Basics of Stock trading

1. Why stock market

Business takes wealth from family, then bank loan then from public.
From public they took money in terms of stocks and share profit percentage.

Primary market
B issues IPO in primary market

IPO- initial public offering

Private to public means companies own shareholders either exists or issues

their shares to public to raise money.

Companies hire investment banks to market, gauge demand, set the IPO
price and date, and more.

First listing in a Primary market with a fixed IPO pricing. Public may buy IPO
in a stipulated time (listing day) not other than that.

IPO price can be bidded also

Secondary Market
After IPO phase one business can enter in Stock exchange listing and get
traded with a good background history in primary market stage

Its where the trading occurs like NSE exchange. Continuous changing in
stock pricing.

One sells one buys

If one cannot buys the IPO then they can trade stocks in secondary market.

2. How does someone make money in

stock market
Business profits at compound rate so also the stocks prices hike at
compound rate
 3. How to stop losing money
Diversify stocks while investing because when market crashes that particular
segment crashes. Like IT or Pharma

Good fundamental analysis

Nifty 50
Open NSE> go to live market> nifty 50

It’s the top 50 stocks from diversified fields

Order book
In every NSE exchange for every stocks there are listing of top 5 buying bid
and selling bids with quantity.

Buying Buying Selling Sellin

qty price qty g
price
99 700 100 600
98 500 102 700
97 200 103 300
96 300 105.6 250
95 400 107 100

Ltp last trading price

The last price where the buyer and seller both agreed

Buyer bided to buy at 98, 99, 99.5….

sellers bided to sell at 99.5, 100, 101….

Then ltp would be 99.5.

Other than ltp prices they are waiting for their bid to accept. In stock
exchange we don’t know who buys or who sells we are waiting for our
bargaining bids to accept. Let’s say I want to buy at 95 but they are selling
at 97 and I am okay with it then I agreed to buy at 97. Then ltp would be 97

Impact cost
Lets say I bought at 100 and sell at 99.5 then 0.5% would be the impact
cost .
If I trade 10 trades in a day or say 100 trades in a week then 50% will be the
impact cost which is huge for a frequent trader.

Impact cost is more than brokerage cost, SEBI charges, government

transaction cost or exchange turnover charges.

Nifty 50 are those companies with 0.5% impact costs. This in one of the
criterion in listing at nifty 50.

4. Risks of stock price

1. Commodity price
2. Headline risk- is headline can impact Indian market also though there
will be no direct impact
3. Rating risk- credit ratings poor
4. Obsolescence risk – company ideas obsolete
5. Detection risk- detecting fraud
6. Legislative risk- govt changes rules and their impact
7. Inflammation risk- inflammation hits price hikes
8. Model risk- Business model doesn’t work

A slight change in profit can have a huge adverse affect in drastically

dropping of stock prices even upto 50%.

5. Why stock prices goes up or down?

Book value
Let’s say screener.in shows book value of the company A is 450.

Current share price= 1313

1313/450= 2.91 times the book value A company is trading.

Let’s say market cap= 180000 Cr

Book Value Cap= (1.8/2.91)= 60000 Cr

If the last quarter price net profit is= 9400 Cr

Net profit percentage on book value = (9400/60000)×100= 15%

Net profit percentage on market cap = (9400/180000)×100= 5%

Book value is the net profit that is distributed to share holders from the
company.
It’s the worth of the company If all its assets are sold and all the
liabilities are paid back.

Beta
Measure the volatility of the stocks compared to the Market.

Beta high means high risk

Beta 1 means if nifty goes high by 1% then it’s share will also goes high by 1
and vice versa.

Upper circuit/ lower circuit

Stock exchange limits the stock prices above or below of which it should be
traded. That’s the limit for the up and down stocks called bracket.

One day maybe stock opens at 10% up then exchange halted for some
minutes then reopen if again spikes to 5% then again halted for some
minutes if third time came then the market will be suspended for the entire
day.

6. How to invest in stock market without

anyone’s help
Nifty 50

Etf

Mutual fund

Index fund

7. Dmat and trading account

Demat account
Account like bank account but where stocks exists instead of money

Two depository: NSDL and CDSL

Dp id: like bank account no

One Dmat account enough with it u can open 10 trading account

Trading account
It’s the account to open with a broker without broker one can’t buy or sell at
stock exchange

Broker can only open trading account can’t ask you to open Dmat account.

