FINANCE CLUB

YOUR ONE-STOP DESTINATION FOR LEARNING HOW

TO PICK AND ANALYSE STOCKS!

Equity
Research
Guide
2ND EDITION

Equity Research Made Simple:

A Beginner's Guide to Understanding Stock Analysis
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INTRODUCTION TO EQUITY RESEARCH

What is Equity Research?

Equity research is the process of analyzing and evaluating the
financial performance, prospects, and valuation of publicly traded
companies' stocks. Equity research involves a comprehensive
analysis of various aspects of a company, including its financial
statements, industry trends, competitive landscape, management
team, growth potential, and overall market conditions. The aim is
to gain a deep understanding of the company's operations and
financial health, as well as its potential for generating future
returns.

Who conducts Equity Research?

Equity research is conducted by professionals known as equity
research analysts or equity analysts. These individuals work for
investment banks, brokerage firms, asset management
companies, and independent research firms. Stock investors also
conduct equity research, especially those who are actively
involved in managing their investment portfolios.

Why is Equity Research conducted?

Equity research is conducted by stock investors to make informed
decisions about buying, selling, or holding stocks. It provides
insights into a company's financial health, growth potential, and
risks. By assessing these factors, investors can evaluate the
value of a stock, manage risks, align with long-term strategies,
and diversify portfolios.

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Three steps involved in conducting Equity

Research

Research: This initial step involves gathering information about

the company you're analyzing. This includes understanding its
business model, industry, competitors, market trends, and overall
economic conditions. It forms the foundation for the qualitative
and quantitative analyses that follow.

Qualitative Analysis: In this step, you delve into the qualitative

aspects of the company. This includes assessing the company's
management team, corporate governance practices, brand
reputation, competitive advantages, growth strategies, and any
unique factors that might impact its future prospects.

Quantitative Analysis: This step involves analyzing the

company's financial statements and performance metrics. The
goal is to gauge the company's financial health, profitability,
efficiency, and how well it's utilizing its resources. By combining
these three steps, equity research analysts gain a holistic view of
a company's overall health, strengths, weaknesses, opportunities,
and threats. This information forms the basis for making informed
investment decisions and providing recommendations to
investors. This guide will help you understand all these steps in
detail and will help you make a detailed report for the equity
research competition.

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CONTENTS
1. Qualitative Analysis of a stock

1. Identifying a Company and evaluating its business - How to pick a stock

Understanding and evaluating an Industry - How to select the right industry
Analyzing the Company - How to select the perfect company

2. Figuring out if this is the best stock in the industry - Company and Competitor
Analysis
Porter’s Five Forces
SWOT Analysis

2. Quantitative Analysis of a stock

1. Where are financials of a company found - Financial Statements

2. How to make sense of so much financial Data - Fundamental Analysis

Ratio Analysis
How to analyze annual reports of the company

3. When should a stock be bought - Technical Analysis

4. Insights to keep in mind

3. Glossary

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How to use the guide to build an

Equity Research Report ?
In this guide, we’ve covered all After this, we analyze the
the essential skills to build your financials of a company. We
own equity research report in a understand if a company makes
chronological manner. good profits or is at a loss. Then
we see if the stock price is too
One usually starts with a high and has a chance to fall, or
qualitative analysis of an vice versa. All of this is done by
industry to identify which analyzing the financial ratios
industry one is interested in that we’ll be teaching you about
based on how fast it is growing in the guide. Each company is
and any external factors that analyzed by comparing its
make the industry look exciting. ratios with respect to other
One goes about this by reading companies in the same industry
the news about industries and to see which one is the best!
companies and the annual
reports of those companies. You will understand that each
industry is driven by different
factors; figuring out which
factors to look at and how to
compare ratios is what this
guide will help you learn! With all
your data, you can conclude if
an industry is good to invest in,
and then you can calculate the
various ratios we’ve spoken
about, compare them to other
companies, and figure out which
company you want to invest in.

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How to make a stock

recommendation
The primary objective of this equity research guide is to provide
individuals with limited to no prior financial knowledge with a
structured and accessible pathway to understand and master the
essential components of stock analysis.

We've described in detail the entire analysis, now one might be

thinking, "How do I put together this information and make a final
recommendation in my report?"

1. One sees if their conclusion about an industry says that the

risks are low and opportunities for growth outweigh all the
cons. Use the technical indicators mentioned here to figure
out when to buy and sell your stock
2. Then one judges companies in the industry, by analyzing if
the company has any unique product or service, or if they
have greater or more unique revenue streams and any other
advantages
3. After this, the financial ratios of a company are analyzed. If
the ratios that one feels are more important, seem better
than the industry average, you're closer to your
recommendation!
4. After a final checkup to see if you trust a company's overall
strategy and management based on one's own
understanding via all prior research

Vice Versa to figure out if you want to sell the stock!

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HOW TO PICK A STOCK ?

TOP-DOWN APPROACH
Before delving into individual The idea is to identify specific
stocks, top-down investors industrial sectors that are
examine macroeconomic issues expected to outperform the
such as monetary policy, market. Top-down investors
inflation, economic growth, and direct assets to outperforming
larger events, as these factors economic regions rather than
affect the growth of betting on specific companies
industries. Monetary policy is a based on these qualities.
set of tools used by a nation's Instead of starting with the
central bank to control the complete universe of individual
overall money supply and company stocks, top-down
promote economic growth and investment can better use an
employ strategies. A monetary investor's time by looking at
policy decision that cuts interest large-scale economic
rates, for example, lowers the aggregates before deciding on
cost of borrowing, resulting in regions or sectors and then
higher investment activity and specific companies. However,
the purchase of consumer by excluding specific
durables. After examining global companies that beat the overall
macroeconomic conditions, market, top-down investors may
researchers assess general miss out on numerous
market conditions to identify potentially profitable
high-performing sectors, possibilities.
industries, or areas within the
economy.

