Equity Research lab: Simplest Way of Stock Investment

STOCK FUTURE TIPS

Introduction:

In financial market in-order to understand and evaluate any stock the 1st basic step we adopt is to see the financial ratio. Financial ratios are derived from one or more financial parameters by the way of dividing one parameter with the other. With the help of these ratios one can make the primary investigation on the stocks and its fundamental outlook. These ratios will also provide the comparative analysis of the good stocks to invest from a group of stocks available in same sector. Before going deep into the ratios let me explain few basic terms associated with the financial ratios.

  

Investment basics:

Balance Sheet:
Balance sheet of a company is the consolidated information about the assets and liability of the company. This part of the information also contains various figures like the sale volume, net profit, reserve and surplus etc. If you are a non commerce graduate then definitely you will find it difficult to understand the balance sheet. However as a trader or investor in the capital market you don’t require knowing the construction and detailed feature of the balance sheet. Only little information on balance sheet is enough for our understanding.

Net profit:
The profit made by the company during a financial period deducting the taxes and other liabilities is called net profit.

Reserve and surplus:
The amount of profit which is not disbursed to the investors by the way of dividend is called reserve and surplus. It is kept in the reserve and surplus book.  Many times these capital are being used by the company to issue the bonus shares to the investors.

Book value of the share:
Book value of a share is defined as the net asset of the company per each ordinary out standing share. In other words you can say each share holder’s value in the company in terms of assets is called book value.

Ratio analysis:
The financial ratios which I am going to explain in the following section are a. EPS (Earning per Share) b. P/E (Price to Earning Ratio) c. Debt -equity ratio. d. Price to book value ratio. You may find many more ratios in the financial mathematics but all are not important for our study.

After understanding the basic definitions of these ratios if you will take a group of industries from a particular sector and compare their ratio then you will get to know which is the best company to invest; based on the current market price. My aim is not to teach you the theory of these ratios. My aim is to make you aware of the best method to choose a stock of stocks. In this article I will explain the various ratios and the next article “Stock valuation and stock picking using financials” I will discuss how to choose a stock by using these ratios.

• EPS (Earning per Share): EPS is derived by dividing the net earning of the company by the numbers of the outstanding shares of that company. These shares are the general shares. That does not include the equity convertable preference shares, the bonds or commercial paper. The Outstanding shares were the tradable shares.
• P/E (Price Earning Ratio): Price earning ratio is derived by dividing the market price of the share by the EPS.
• Debt –Equity Ratio: Debt equity ratio is the total debt of the company divided by the number of ordinary equity shares. This Ratio exhibits the debt per share holder.
• Price to book value ratio: This is derived by dividing the book value of the share with the current market value of the share.

These four ratios are the key ratios for fundamental analysis. The main job of the fundamental analyst is to provide you the information on the growth stock and value stock.

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