Buy flow

Give money to broker>broker ask from exchange>stores in depository or

dmat acc

Sell flow

Told broker to sell>broker to exchange>broker asks share from depository

with your consent and sell

This consent comes in two format

1. DIS slip: delivery instruction slip: asks you to sign every time
2. Poa: power of attorney to broker that without your consent in each step
they got the power to sell and asks from depository

8. Difference between trading and

investing
Investing is long term

Trading is a business

9. When to enter and exit from the

market
No perfect timing

Investment in the form of - Real estate, Gold, FD and Stocks

10. Ways to invest in stock market

Market sensex is nifty

If nifty goes high stock price will go high and vice versa

If nifty high by 5% then our stock price goes high by more than 5
Similarly if nifty goes down 10% then the stock need to be 1-2%lower then it
will call beat the market. Our aim will be to beat the market.

One can trade directly on nifty by buying ETF

Timings
One can buy Monthly i.e SIP systematic investment plan. In monthly they can
fixed the price say monthly I want to spend 1000 rs so every month the no of
stocks would be different.

One can buy stocks with lump sum amount

Stocks
Common stocks – have voting rights get dividends

Preferential stocks- no voting rights only a fixed dividend is given.not

dependent on the growth of company

DVR- differential voting rights lesser voting rights lesser pricing. Like say
having 10 dvr shares one get voting right equal to I common share.

Ex tata dvr price is 73 whereas common share price is 173

Stocks depends on market cap

Large cap- market cap> 10k crore (7k sometimes) : nifty 50 companies in
general, high stable give avg returns lower growth

Mid cap – 200cr<market cap<10k crore

Small cap- market cap< 200 crore: high growth but risky

Dividend payment
Growth stock – one company mostly growing they can invest their full
principal and interest in next year and not giving dividend every year.

Dividend stock- one company reinvest their profit portion and shares
dividend to their stock holders

Valuation based
Under valued: calculated from book value

Overvalued

Though this valuation is very tricky and can’t match the actual intrinsic
valuation
Risk based
Blue chip- low beta value: stable stocks, if market is up by 1% then it follows
the same. Also multibagger company like l&t it has business over larger
domains or genres

High beta stocks- high beta value: unstable stocks high liquidity beat market,
abrupt rise and downfall

Price trend/ economy based

Cyclicals- stocks dependent on the economic growth. Like car automobiles
luxury items.

Defensive- stocks fall in the basic need of life like food sector oild sector. If
market crashes this stocks will still sustain due to life necessity

Different ways of investment

Direct- stocks

 Active- learn and invest

 Passive- buy nifty equity

Mutual fund- every year fixed deduction of 2% no effect on profit

PCM- more than 50lakh investment advisory high percentage. Sometime

2.5% fixed along with Percentage on profit also

Investment advisory – sebi certified

11. Who are the stockbrokers and how to

choose the right one
Middle man between investor and stock exchange

Full stack brokers- They charge 1% approx in every transaction

Now discounted brokers are like Zerodha, Up stocks they don’t charge
brokerage on delivery they only charges on intraday

How to choose
A stockbroker mustn’t give advisory
 12. Who are the investors in the stock
market
Moneycontrol>search a company> share holding patterns

Shows the listing of the shareholders with their percentage

 Promoters – owner (ICICI doesn’t have promoter share)

 Pledge- owners/ companies stock for sell as a debt to earn money
 FII- foreign institutional investors
 DII- domestic institutional investors ( ex LIC)
 Retails traders
 It’s good that promoter share increases and it’s bad that pledge share
increases
 It’s may be condition that some companies does not have promoter
shares as the owners diluted their position so that they become normal
share holders

Module 2
13. Economics
Micro economics –
Macro economics-
overall countries

Economic indicators:

CPI- Customer price index

Applicable of considering both organized and unorganized sectors.

In 2022 A normal household have to pay 40000 for their necessary expenses.
The same household have to pay 42000 for the same utilities in 2023. So
increase is 5%

This index only applies for necessary households not for luxury items

2<cpi< 6
Inflation below 2 means products generates but people don’t have money to
buy

>10 is hyper the market crashes

GDP
Gross domestic product

Applicable of considering both organized and unorganized sectors.

Say in a country in 2022

The worth of agriculture is 30 rs

The worth of production is 40rs

The worth of service given is 30 rs

Total cost or GDP is 100rs

Say in the same country in 2023

The worth of agriculture is 36 rs

The worth of production is 30rs

The worth of service given is 44 rs

Total cost or GDP is 110rs

The GDP is = 10% called nominal GDP

Say the inflation in this year is 6%

So the actual GDP is = 4%

Per capita GDP= divided b my no of individuals

14. Understanding Indian economy

PPP
Purchasing power parity is the rates of currency conversion that try to
equalise the purchasing power of different currencies, by eliminating the
differences in price levels between countries.