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HOW TO PICK A STOCK ?

BOTTOM-UP APPROACH
In this technique, we analyze individual companies before
constructing a portfolio based on specified criteria. In this
approach to investing, investors tend to focus on
microeconomic aspects such as supply and demand, taxes
and regulations. Bottom-up investors select a company and
then examine its financial health, supply, demand, and
other aspects over a given time period. Bottom-up investing
assumes that individual companies can outperform their
industries, at least in terms of relative performance. A
company's distinctive marketing strategy or organizational
structure, for example, is a leading indicator that prompts a
bottom-up investor to invest.

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Industry Analysis
What is industry analysis?
Industry analysis means A macroeconomic factor is an
assessing a market or industry influential fiscal, natural, or
to understand its competitive geopolitical event that broadly
dynamics. It helps investors affects a regional or national
understand a company’s economy. Macroeconomic
position compared to its factors tend to impact wide
peers. swaths of populations rather
It helps gauge the overall than just a few select
attractiveness of the industry individuals. Examples of
and the factors that determine a macroeconomic factors include
company’s success. economic outputs,
Industry analysis tells what is unemployment rates, and
happening in an industry in inflation. For example Rising
terms of demand and supply, interest rates can reduce a
competition within the industry business’s ability to service
and with other industries, debt, as rising costs are
prospects considering incurred by the organization
technological changes, and the with no corresponding increase
influence of macroeconomic in revenues to offset.
factors. All in all, it helps Businesses may be placed in a
identify opportunities and precarious situation if too much
threats for a company in the of their capital is consumed
current scenario and the future. paying off high-interest debt.
These indicators of economic
performance are closely
monitored by governments,
businesses, and consumers
alike.

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What does this analysis entail?

Before spending big bucks on any company, understanding the
industry is extremely important. If you are investing in a
pharmaceutical company, there are a few things you will have to
keep in mind to ensure that your investment will give you good
returns.

For example, drug regulations and patenting, the demand

situation for medicines, FDA regulations, and more.

Such factors tell investors which threats the pharma industry

faces, which factors go in its favor, and the competitive
landscape of the industry. A thorough industry analysis will
help you understand the unique aspects of any industry.

It is very important to note, that the qualitative &

quantitative factors vary from industry to industry and
the stage a company is at.

How to Conduct Industry Analysis?

Industry analysis involves examining the various factors that
influence and shape an industry's performance, dynamics, and
competitive landscape. There are many ways in which you can do
this. However, we have zeroed in on two of the best methods to
help you analyze an industry.

1. Porter's Five Forces Analysis

2. SWOT Analysis

We have discussed these methods later in detail

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company analysis
Read the history of the company to find out how it was
founded and how it grew. Find out about the type of product
sold and target consumers to have a clear understanding of
the possible customers that might purchase a product or
service in order to direct marketing efforts.

Analyze the business model of the company. The term

business model refers to a company's plan for making a profit.
It identifies the products or services the business plans to sell,
its identified target market, and any anticipated expenses.

Business models are important for both new and established

businesses. Business model is important because it provides
the investors with the knowledge about the competitive edge
of the company and provides better insights.

A strong business model leads to cash

generation and future expansion.

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Important points to analyze in a business model

1. How does the company earn its revenue?

2. Who are its competitors?

3. Who are the major customers of the company?

4. What is its unique selling point?

5. What are the major expenses of the company?

Let's take an example of DMART (Avenue Supermarkets)

Avenue Supermarkets is a one-stop supermarket chain that

aims to offer customers a wide range of essential home and
personal products under one roof.

The company was founded by Radhakishan S. Damani in 2002

and is headquartered in Mumbai, India.

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Unique Selling Proposition (USP): A distinctive shopping

experience, consisting of a wide range of everyday-value
retail products sold in a modern ambience and with the feel of
a large retail mall.

Each DMart store stocks home utility products at competitive

prices. The three main categories of products are food, non-
food FMCG, merchandise and apparel.

DMart follows a cluster-based expansion approach. The focus

is on deepening their penetration in the areas where they are
already present before expanding to newer regions.

DMart has 365 stores across India. The company started

diversifying store locations across various states and now has
10 state locations, 1 union territory and NCR.

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DMart's business model is based on the concept of offering

value retailing to customers using the Everyday Low
Cost/Everyday Low Price strategy, which offers low prices on
an everyday basis by achieving low procurement and
operations costs.

The business is consumer-driven with a strong promoter

background (an individual or a group of people who come up
with the concept of starting a business are the promoters of a
company). and an experienced senior management team that
has helped to offer high standards of customer service and a
pleasant shopping experience.

Taking advantage of consumer behavior, they keep a product

at a cheaper price than others, but as they have a variety of
products, many consumers also purchase other products
when they come to buy one product.

