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15 Apr 2019

STOCK MARKET--What are the criteria to find fundamentally strong stocks?

Fundamental Analysis is a technique of analysing the financial data. It focuses on identifying the intrinsic value of the shares unlike technical analysis which only focuses on the price history and charts of the stock. Let us discuss this Stock selection criteria – follow the fundamental way of selecting a stock:nvestment checklist before buying a stock:
Below are some of quantitative factors which one should check before picking stocks for investment:
1. Growing Profitability:
One should check if the business has stable and growing profitability and the growth in EPS is continuous over the last 5 years.
The formula for calculating EPS is:
EPS = (Net Income – Preferred dividends)/ Weighted average number of common shares outstanding
EPS of the company should be constantly rising.
2. Equity History
One should check the equity history of the company which can be analysed through the financial statements of previous years.
3. Revenues
One should check if the revenues have been growing consistently and is there any visibility of revenues going forward.
4. Leverage
The debt to equity of the company should be equal to one or below 1.
The formula for calculating debt to equity is:
Debt to Equity ratio= Total Liabilities/ Total Equity
5. Return
The company should have growing return track record. The Return of Equity should be more than 15 and the Return on Capital Employed should be more than 15.
6. Dividends
One should check whether the company has growing dividend record of last 5 years.
7. Cashflows
The company should have positive operating cash flow as well as free cash flow continuously over last 5 years.
8. Annual Reports
From the Annual Reports of the company one should check about the qualification of the auditor and other observation from the corporate governance report.

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