PPP therefore compares the prices in different countries for a certain basket
of goods and services e.g. food, housing, transportation etc.
For example, if a family spends ₹50,000 a month in India and an equivalent
family in the USA buys the same basket of stuff for $2,000, then the PPF-
factor for USD is 25. You should now contrast this number against the
USD/INR forex rate which is much higher at 80+ per dollar. Therefore, if you
are earning ₹10 lakhs in India, the equivalent PPP-adjusted salary in the US is
$40,000 found by dividing the India salary by the PPP-factor and not by the
exchange rate. If you are looking for a job abroad in the US, then a package
of more than $40,000/year should make you better off than in India.

Similarly, for UK, the PPP-factor for USD in GBP is 0.6813. We divide the
USDINR rate of 24.0595 with this figure to get the GBP in INR PPP-factor as
35.32. So, a £100,000 salary is equivalent to ₹35.32 lakhs in India in PPP
terms.

OCED gives the table of PPP.

15. Different organized sectors and their

role in Indian economy
Sector analysis
Top down approach/rotational approach
Choose a sector- sector analysis. Then choose some companies in those
sectors and pick uf stocks

Bottom up approach
No sector analysis pick up a company. Maybe the sector is not good but the
company is doing well. So we do fundamental analysis on the company itself.

Sectors-13 sectors

Sector and industries

 Both are termed interchangeably
 Same segment of economy
 Similar business nature
 Sector is broad. Industry means a group of companies.

BFSI sector
a) Financial industry
b) Banking industry
c) Insurance industry
 d) Stock broking industry

Economic sector definitions

 Primary sector- agricultural, mining
 Secondary sector- construction, manufacturing
 Tertiary sector- retail, entertainment, financial
 Quaternary sector- consulting, education, r&d

Broader sector contributing in GDP

GDP contribution in Working percentage of
India population
Agriculture 14 51
Manufacturing 27 22
Services 59 27

Different sectors
1. Agriculture
2. Animal husbandry
3. Fishing
4. Natural resources
5. Gems
6. Defense
7. Aviation
8. Energy
9. Petroleum and products
10. Mining
11. Iron and steel
12. Construction
13. Engineering
14. Infrastructure
15. Pharmaceutical
16. Information technology
17. Textile
18. Pulp and paper
19. Printing
20. Banking
21. Financial and financial services
22. Financial technologies
23. Insurance
 24. Retail
25. Tourism
26. Media and entertainment
27. Health care
28. Logistics
29. Telecom

Stock market active sectors

All sectors except agriculture

Nifty or sensex represents 13 sectors with different weightages

NSE India>home>menu>market watch>equity and stocks and SME

markets> choose equity/stock>nifty 50 drop down list>sectorial indices
(showing the top 13 sectors)

Nifty sectors weightages

Sectors Weightage
s
Financial 39.47
services
Energy 15.31
IT sectors 13.01
only
services
not
products
Consumer 12.38
goods
Automobil 6.11
es
Rest 8 13
sectors

16. Industry analysis

Sector analysis from IBEF website

17. Learn map

Nil
 18. Introduction to Excel and data sheets
Excel operation on historical data
How to find historical data?
Go to NSE>search a company>equity>trade information, historical
data>trade data>choose the period>click on Download (in .CSV format)

Open the data in Excel or origin

Columns are

Date, open, high, low, prev close, ltp, close, vwap, periodic high, periodic
low, volume, value, no of trades

Close price calculated by formula

Volume×close= value

Excel
Open in CSV format

Calculate simple moving average SMA

Say SMA of last 20 days = avg(close of 20days)

Google finance and live data operations

Get real time data from Google finance
Go to Google, write the company name, search in finance options like images
news etc .

It shows the real time data

Real time data on Google sheets

Open Google sheets >

Write formula to get real time data

=googlefinance(“ticker”, “attribute”, “startdate”, “enddate”, “interval”)>

enter

Ticker- NSE: TCS for NSE exchange price

For global data only company name

Like =googlefinance(“Google”) – shows the real time price of Google in
global market. If no attribute is mentioned it automatically give the real time
price.

Attributes
Start date- “yyyy/mm/dd” format, optional

End date- “yyyy/mm/dd” format, optional

Interval- daily/1, 7 – daily or weekly

These 3 are used to generate historical data or chart of data

19. Mathematics for stock market

Calculate future value
compound interest formula

=FV(rate, nper, pmt, [pv], [type])

Rate- rate of interest

Nper- no of year

Pmt- per month value-0 for one time investment.