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Porter’s Five Forces

Rivalry with Peers The Threat of New
It is important to know about the
Competition
position of a company The second competitive force
compared to peers from the that Porter emphasizes is the
same industry. You cannot rank ability of new companies to
a manufacturing company enter the industry and intensify
against a pharmaceutical the competition.
company for comparison.
Industries where it is difficult for
For the same reason, one new competitors to enter,
needs to look at the competition benefit from extended periods of
levels. Competition and the fear profitability and very limited
of losing out on business to a rivalry.
peer company keep companies
on their toes and help them Competition tells us how difficult
innovate. it is for the company to make
money and how far it has been
According to Porter, competition successful. The success,
is intense when there are more therefore, will translate into
players, when the products are stock prices.
similar and the companies are
fighting to find an edge over
other products, in the case of
perishable products, etc.

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Porter’s Five Forces

Threat of Bargaining Power of
Substitutes Buyers
Substitutes are interchangeable Buyers hold the power to
products like Domino’s Pizza demand higher quality and lower
and Pizza Hut’s Pizza. If one's prices from sellers. The
price rises, demand for the bargaining power is high in the
other increases. following cases:

Since it is so easy to switch to a When the buyers outnumber the

substitute on account of any suppliers, which means demand
change, such as a price rise or is less than supply, companies
quality drop, the threat remains will have to make some changes
and the pressure to to avoid losing money.
continuously perform better and
in a cost-efficient way is If the buyer has many similar
essential. products available, relies less on
one supplier, and has low
The better the company switching costs. Then the seller
executes against its substitutes, must take steps to make their
the higher it goes. product stand out for the buyer
to choose it.

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Porter’s Five Forces

Bargaining Power of Suppliers

Many small and mid-sized companies face a threat from an

industry where suppliers hold bargaining power.

Imagine a fashion company that has a specific dress line and

design that make it famous but needs a specific cloth type
available only from a handful of suppliers. In such cases, the
suppliers can raise the prices, which will impact the dress’s final
cost and the brand’s business.

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Swot Analysis
SWOT analysis is the process of identifying the Strengths,
Weaknesses, Opportunities & Threats a company has over its
competitors.

Let's understand this by taking an example of the airline industry;

Strength of the Airline Industry Weakness of the Airline Industry

Under this, you have to look for Here you have to identify the
the unique factors in an weakness that can take the
industry that will help it stand airline industry downhill. The
out against other competitors. most common weakness is
The biggest strength of the poor aviation infrastructure in
airline industry is its safe and most of the developing
fastest mode of transportation. countries. Also, airlines face a
very high rate of cancellations.

Opportunities for the Airline Industry Threats to the Airline Industry

This section covers the growth Well, the best example to

factors in an industry. As far as explain this is, just to take a
airlines are concerned, the look at how Covid19 situation
opportunities in this space threatened the Airline industry.
include tourism growth, how So, this section deals with the
cheap airline fares are potential dangers an industry
becoming, and more. can face.

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Resources :
How to do an industry analysis? | Groww academy
Industry Analysis | Learn with Upstox ft. CA Rachana Ranade
Industry Analysis | Small Business Accelerator (ubc.ca)

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financial statements
BALANCE SHEET

PROFIT LOSS STATEMENT

CASH FLOW STATEMENT

Financial statements are written records that convey the business

activities and financial performance of a company.

The balance sheet provides an overview of assets, liabilities,

and shareholders' equity as a snapshot in time.

The income statement primarily focuses on a company’s

revenues and expenses during a particular period. Once
expenses are subtracted from revenues, the statement
produces a company's profit figure, called net income.

The cash flow statement (CFS) measures how well a

company generates cash to pay its debts, fund its operating
expenses, and fund investments.

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Let's us look at the Financial Statements of DMART

(Avenue Supermarkets)

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Source: DMart Annual Report’24

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While analyzing the financial statements we need to keep in

account the fundamental analysis, noting the various ratios and
understanding their impacts on the financial health of the
company.

Here are some key reasons why financial statements are

important in equity research:

FINANCIAL STATEMENTS VALUATION ANALYSIS

Financial statements, such as Valuation is the process of

the income statement and determining the worth of an
statement of cash flows, help asset or company. Valuation is
assess a company's financial important because it provides
performance over a specific prospective buyers with an idea
period. These statements of how much they should pay
provide information on for an asset or company and
revenues, expenses, profits, and for prospective sellers, how
cash flows, allowing equity much they should sell for.
researchers to evaluate the
company's profitability,
efficiency, and ability to
generate cash. It gives an idea
about whether the company is
utilizing the money prudently or
not and whether it is able to
generate enough capital to
repay debts and smoothly run its
daily operations.

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Financial statements are vital for valuation analysis, which is a

fundamental aspect of equity research. Statements like the
balance sheet provide information on a company's assets,
liabilities, and equity, enabling analysts to determine the
company's net worth and calculate various valuation metrics, such
as the price-to-earnings (P/E) ratio, the price-to-sales (P/S) ratio,
and the price-to-book (P/B) ratio. It gives an idea about whether it
is overvalued or undervalued, which can determine the direction
of stock's movement in the near future.

TREND ANALYSIS FINANCIAL HEALTH ASSESSMENT

By comparing financial Financial statements offer

statements over multiple insights into a company's
periods, equity researchers financial health and stability.
can identify trends and By analyzing key financial
patterns in a company's ratios, such as liquidity ratios
financial performance. This (e.g., current ratio and quick
analysis helps in ratio), solvency ratios (e.g.,
understanding the company's debt-to-equity ratio and
growth trajectory, profitability interest coverage ratio), and
stability, and potential risks or profitability ratios (e.g., return
opportunities. on equity and gross profit
margin), equity researchers
can assess the company's
ability to meet its short-term
obligations, manage long-term
debts, and generate
sustainable profits.

