How to find fundamentally strong stocks that are best?

In the stock market there are 1000s of stocks available to invest. But you can’t invest in all at a time and also it is not possible to study all the stocks. And we should always remember that investing without any research is all gambling. Also we can’t build our portfolio by asking tips or following telegram groups randomly. So, to build a portfolio of fundamentally strong stocks we need to do the fundamental analysis of the stocks. Now we will discuss the fundamental analysis tools to analyze the fundamentally strong stocks for our portfolio.

Table of Content :

• What is fundamental Analysis
• How to do fundamental analysis
• Extra points to keep in mind
• Conclusion

1. What is fundamental analysis :

Fundamental Analysis is the method of finding the real value of a stock or company by the study of the financials of the company. It is basically a way to calculate the intrinsic value of the company with the help of the data of its growth it has shown in its Profit & Loss statement and Balance Sheet.

2. How to do Fundamental Analysis :

To do the fundamental analysis of stocks we have to study some ratios and points with the help of which we will find a fundamentally strong stock. So, let’s discuss all the ratios one by one.

• ROE & ROCE :-

ROE is Return on Equity which means that how much a company earns on its investments for the investors. Whereas ROCE provides a broader picture about stock because it has included liabilities. These are the important ratios to do the fundamental analysis of stock.

So, in a fundamentally strong stock ROE should be above 10% & ROCE should be above 12%. It means that the company is providing at least something to its investors on investment. Without ROE it’s not good for the company because if the company is not providing any returns then what is its use of investing. It is one of the most important ratios for the fundamental analysis of stock.

• Sales Growth :-

Company’s sales should grow at least 10–12% on YoY and QoQ basis for a fundamentally strong stock. Below this is not attractive because it does not provide satisfaction for the long term. Sometimes company’s sales increases but profit not increase then also we should look deeply because may be company sold its old unsold inventory on discount and sales increases due to that but less price not able to make profit.

To look that company is really growing look for sales of almost 3–5 years and check is it consistently showing growth. Because sometimes company’s sales fall in one year and then in next year it again reaches to previous high and due to base effect it start showing high growth whereas in real there is no growth. So, it is very important to find a fundamentally strong stock.

• EPS growth :-

EPS (Earning Per Share) means that how much a shareholder earns for every share held. Only sales is growing but profit is not growing it means that the company is not able to manage its expenses. So, to look that we check EPS growth rate that should be at least 12% in a fundamentally strong stock. Below that is not attractive.

If we talk about 3 out of 4 multibaggers then these are only those which have strong EPS growth. It is a very important fundamental analysis tool to find the best stock for the future.

• Institutions Holding :-

The company we are selecting should have many institutions with mostly shares held. Because it reduces the risk of manipulation. Companies should have more than 10 institutions so operating games can be avoided. Always remember that big momentum comes with big money. Institutions always invest in fundamentally strong stocks.

It is good if the holdings of big institutions are increasing to do the good fundamental analysis of stocks. The more institutions the better it is for the company. Because big momentum only comes with big money and big money only comes from institutions. By analyzing that we are following the theme of smart money which is very important.

• Promoters Holding :-

A company should have promoters’ holding more than 40% because it shows how much promoters trust their own company. In this it should be better if it is an increasing pattern for fundamentally strong company because promoters know their company better and its increasing means the company has something to believe. Also promoters holding should not be pledged. High holdings but all pledged is also of no use.

If a promoter has belief in his company then chances of default reduces in future. Company’s promoters knows the future of company better then any institution or investor. So, this can be one of the important fundamental analysis tools to find the fundamentally strong stock.

• P/E :-

Price to Earning (P/E) ratio is calculated by dividing Price of the stock with its EPS growth rate. It is the very important fundamental analysis tool to find the fundamentally strong stocks. For long term investing it should be kept in focus.

This ratio helps us to find the valuation of the company. Generally we compare P/E of any company with its industry P/E. Now if the P/E ratio of the company is more than the industry average P/E ratio then it is generally considered as overvalued and if P/E is lower then it is undervalued.

Now you are thinking that we should invest in the companies with lower P/E. But don’t do it blindly. Always try to find the reason for low P/E. If a company is profitable and still it has a lower P/E then we can study it further. Otherwise if the company has a lower P/E because it is not earning then we should not be shocked and stay away from that company.

• Debt to Equity ratio :-

Debt to Equity ratio is also one of the important ratios to do the fundamental analysis of the stock. It is the ratio of debt of the company against its equity. If this is zero then it is best and means that it is fundamentally strong stock because the company is debt free.

Generally for a fundamentally strong stock it should be below one. If it is under one then it is considered that company’s debt are under control and it not have to pay big amount as interest to the debtors. Debt is one of the most important fundamental analysis tools to find the fundamentally strong stock.

3. Extra points to keep in consideration :

These were the main ratios we should check for fundamental analysis of stock. After that if stock looks attractive in these parameters then we can check some more points to get the clear picture of the company like—

• Annual Reports.
• Investors Presentation.
• Inventory turnover ratio should be above 12.
• Return on Assets should be above 12.
• Consistency of growth.

This is all we can study to check the fundamentally strong stock before investing in it.

4. Conclusion :

So, to find the fundamentally strong stocks we have to deeply study the ratios discussed above. Never invest just on the basis of one ratio or factor. Also according to the situation and company we can adjust in one or two ratios up to some extent only. But it doesn’t mean that we will compromise with more than two ratios.

It is also important before studying the fundamentals of a company that how is the future of that sector. Will it be able to sustain in future or not. For that we have the example of Nokia.

Learn More :

Thank you for reading Buffett Money’s guide on the Fundamentally strong Stocks. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

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• Patience is a virtue

Thank You

Happy investing🙂🙏