You can find the stock market with a list of companies from different sectors or industries giving lucrative returns to investors as well as traders to earn some profits with short-term trading. However, buying the stocks blindly without doing research or analysis can cost you in terms of losses or you might wait for many years for the capital gains on your investment.
There are many factors that affect the stock market in India and individual stock prices movement of the companies. When you do research you will be able to analyse such factors that determine the stock price and are also responsible for its movement in the stock market.
But the question right here is what to research while analysing such factors that can affect the stock price or can be the decision-making factors while buying a stock. Hence we brought her the key points that you should research and analyse while purchasing a stock of a company.
POINTS TO CHECK BEFORE BUYING A STOCK
Though there are various points to consider before buying a stock for long term but researching and analyzing all the factors are not possible for the normal investor. A professional research analyst or financial analyst can do that thing thoroughly. But here are a few fundamental as well as technical factors that you can also research about the stock of the company.
QUESTIONS TO ASK BEFORE BUYING A STOCK:
What is the Core Business of the Company?
As Warren Buffett once said, “You should never invest in a business you cannot understand.” Yes, before you buy shares of any company from the investment perspective you need to understand the business model of the company. What does the company manufacture or produce or provide the services along with various business verticals and identify the core business of the company.
You should understand how the company works in meeting its clients’ needs and what is the manufacturing process and its plant units. And if the company is service sector, then what kind of exact services it is offering to whom and what are the other business verticals? You should also have an understanding of the business or industry in which it is operating.
How Company Earn its Revenue?
The second thing you need to research while buying a stock of a company is to analyse what is the main source of income of the company. This means how does company earns its revenue and what the various other segments of the business from which the company is earning its revenue. Check the market share of revenue in the industry and what are the operating income and margins.
Also, check the operating margins and net profit margins from various segments or overall EBDITA and NET Profit margins of the company. It will help you determine whether the company is profitable or not and has the scope for revenue growth in the future or not. You can easily find revenue and income-related information in annual reports and quarterly or annual financial results.
Who are the Promoters & Management of the company?
Now do some research on knowing about the people in the top management of the company. Who are the founders, co-founders and promoters of the company? Check their educational backdrop and experience in the industry with a track record of their role in this company or if they worked with other groups of companies since they are working in this industry or any other industry.
Who are keyman sitting at the helm of the company, those positions include chairman, MD, CEO, CFO and non-executive directors of the company? You can also check their shareholdings in term of equity shares, their salary and their role in the company. It will help you to know who is the key person running the company or involved in the decision-making at the management level. You can find management information on the website of the company or in the annual report.
CHECK FUNDAMENTALS BEFORE BUYING A STOCK
There is a quote by a legendary investor Warren Buffett, “Never Invest In Something You Don’t Understand”. If you as an investor understand the business of the company, its operating structure and model, its revenue stream & income and align with the management of the company, you can therefore check the fundamentals of the company. It will help you understand, how much the company is fundamentally strong and whether you should invest or not.
Analyse the Financial Growth of the Company
Generating revenue every year would be not enough for a company there should be significant growth every year in terms of operating income and net income. This is one of the very important parts while researching and analysing any company to know its performance.
Calculate the CAGR revenue, operating income and net profit growth of the company. It will show you how consistently the company is growing or not and also check the operating as well as net income margins of the company. It will help you analyse the growth factors of the company because as per the revenue and income growth of the company, the share price of the company also grows.
Analyse the Industry Trend & Future Scope
Analysing the company’s growth from its revenue and income will not give you the true picture, if the industry is running into crises, then how it is possible the company will grow well? Hence, you also need to analyse the industry growth and its trend so that you can compare the company of which stock you are looking to buy, is doing well or not or growing as per the industry trend.
And while analysing the industry or sector also check the market share and role of the company in the industry. The leading companies in the industry influence the entire sector and also represent the entire industry in terms of growth and various activities in that particular industry or sector.
RATIOS TO CHECK BEFORE BUYING A STOCK:
After analysing earlier factors, you need to do some research and analysis on the various key ratios that can give you the financial health and valuation of the stock price of the company. Every company falling in certain industry have some ratios dedicated to assess their financial, operations, margin, etc. For example, average revenue per user (ARPU) is used in telecom industry, load factor is used for Airline industry, etc. Some of the ratios are described below.
Earnings per Share of the Company
This is one of the most important ratios you need to analyse while researching on stock price of any company. Earnings per share or EPS is calculated by dividing the net profit of the company for a particular period like for a financial year by the total number of outstanding shares in the market. EPS means how much the company earned per equity share in a particular period.
The consistent growth in the EPS shows the growth in the net profit of the company and the earnings for the shareholders on each share is also increasing. The EPS is used to evaluate the share price of the company and compare the same with its peer group companies. It helps to know whether the current share price of the company is overvalued or undervalued.
Return on Equity &Return on Assets
Return on equity is calculated by dividing the net income of the company by the equity shareholders. This means the total return on the amount invested by the equity shareholders is the ROI, which needs to be researched while analysing the key ratios and fundamental factors of the company. The shareholder’s equity can be calculated by deducting the debt of the company from its assets.
Return on Assets or ROA can be calculated by dividing its net income by the total assets. This ratio shows how much return the company is giving on the total assets. A higher ROA means the company is efficiently using the assets of the company and earning good returns. You can use this ratio to compare with the other listed companies before buying their stocks.