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RISK ASSESSMENT 3. Contingent liabilities

(liabilities which include
liabilities that may occur
Financial statements help equity
depending on the outcome
researchers evaluate the risk
of an uncertain future
associated with investing in a event)
particular company. Risk and
vulnerability to economic
downturns can be assessed by Comparision and
analyzing following factors:
Benchmarking
1. Debt : When a corporation
Financial statements enable
borrows money to make big
equity researchers to compare
purchases or investments
a company's performance and
that are normally financial metrics with those of
unaffordable and has to be its peers and industry
repaid within a certain time, benchmarks. This analysis
along with interest, such a helps in understanding a
borrowed sum is called debt. company's relative position
2. The degree to which a firm within the industry, identifying
can increase its operating its competitive advantages or
income by increasing disadvantages, and making
informed investment decisions.
revenue.

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Overall, financial statements provide the quantitative foundation

for equity research, offering valuable information and insights that
assist analysts in evaluating companies, valuing stocks, and
making informed investment decisions.

Resources:
Understanding the P&L statement
Understanding balance sheet
The Cash Flow statement
The connection between balance sheet, P&L statement and cash flow
statement
How to Read Financial Statements: A Beginner’s Guide | HBS Online

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fundamental analysis
Fundamental analysis (FA) measures a security’s intrinsic value
by examining related economic and financial factors. Intrinsic
value is the value of an investment based on the issuing
company's financial situation and current market and economic
conditions.

In order to decide whether to invest in the stock or not, it is

important to analyze important financial ratios. We will cover the
most important financial ratios.

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RATIO ANALYSIS
1. Valuation Ratios

P/E (Price to Earnings) Ratio

P/B (Price to Book) Ratio

2. Debt Ratios

Debt to Equity Ratio

Interest Coverage Ratio

3. Liquidity Ratios

Current Ratio
Quick Ratio

4. Profitability Ratios

Return on Equity Ratio

EV/EBITA
Gross Margin Ratio

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VALUATION RATIOS
Valuation, in general, is the estimate of the ‘worth’ of
something. In the financial markets, these ratios are used to
evaluate the fair value of a company’s stock price relative
to its financial performance. They assess a company’s
market value relative to its financial metrics, such as
earnings, sales, or book value, providing insights into its
overall worth and investment potential.

P / E RATIO
The price-to-earnings ratio is Earning per Share (EPS) :
the ratio for valuing a Earnings per share (EPS) is
company that measures its a company's net profit
current share price relative divided by the number of
common shares it has
to its earnings per share
outstanding. You can also
(EPS). It essentially tells us
easily calculate outstanding
how costly the share is shares by dividing a
compared to how much an company’s market
investor earns per share. capitalization by its share
price. A company’s market
capitalization and share
price are just a Google
search away.

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EPS of Tata Motors in Think of it this way:

March'23 was 7.11, which
means for every share, the The market price of a stock
company earned a profit of tells you how much people are
Rs 7.11. willing to pay to own the
shares, but the P / E ratio tells
A high P / E could mean you whether the price
that a stock's price is high accurately reflects the
relative to its earnings and company’s earnings potential
possibly overvalued. or its value over time.
Conversely, a low P/E
might indicate that the A P / E ratio holds the
current stock price is low most value when
relative to earnings. compared against similar
companies in the same
It could also mean that industry to check if it’s
investors see growth higher or lower than the
potential in the company average P / E ratio and
and are willing to pay a lot hence over or
for the stock compared to undervalued. (Read about
how much they presently the limitations of this ratio
earn from it in anticipation for a better
of a lot of future growth and understanding!)
an increase in the stock
price.

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P / B RATIO
The price-to-book (P / B) If the P / B is under 1.0, then
ratio measures the market the market is thought to be
valuation of a company underpricing the stock since
the accounting value of its
relative to its book value. It
assets, if sold, would be
essentially tells us how
greater than the market
costly the share is compared price of the shares.
to its book value. Therefore, value investors
typically look for companies
that have low price-to-book
P / B ratio = Market value per ratios, among other metrics.
share / book value per share
A high P / B ratio could
mean that the company is
Book value : It is the overvalued since its market
company's value as share price is much higher
reflected in its financial than its book value.
books of accounts. Books of
accounts include documents A good P/B ratio is relative
and books used in the to a business and its
preparation of financial industry. In order to decide
whether a company’s P/B
statements.
ratio is good, we have to
compare it with its
Book value of a company = competitors.
total assets - total liabilities /
total number of shares

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DEBT RATIOS
The financial leverage of a business is determined using
debt ratios. Debt ratios assess a company’s ability to meet
its long-term obligations by comparing its total debt to its
assets, equity, or income, providing insights into its
financial stability and risk.

DEBT TO EQUITY RATIO

This ratio shows how much A high debt-to-equity ratio
debt a company has generally means that, in the
compared to its assets. case of a business
downturn, a company could
Total shareholder equity is have difficulty paying off its
equal to a company's total debts. The higher the D/E,
assets minus its total the riskier the business.
liabilities.
A very low D / E ratio
suggests that the company
D / E ratio = total is not taking advantage of
debt / total debt financing to expand.
shareholder equity (You can read more about
its limitations for a better
understanding.

