REVA Academy for Corporate Excellence (RACE)
LLMs for Fintech
Harshitha R S
Batch 2
[Link]
Stock Selection based on
Fundamental Analysis
REVA Academy for Corporate Excellence (RACE)
Two methods for studying stocks
Fundamental analysis
- study of any security’s intrinsic value.
- determining a stock's real or "fair market" value.
Fundamental analysts search for stocks currently trading at prices higher
or lower than their real value.
Technical analysis
identifies trading opportunities by analyzing statistical trends
and patterns on price and volume charts.
REVA Academy for Corporate Excellence (RACE)
Multiple parameters are taken into consideration during fundamental analysis,
but the most important ones which have a positive correlation with consistent
performing stocks are elaborated here:
REVA Academy for Corporate Excellence (RACE)
1. Earnings per Share (EPS) –
This is the portion of the company profit that is assigned to each share of its stock.
A growing EPS is a good sign that the stock price is worth investing.
EPS = [(quarterly/annual income)-dividends]
outstanding stock shares*
*outstanding stock shares - company stocks currently held by all its shareholders
REVA Academy for Corporate Excellence (RACE)
2. Price to Earnings Ratio (P/E)-
Price to Earnings Ratio is called P/E ratio. This is a measure of valuation.
P/E = Market Price of Stock
Earnings Per Share.
It tells whether a stock at current market price is cheap or expensive.
A good P/E ratio is around 20 to 25.
REVA Academy for Corporate Excellence (RACE)
3. Price to Book Ratio (P/B)-
Book value - the amount of money paid to the shareholders when the company is liquidated
and paid all its debts.
Price to book ratio = current stock price per share
book value per share.
A good book to price ratio is less than 1 that is a stock is undervalued and worth buying,
if ratio is greater than 1 then it indicates stock price is trading at a premium to company's book
value
REVA Academy for Corporate Excellence (RACE)
4. Return on Equity (ROE)
ROE = company's net income/stakeholders equity (amount that the owners of a
company have invested in their business)
If a stock has 15 - 20% ROE, then it is a good stock and considered as a parameter to buy
REVA Academy for Corporate Excellence (RACE)
5. Debt-to-Equity Ratio (D/E)
D/E = company's total liabilities/shareholders equity
a higher D/E ratio suggests more risk, while a low one may indicate that a
business is not taking advantage of debt financing to expand.
A good D/E ratio is considered to be 1.5 to 2.5 but ideally it is considered as 1 to 2
REVA Academy for Corporate Excellence (RACE)
Other parameters like :
- Market cap
- Free Cash Flow (FCF)
- Dividend
- EBITDA (earnings before interest, taxes, depreciation)
REVA Academy for Corporate Excellence (RACE)
If all five parameters are met, the stock can be considered for investing/ trading.
However, this needs to be confirmed by technical analysis.
REVA Academy for Corporate Excellence (RACE)
For Example :
TCS PERSI LTIM LTTS INF TECHM HCLTECH MPHA COFO WIPR
STENT Y SIS RGE O
EPS 32.2 34.22 39.4 105.18 14.7 5.57 16.03* 20.62 28.98 5.15
5 0 * 4
P/E 31 59 42 46 28 36 27 31 56 22
P/B 14.1 13.41 10.2 12.23 9.71 4.89 6.51 6.27 12.31 3.63
2 9
ROE 46.2 23.23 26.5 23.54 31.7 17.01 22.71 20.64 21.89 14.6
1 6 9
D/E 7.7 0 0.8 1.33 0 0.06 3.5 8.3 0.12 0.08
REVA Academy for Corporate Excellence (RACE)