How To Analyze A Stock/Company For Investment?

Ganesh Adhikari

Investors analyze several stocks/companies to find the potential winners in the capital market. The path to succeed in the stock market begins with analysis. The methods for stock analysis are different for every other investor. The two most common and traditional ways to analyze a stock are fundamental and technical analysis. A unique and powerful approach is devised called the techno-fundamental approach which is a mix of technical and fundamental analysis to make better bets against the market.

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Fundamental Analysis

Fundamental analysis is a process of evaluating the intrinsic value of a stock using various economic and financial factors. Some of the indicators used for fundamental analysis of a stock/company are:

1. Earnings Per Share (EPS) :

Earnings per share show how well the company is generating in profit per share. It is determined by dividing the company’s total earnings by the total number of shares outstanding.

EPS = Company’s Total Earnings/Total Number of Shares Outstanding

The higher the EPS, the better the company’s worth. High EPS means the ability to pay high dividends. The stock with high EPS is traded at a high price.

2. Price-to-earnings (P/E) Ratio :

The P/E ratio is one of the most essential indicators while analyzing stocks. It helps to determine if the stock is undervalued or overvalued. Undervalued stocks have a low P/E ratio while the overvalued stocks have a high P/E ratio.

P/E = Share Price/Earnings Per Share

Stocks with a low P/E ratio are considered safe than high those with a high P/E ratio. Traditionally stocks with a P/E ratio of less than 15 are considered undervalued. Commercial banks in Nepal are considered safe play as they have a comparatively low P/E ratio.


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3. Return on Equity (ROE) :

Return on Equity or ROE calculates the efficiency of a company to generate profits on its shareholder’s investment.

ROE = (Net Income / Shareholder’s equity) * 100

ROE determines how well the shareholder’s equity is being utilized to make profits. Companies with high ROE suggest the company is performing well and generating good revenues with the investor’s money. Microfinance companies in Nepal have shown better roe than other sectors.

4. Price to Book Value (P/B) Ratio :

The price to book value ratio is used to compare the company’s current market value to its book value. Book value reflects a company’s net worth.

P/B ratio = Share Price/ Book value per share

P/B ratio under 1.0 indicates the undervalued stock, but anything below 3.0 is considered safe. A higher p/b ratio means the investors have huge expectations from the stock and are positive about the company’s future growth. The insurance companies in Nepal might have a high P/B ratio due to potential future growth.

5. Dividend History :

The companies which had paid good dividends in the past are expected to follow the same path in the future. Looking at the current financial position of the company is equally important and its dividend history can help to find good stock. A glance at the reserves and surplus can provide additional information about the stock’s value. Healthy reserves mean the available liquidity which is important for the cash flow and growth of the company.


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6. Management Quality :

It is often said that there are no good or bad companies, only good or bad managers. Top executives are the key to the future of the company. The company’s management information can be accessed from annual reports of the company on the internet. Legendary investors like Warren Buffett speak about the importance of quality management for the company’s progress.

Similarly, profits, debt and liabilities, and annual growth rate are crucial aspects in analyzing a stock. The information can be obtained from the company’s annual and quarterly reports.

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Technical Analysis

Technical analysis is used to forecast the price movements in the market through the study of past market data, price, and volume with the help of trends, charts, and patterns. Technical analysis is key to make profitable entry (buy) and exit (sell) points. The value of the company is not prioritized in technical analysis. Some of the most popular tools used for technical analysis are:

1. Moving averages

2. Relative Strength Index (RSI)

3. Fibonacci Retracement

4. Moving Average Convergence and Divergence Indicator (MACD)

5. Bollinger Bands

6. Stochastic Oscillator

7. Aroon Indicator

8. The On-Balance-volume Indicator (OBV)


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Fundamental analysis is used to evaluate the intrinsic value of the company while technical analysis is about predicting the stock’s price direction looking at statistical trends in the stock’s price and volume.

The secrets to profiting in the stock market lie in how you analyze stocks/companies. Combining the fundamental and technical analysis can give you an edge while picking up the stocks. How I made $2,000,000 in the stock market is an interesting book that tells the extraordinary journey of a dance who made $2 million using the techno-fundamental concept.

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