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Startups or companies D / E ratios vary by industry

looking to grow quickly may and are best used to
have a higher D/E naturally, compare direct competitors
but they could also have or to measure changes in
more upside if everything the company’s reliance on
goes according to plan. debt over time.

So it’s important to look at other

factors as well.

INTEREST COVERAGE RATIO

ICR is a measure of Essentially, it shows how
company’s ability to meet its easily a company can pay
interest payments on interest on its outstanding
outstanding debt. It is debt with its current
calculated by dividing a earnings.
company’s earnings before
interest and taxes (EBIT) by Outstanding Debt refers to
its interest expenses. the total amount of debt that
a company or individual
currently owes and has not
yet repaid.

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A higher ICR indicates that a However, an extremely high

company is more capable of ICR might not always be a
meeting its interest positive sign. It could
obligations, which is indicate that the company is
generally seen as a sign of not utilizing debt effectively
financial health. Conversely, to finance its growth,
a lower ICR suggests that a potentially missing out on
company may struggle to opportunities to leverage
cover its interest payments, debt for expansion.
which could be a red flag for
investors as the company
may be at risk of defaulting
on its debt obligations.

Interest Coverage = EBIT / Interest Expense

LIQUIDITY RATIOS
Liquidity is the ability to convert assets into cash quickly and
cheaply. Liquidity ratios are crucial financial metrics that assess
a borrower's capacity to settle current debt without seeking
external funding. These ratios evaluate a company's capability
to meet short-term responsibilities and cash requirements,
indicating whether it can utilize its liquid assets to address
current liabilities.

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CURRENT RATIO
The current ratio is a Inventory refers to a
Liquidity ratio that measures company's goods and
a company’s ability to pay products that are ready to
short-term obligations, or sell, along with the raw
those due within one year. materials that are used to
produce them. When
It tells investors how a customers purchase
company can maximize the products on credit, the
current assets on its balance amount owed gets added to
sheet to satisfy its current the accounts receivable. It’s
debt and other payables. shown as a liability on the
balance sheet.
More assets imply that a
company has, more
resources to generate Current ratio =
revenue, so it will be easier current assets /
to pay off its debts. current liabilities

The current ratio measures

a company’s ability to pay In simple words, the current
current, or short-term, ratio tells us the value of
liabilities (debts and assets a company
payables) with its current, or possesses for a liability of 1
short-term, assets, such as rupee.
cash, inventory and
receivables.

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The current ratio aids If a company is unable to

investors in assessing a pay the debt, it might have
company's short-term debt to sell some assets in order
coverage using current assets to repay it. This leads to a
for comparisons with negative image of the
competitors. company among investors
and a decrease in its share
One weakness of the current ratio price.
is its difficulty in comparing the
measure across industry groups.

QUICK RATIO
The Quick Ratio, also known Typically, the quick ratio in
as the Acid test ratio, most industries should be
evaluates a company's above 1.0. However, a high
liquidity by assessing ratio isn't always favorable.
whether its short-term It might suggest that cash is
assets are sufficient to cover sitting idle instead of being
its current liabilities. reinvested, distributed to
shareholders, or utilized in
In some cases, analysts productive ways.
favor the quick ratio over the
current ratio due to its Quick ratio = ( Cash +
exclusion of assets such as Marketable securities +
inventory, which may be Account recievables ) /
difficult to liquidate quickly, Current liabilities
making it a more
conservative metric.

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Companies with a quick ratio However, this is not a bad

of less than 1.0 do not have sign in all cases, as some
enough liquid assets to pay business models are
their current liabilities and inherently dependent on
should be treated cautiously. inventory, such as Retail
If the ratio is much lower stores.
than the current ratio, a
company's current assets
are highly dependent on
inventory.

PROFITABILITY RATIOS
The profitability of a business is determined using profitability
ratios. Profitability ratios assess a company's ability to
earn profits from its sales or operations, balance sheet
assets, or shareholders' equity.

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RETURN ON EQUITY RATIO

Return on equity (ROE) is a Sometimes an extremely
measure of financial high ROE is a good thing if
performance calculated by net income is extremely
dividing net income by large compared to equity
shareholders' equity. It because a company’s
simply means how much performance is so strong.
income the company
generates based on its However, an extremely high
share price. ROE is often due to a small
equity account compared to
The higher the ROE, the net income, which indicates
more efficient a company's risk. If the price of the stock
management is at has significantly fallen due to
generating income and some reason, ROE will
growth from its equity increase, but this increase is
financing. Equity financing is not a positive sign as it's not
the process of raising capital due to an increase in net
through the sale of shares. profits.

ROE = Net Income / average shareholder equity

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EV / EBITDA
The EV / EBITDA metric is a EV (enterprise value)
popular valuation tool that calculates a company's total
helps investors compare value or assessed worth,
while EBITDA measures a
companies in order to make
company's overall financial
an investment decision.
performance and profitability.

EBITDA = net profit + interest + taxes

+ depreciation + amortization

It's best to use the EV / Amortization is an

EBITDA metric when accounting technique used
comparing companies within to periodically lower the
the same industry or sector. book value of a loan or an
intangible asset over a set
EBITDA or Earnings Before period of time. In simple
Interest, Taxes, words, when you pay off the
Depreciation, and debt on a fixed repayment
Amortization, is a financial schedule in regular
metric. Companies use it installments over a period of
extensively to compute their time.
business performance in
terms of finances, and it is
also often used as an
alternative to net income.

