The Indian stock market has nearly 2,800 stocks listed (NSE and BSE) across sectors providing a plethora of opportunities for investors to choose from. However, identifying stocks is a tall task as it requires in-depth research and due diligence. Further, analysing and forecasting are two key parameters that help you predict the future price of the stock. Here in this article, we have summarized what is the prudent way to analyse a company through quantitative and qualitative factors. Well, will one of them work? No, it is necessary to understand both these factors to analyse a stock. Therefore, we have briefly explained the factors and would certainly be covering in detail in our forthcoming articles. Click here now
First, let us understand Quantitative factors
The quantitative factors are calculated to arrive at a definite number. However, the absolute number is not as productive and the prudent approach would be to compare with peers within the same industry or sectors.
1.) Financial statements analysis – This includes analysing company’s income statement, balance sheet and cash flow. For forecasting, it is very essential to analyse past financials and see how the company has performed across various economic cycles.
2.) Ratio Analysis – It provides a crisp understanding of the company in terms of its profitability, efficiency and solvency. The ratios are used to compare with peers in the same industry or sectors.
3.) Valuations – Valuations are extremely important to understand whether the stock is undervalued or overvalued. Three common methods used in equity valuations are Dividend Discount Model (DDM), Discounted Cash Flow (DCF) Valuation, and Relative Valuations.
The qualitative factors are not measured and are judged by the investor as these are subjective in nature.
1.) Understanding the business of the company – As Warren Buffet once said, “Never invest in businesses you cannot understand”. It is very essential to have a sound understanding of the company’s business including its products/services, customers, auditors, competitive advantages etc. This helps you forecast the growth of the company in a better way.
2.) Management Team – One needs to know the management team’s experience and capabilities. This includes understanding management’s background past experiences and other company holdings. Further, it is important to understand the promoters/management’s financial condition.
3.) Corporate Governance – Corporate governance is one of the most important factors to consider before stock picking. It is important that the company’s key personnel did not or are not involved in any fraudulent activities. In the recent past, we have observed that companies with corporate governance issues have taken a real beating in the markets.
4.) Company’s policies and vision – The management decides on key company policies with regards to its accounting, remuneration, foreign exchange, related party transactions, dividend etc. These are essential to understand the company’s approach towards revenue recognition, remuneration, hedging and distribution of profits.
In our forthcoming articles, we will be explaining all of the above factors individually for better understanding which will help you make a better decision. Subscribe now to stay updated. Click here now
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