, so let's get started. So, as we know that analyzing a business is very important aspect for investing in that company to get returns or safe returns or to become rich or change your life in a short time. so now coming to the part how we can Analyse a business and i will let you know that in a simple and lucid style with a real-life example.

Scenario:

The biggest market of web and internet is with google as we know. Actually, we can say google is the king and has monopoly over its market. So, if we want to start investing in a company similar to google with a much less value and stock price than google and we actually don't want to miss the opportunity to take a stock which can become biggest competitor of google in near future. so how to Analyse its business and how actually you can become a shark in angel investing like Ashneer Grover, Anupam Mittal or Aman Gupta. So say the company name is "ABC" in which we want to invest.

Product of competitor and which usp(unique selling point) your product has:

So, let's Analyse what value google is providing in the market to the customer which creates its monopoly. So, google focuses on search engine technology, online advertising, cloud computing, computer software, artificial intelligence and consumer electronics. So, in order to break monopoly of google, our company ABC has to first made a product in search engine technology which is more fast and more advanced than google as google comprises of 65% of MarketShare in this area. so may be the product has to be more fast delivering much accurate users result. Interface should be easy to use, and they have to reward people if they are using ABC search engine rather than people. This will create trust in the mind of people and then we can acquire a large share of advertising because of user database that our company has. so, this is how we look at the competitor product and its usp. if all these things are in the product, then we can think of investing after analyzing other points.

Sales and revenue of the company with its cashflow:

So, let's say ''ABC'' has sold his product of $5 (manufacturing cost) to 200000 customers at a selling price of say $8 making a profit of $3 per product. We will see the expenses of the company that how much money company has in terms of its net income/net revenue. So here according to our example we can see that our total cost price for manufacturing these products is $1000000 and after selling the product as mentioned above, we are making profit of whopping $600000($1600000-$100000). So, in this case ABC is in profit but we don't have to see this number only and invest in the company. Now we will see the expenditure of the company that is salary of employees, office expenditure, if there are any debts etc. So, lets understand this:

1. Our profit by selling products also known as gross profit                         =$600000
2. salary and other office expenses also known as administrative expenses=$300000
3. The difference of gross profit and administrative profit is known as operating profit =$300000
4. Now ABC has to pay say tax of 10% on operating profit 
5. so, after tax the Final profit for that financial year of ABC would be $270000

Now if we don't have any debt or debt is less than our profit and revenue, we see how much free cash we have in our account and mostly during analysis we take sales and revenue data for last 3-4 years. So, if all these data are positive, we can think of investing after other analysis. 

Companies vision or Expansion plans:

So, the next thing comes in analysis of a business is its growth data of last three to four years and the numbers that the company ABC is targeting for next 2-3 years at least. Suppose ABC has growth of 55% from its scrap days and its revenue is going to be more than the current financial year in next 2-3 years with good expansion strategies and its business is going to grow and ABC is bringing some products for growth which will solve the problem of current scenario then we can think pf investing in ABC.

Valuation of the company according to its stock price:

This has to be one of the most important points which we have to look before investing and I will also let you know the formula for finding right valuation in simple terms. Suppose the stock price or equity value that has been asked from you by ABC is $60/share for its share or stock and the annual earnings of the last 12 months per share is $5 which means company is getting profit of $5 per share last year so by watching companies' growth we will find PE ratio by the formula shown in figure. Here we to have to note that if a company is growing at a faster rate its PE can be higher than the company which has same earning per share but growing at a slow pace. Let me give you an example:

If the profit of Company XYZ is growing at 10% at $5 Earning per share so this company and the company like ABC which is growing at a rate of more than 20-30 % with same $5 Earning per share for last year can have more PE on the basis of its growth rate. Sometimes PE can be high for good companies or negative or zero for default companies. So, growth rate and this formula for PE together is neccesary for determining valuation for getting good returns in future.

Promoters' shareholding pattern and Management of the company:

So here we will Analyse this aspect of company that what is shareholding pattern of the company, how is decision making ability of the company, so as we know nobody knows how the company is and what will be its future than its promoters, owners or founders. So, from shareholding pattern or distribution of equity among investors we can be saved from scam because if there is some problem in company then shareholders can sell their shares at a low rate to investors also to cut off their losses small. so, we have to keep this thing in mind while investing. As well as we have to keep note of management interviews on different medias to know companies' management vision and decision-making ability. A Standard metric to Analyse share holding pattern is owner or promoter of the company should be holding minimum 51% share in the company. This implies that the company has someone who could take bold decisions whenever needed and there are less chances of fraud. Here is the shareholding pattern figure:

If you have analyzed this all aspects mentioned above, then you can go for investment in that company it has low probability to get shutdown or delisted. And if the companies don't satisfy these analyzing qualities, then ask yourself this question for sure before investing:

Thanks for reading