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EBITDA can be used to track A high EV/EBITDA means

and compare the underlying that there is potential for
profitability of companies, the company to be
regardless of their overvalued since its
depreciation assumptions or enterprise value is much
financing choices. higher compared to its
overall financial
EV explains how much a performance and
business is worth in terms of profitability. It is important
purchase price. Essentially, if to remember that when
you wanted to buy a public using the ratio, you can
company, you would need to only really apply it
pay off all the company's comparatively in a specific
debts and buy out all the sector.
current shareholders' equity,
enterprise value shows how
much that would cost.

GROSS MARGIN
The amount of money a The higher the gross margin,
company retains after the more capital a company
incurring the direct costs retains, which it can then
associated with producing use to pay other costs or
the goods it sells and the satisfy debt obligations.
services it provides.

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Gross Margin percentage = (Revenue−Cost of

goods sold) / Revenue.

A higher gross margin By using its money

typically indicates that a efficiently, a business can
company is more efficiently meet its everyday business
run and more financially needs and avoid taking debt.
stable than others in the That way, the business has
same business. more control over its
activities.
Typically, the gross profit
margin of a business is a
measure of its efficiency. It
indicates how well a
company is utilizing its raw
materials and direct labour.

These ratios will aid your understanding of a business, but

they should always be looked at in totality rather than
focusing on just one or two ratios.

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DIVIDEND PAYOUT AND YIELD RATIOS

A dividend is the distribution The dividend payout ratio is
of a company's earnings to the fraction of net income a
its shareholders and is firm pays to its stockholders
determined by the company's in dividends.
board of directors.Mature
companies are the most Dividend Payout = Dividend
likely to pay dividends. (or Dividend per share) / Net
Income (or EPS)
Paying dividends sends a
clear, powerful message Dividend Yield Ratio tells us
about a company's future how much a company pays
prospects and performance, out in dividends each year
and its willingness and ability relative to its stock price.
to pay steady dividends over
Dividend Yield = Dividend per
time provide a solid share / Share Price
demonstration of financial
strength.
In other words, it tells you
Companies in the utility and how much income you
consumer staple industries earned in dividend payouts
often have relatively higher per year for every rupee
dividends. invested in a stock

It's important for investors to keep in mind that higher dividend

yields do not always indicate attractive investment opportunities
because the dividend yield of a stock may be elevated as a result
of a declining stock price.

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Resources:

Basics Of Fundamental Analysis Lecture 1 P1 by CA ana

Phadke Ranade

Fundamental Analysis Lecture 2 by CA Rachana Phadke

Ranade

Stock Market for Beginners: Must know Financial Ratios

Before Investing in a Stock | CA Aleena Rais

Fundamental Analysis: Principles, Types, and How to Use It

(investopedia.com)

Current Ratio

P/B ratio

Price to Earnings Ratio

EV/EBITDA

Return on Equity Ratio

Debt to Equity Ratio

Fundamental Analysis of Adani Enterprises

Fundamental Analysis of IHCL

Quick Ratio

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how to analyze annual reports of the company

An annual report is a detailed report that shows a company's

operations and financial performance in the preceding 12 months.
Annual reports are key marketing tools for investors that companies
put out, which includes illustrations, letters from the chair or CEO,
and financial overview.
Potential investors should also consider any risk factors
associated with the company, including litigation and customer
concentration.

What To Look For In An Annual Report?

Company Profile

It is important to know the company’s structure to make qualitative

interpretations. For example, by knowing their competitors, we can
compare two companies to shortlist the best one.

The company's vision and mission statements

In this section, you will get to read the vision and mission
statement, values and goals of the company. These statements are
general in nature.

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Take a look at the vision and mission statements of Infosys:

Vision: “We will be a globally respected corporation.”
Mission: “Strategic Partnerships for Building Tomorrow’s”
Enterprise. ”Some companies also set a vision like “To touch
revenues of Rs 5000 crore in 5 years.”

Overview of products and financial highlights over the last

5 to 10 years

Get details of products being manufactured by a company,

segment-wise performance in the last two years, key raw
materials consumed, etc. Some companies publish financial
highlights of 5 to 10 years in annual reports.

Director's Report

This part includes a financial summary, an explanation of the

financial results, and major company developments.

Management discussion and analysis (MDA)

The management commentary, or MD&A is one of the most

useful parts of a company’s annual report. The company’s
management shares their opinions, challenges & outlook in this
section. Further, the management discusses the company's
goals and new projects they intend to undertake.

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It is recommended that you read at least 3-5 years of MDA to gain

a better understanding of the company’s tendencies in various
economic scenarios.

Corporate Governance Report

This section discusses a company’s corporate governance,

including the board of directors’ composition, background
information on the company’s directors and independent directors,
attendance of directors at board meetings and annual general
meetings, remuneration of directors, re-appointment of directors
after the term ends, and the composition of sub-committees.

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Resources:
How to read the annual report of a company
How to Efficiently Read an Annual Report (investopedia.com)

PERFORMANCE
One of the most important A stock might seem like an
metrics to look at when attractive investment if it has
evaluating a stock’s had a 10% return over the past
performance is the total 52 weeks, but if the rest of the
market return over different stock market has increased by
periods. A stock may have more than that, there might be
increased significantly in value a better choice.
within the past few days or
months, but it could still have An additional way investors
lost value over the past year might consider evaluating a
or five years. stock’s performance is by
comparing it to other
Another step investors may companies within the same
want to take to evaluate a industry. One might discover
stock’s performance is that an entire industry is doing
comparing it with the rest of well in the current market or
the stock market. that another stock within the
industry would be a better
investment.

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Looking at stock returns is There are several financial

useful, but it’s also a good idea ratios (explained above)
to look into the actual revenue that can be used to
of a company through its profit evaluate a stock and find
and loss statement, or out whether it is currently
earnings reports. Stock prices under or overpriced in the
don’t necessarily follow a market.
company’s revenue, but
looking at revenue gives
investors an idea about how a
company is performing.

COMPETITIVE BENCHMARKING
Find out other companies in the same sector and compare their
financial ratios. With the financial ratios, you can tell which stock in
a given sector comes at the most value-for-money price right now
against its past sales and earnings, its present book value and
shareholder equity and so on.

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technical analysis
You and I together have
Volume in Technical
Analysis created a volume of 100
shares. Many people tend to
assume volume count as 200
Volume plays a very integral
(100 buys + 100 sells) which
role in technical analysis as it
is not the right way to look at
helps us to confirm trends and
volumes.
patterns. Consider volumes as
a means to gain insights into
Volume information on its
how other participants
own is quite useless. For
perceive the market.
example, we know that the
volume on Cummins India is
Volumes indicate how many
13,49,736 shares. So how
shares are bought and sold
useful is this information
over a given period of time.
when read in isolation? If you
The more active the share, the
think about it, it has no merit
higher would be its volume.
and hence would actually
For example, you decide to
mean nothing. However when
buy 100 shares of Amara Raja
you associate today’s volume
Batteries at 485, and I decide
information with the preceding
to sell 100 shares of Amara
price and volume trend, then
Raja Batteries at 485. There is
volume information becomes
a price and quantity match,
a lot more meaningful.
which results in a trade.

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As a practice, traders usually Low Volume = Today’s

compare today’s volume with volume < last 10 days
the average of the last 10 average volume
days' volume.
Low volumes mean LESS
Generally, the rule of thumb is investors are interested in
as follows: buying or selling.
High Volume = Today’s
volume > last 10 days Average Volume = Today’s
average volume volume = last 10 days
average volume
Higher volumes mean MORE
investors are interested in The Average Volume is the
buying or selling. total volume for a specified
period divided by the number
of bars in that same period.

Technical Indicators – Momentum Indicators

Moving averages and most other technical indicators are
primarily focused on determining likely market direction, up or
down.

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There is another class of MACD

technical indicators, however, short for moving average
whose main purpose is not so convergence/divergence, is a
much to determine market trading indicator used in
direction as to determine technical analysis of
market strength. These securities prices. It is
indicators include such popular designed to reveal changes
tools as the Stochastic in the strength, direction,
Oscillator, the Relative momentum, and duration of a
Strength Index (RSI) and the trend in a stock's price.
Moving Average Convergence-
Divergence (MACD) indicator. RSI
The relative strength index
(RSI) is a momentum
indicators used in technical
analysis. RSI measures the
speed and magnitude of a
security's recent price
changes.

Resources :
The Only Technical Analysis Video You Will Ever Need... (Full
Course: Beginner To Advanced)
What is Technical Analysis of Stocks | Kotak Securities

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Support and Resistance

Support: Resistance:
In a downtrend, prices drop It acts in contrast to support in
due to excess supply. As prices financial markets. Prices rise
decrease, they become more when demand surpasses
appealing to buyers, causing supply. As prices increase, a
demand to eventually match tipping point is reached where
supply, leading to a halt in price selling pressure outweighs
decline known as support. buying interest. This can occur
due to various factors, such as
You can identify support on a traders perceiving prices as too
price chart by looking for areas high or meeting their profit
where the price has previously objectives.
stopped falling and bounced
back up. It often appears as a Resistance is identified on a
horizontal line connecting the chart by looking for areas
lowest points on the chart where the price has previously
stopped rising and reversed
downwards.

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Integrating fundamental and technical analysis

Fundamental analysis helps High volume breakout stocks
identify which stocks to watch, are stocks that experience a
while technical analysis signals significant price increase
when to act, maximizing along with a substantial rise
potential returns. in trading volume. This
phenomenon typically occurs
Aligning technical signals (like when a stock's price breaks
breakouts) with positive through a key resistance level
fundamentals boosts trade or a support level .
confidence. This balanced Traders often seek high
approach supports long-term volume breakouts as a signal
holdings based on fundamentals of momentum, expecting that
while taking advantage of short- the stock will continue to
term opportunities, leading to a move in the breakout
diversified and resilient portfolio. direction.

Breakout form as price

surges through defined
resistance level
Price resistance level

Price support level

Volume surges as buyers

rush into the stock

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Insights to keep in mind

You must consider different parameters to analyse companies
in different industries and of different sizes

Considering Different Qualitative factors

Let us demonstrate this concept with a simple example! Consider
the automotive industry, what parameters would one search for
to see if the automotive industry is attractive? One would look
at the number of vehicles manufactured in a year and
compare it to the previous year to check for growth. Next, we
would look at manufacturing costs to see if the industry is
facing higher costs and find out why it is facing this issue to form
an opinion on whether the industry is doing well or not. There are
more parameters to analyse, this is just an example!

Now if one looks at the Oil and Gas industry, these parameters
are very different. In this industry one might want to look at
international trade laws and how they have changed the safety
and cost of transporting oil. Logically the next step would be to
judge if consumer demand is shifting towards renewable
energy or stays with oil. In this way, each industry might be
analysed keeping in mind different parameters.

A similar logic applies to comparing smaller companies versus

bigger companies as well.

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Insights to keep in mind

One will look at the rate of growth and analyse the marketing costs
required to acquire new customers along with more intensive
competitor analysis as compared to larger companies. These are
just some examples of parameters to help one develop an
understanding of the concept. It is by no means an exhaustive list.

Considering Different Quatitative factors

Going back to our example of the automotive industry, let us show
the difference in quantitative analysis of companies in this industry.
In an automotive company, investors tend to look at data on how
many vehicles are going unsold - to trace demand. They might also
give more weightage to Return on Assets compared to Return on
Equity, as an automotive company needs a lot of land and
machinery, i.e. assets, to produce vehicles.

In the Oil and Gas industry, one must look at ratios involving debt,
as companies here take up a lot of debt to fund their operations. A
company with lower debt or higher liquidity ratios might be more
attractive here.

Resources :
Return On Assets (investopedia.com)

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Let us look at an example of a company from the healthcare

sector, ‘Fortis Healthcare Ltd’. In order to decide whether to
invest in the stock or not, we need to carry out equity research.

Fortis Healthcare Limited Fortis is present in India,

– an IHH (Integrated the United Arab Emirates
Healthcare Holdings) (UAE), Nepal & Sri Lanka.
Healthcare Berhad The Company is listed on
Company – is a leading the BSE Ltd and National
integrated healthcare Stock Exchange (NSE) of
services provider in India. India.

It is one of the largest It draws strength from its

healthcare organizations partnership with a global
in the country with 36 major and parent company
healthcare facilities, 4,500 - IHH, to build upon its
operational beds and 400 culture of world-class
diagnostic centres patient care and
(including JVs). superlative clinical
excellence.

Source: Screener

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Fortis Healthcare has a good Here we have compared the

P/B ratio but its P/E ratio is ratios with peers from the
poor when compared to its same sector, like Apollo
peers. The company has a Hospitals Enterprise Ltd, Max
fair dividend yield compared Healthcare Institute Ltd, and
to competitors which is a Global Health.
good sign.
In the past year, the stock
Financial ratios offer price has mostly seen a
entrepreneurs a way to bullish trend (bullish means
evaluate their company's an investor believes a stock
performance and compare it or the overall market will go
to other similar businesses in higher) with Rs 313.80 being
their industry. the lowest price and Rs
569.10 being the highest
Ratios measure the price thereby giving 7.85%
relationship between two or returns.
more components of financial
statements. They are used If you are looking for stocks
most effectively when results with good returns, Fortis
are compared with Healthcare Ltd. can be a
competitors. profitable investment option.

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Sample report
Here is an example of a sample report for all our readers to use
as a reference if they wish to:

Sample Report

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glossary
Amortization: An accounting technique used to periodically
lower the book value of a loan or an intangible asset over a set
period of time. In simple words, when you pay off the debt in a
fixed repayment schedule in regular installments over a period
of time.
Resources: Amortization: The Mortgage Professor #5

Depreciation: A reduction in the value of an asset over time,

due in particular to wear and tear.

Assets: An asset is anything that has current or future

economic value to a business.

Liability: A liability is something a person or company owes,

usually a sum of money.

Liquid Asset: A liquid asset is an asset that can easily be

converted into cash in a short amount of time.

Accounts Payable: Accounts payable is money owed by a

business to its suppliers shown as a liability on a company's
balance sheet. Some examples of accounts payable include
cleaning services, staff uniforms, software subscriptions, and
office supplies.

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Obligation: An obligation in finance is the responsibility of a party

to meet the terms of a contract or agreement.

Solvency: The state of not owing money to anyone or of having the

ability to pay your debts.

Operating income: Operating income is a company's profit after

deducting operating expenses such as wages, depreciation, and
cost of goods sold.

Operating expenses: An operating expense is an expense that a

business incurs through its normal business operations.

Leverage: Leverage refers to the use of debt (borrowed funds) to

amplify returns from an investment or project.

Cash flow: The term cash flow refers to the net amount of cash
and cash equivalents being transferred in and out of a company.
Cash received represents inflows, while money spent represents
outflows.

Portfolio: Any combination of financial assets such as stocks,

bonds and cash.

Shareholder’s Equity: Shareholders' equity is the amount that the

owners of a company have invested in their business.

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Thanks for Reading

Our Team
MANAGERS

Aatreyi Bhatia Suchit Pakhale

CONVENERS

Devansh Devanshi Kopal

Priyansh Shamik Tanmay

We would also like to acknowledge Finance Club's Managers for 2023-24:
Arjun Simha and Priyansh Gopawat for their invaluable inputs and foresight
in making this guide.

Find us at
Instagram - https://www.instagram.com/finance.iitb/
Website - https://financeclubiitb.in/
Linkedin - https://in.linkedin.com/company/finance-club-iit-bombay

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Thanks for Reading

Our Team
MANAGERS

Arjun Simha Priyansh Gopawat

CONVENERS

Aatreyi Druv Nakul

Pratham Raghavi Suchit

We would also like to acknowledge Finance Club's Managers for 2022-23:
Dheer Bhanushali and Sarthak Jain for their invaluable inputs and foresight
in making this guide.

Find us at
Instagram - https://www.instagram.com/finance.iitb/
Website - https://financeclubiitb.in/
Linkedin - https://in.linkedin.com/company/finance-club-iit-bombay

E Q U I T Y R E S E A R C H G U I D E