Pv- present value (capital)

investment means negative sign

a) I want to give 1 lac for one time investment at 8% rate for 35 years
Final value= FV(8%, 35, 0, -100000)
b) I want to give 1 lac every year for investment at 8% rate for 35 years
Final value= FV(8%, 35, -100000, 0)
c) I want to give 5000 per month for investment at 8% rate for 35 years
Final value= FV(8%/12, 35*12, -5000, 0)
d) I want to give 100000 rs as first time investment then 5000 per month
for investment at 8% rate for 35 years
Final value= FV(8%/12, 35*12, -5000, -100000)

Present value calculation

Formula

=PV(rate, nper, pmt, [Fv], [type])

a) I want 1cr return in 35 years at 8% rate

Present value= PV(8, 35, 0, -10000000)
b) Invest pv and get 1lac per year for next 15 years at 8% rate
Present value= PV(8%, 15, -100000, 0)

Net present value

=NPV(rate, [value1], [Value2],….)
A company invested 10cr rs then every year get 20lac in return for 5 years
and get post depreciation return 10lac (selling something) with raising debt
14%

Cashflow given

-100000000

2000000

2000000

2000000

2000000

3000000

=NPV(14%, -100000000, 2000000, 2000000, 2000000, 2000000

, 3000000)

Internal rate of return

Calculate rate of return

=IRR (values)

=IRR(-100000000, 2000000, 2000000, 2000000, 2000000, 3000000)

= 16%

I bought a share of 1400rs 5 years ago and the current value is 2200. Every
year they gave dividend of 2%. What is the rate?

Investment -1400

1st year 28

2nd year 28

3rd year 28

4th year 28

5th year 2228

IRR(-1400, 28, 28, 28, 28, 2228)= 11%.

 20. Business tools
Business strategy tools to analyze the profitability of business in long run.
Sell doesn’t implies profitability. Power of compounding not always works. So
business sustains when business reinvest because capital on debt will not
help the business to grow.

Porter’s five forces

Created by Harvard business school professor Michael Porter in 1979.

Identify and analyze 5 competitive forces in industry to determine the

weakness or strengths.

The five forces are -

i. Potential of new entrants into the industry

Easy to open a sweet shop than petrol pump

ii. Competition in the industry

No of existing or established rivals. ( Airtel Vodafone idea)

No of rivals (Jio)

Décor shop only one but sweet shops are 5 in locality

iii. The threat of substitute products

Tea and coffee are running but entry of green tea or herbal tea

iv. Bargaining power of suppliers

Raw material suppliers is low then their product margins will be high.

v. Bargaining power of customers

Customer demand low then I have to sell in low price.

SWOT analysis
A company’s

Strength-
a) Strong brand
b) Skilled workforce
c) Good management
d) Patent or intellectual properties
 e) Customer base
f) Cost advantage
g) Scalable business model

Weakness
a) Bad financial
b) Poor management
c) Poor or old technology
d) Internal politics
e) Trust deficits from stakeholders

Opportunity
a) New geo expansion
b) New product launch
c) New tech adaptation
d) Business environment change
e) Merger or acquisition

Threat
a) Competition
b) Change in customer preference
c) New products in market
d) Natural calamities
e) Change in rules and regulations

Strength and weakness are internal factors and others are external factors

21. Fundamental Analysis

Terminologies
Asset
Anything I own

Current asset
Anything can be converted to cash within one year

Bank balance, sellable products, payment after selling

Fixed assets
Within year which cannot be liquidate or transfer to cash.
Companies own land, machines, transport, tools

It gives value after long term

It can be appreciated or depreciated both depending on nature or price

mechanism.

Intangible asset
Any assets which physically does not exist

Branding and goodwill.

It will used to used qualitative or competitive analysis of companies.

Liabilities
Liability in the form of debt or promises to keep.

Ex: debt, government taxes- companies took taxes from customers by selling
products and they have to pay back to government.

Current liabilities
Which can be settled within one financial year in the form of current asset.

 Salary of Employee
 Debt from raw material vendor
 Taxes in every quarter
 Debt of assets

Non current liabilities

Which needs not to be settled within a year.

 A loan for 20 years then they will pay interest every year and principal
in lumpsum amount in 20 years. So interest in current liabilities
butloan is non current liabilities.
 A pension for every employee.

22. Qualitative aspect of fundamental

analysis part-1
Industry wise growth
Smart money concept: large scale investors with crores of money like DII and
FII s they doesn’t invest in 200-300 companies they choose 30-40 big
companies with long run profitability depending on industry wise and
considering economic growth.

Management of company
The management sometimes can draw huge salary and doesn’t pay
dividends properly. We have to subjectively study their intuitions. Characters
is most important. They can siphon the profits.

Or they may involved in unethical work so that can trouble a company and
when some enquiries were on them then share price will be highly affected .

We have to check the share stakes of the management if it decreases that

means they are not trusting the company anymore.

Select a company study about their management or CEO s in LinkedIn.

Competitive advantage: MOAT analysis

Introduced by Warren Buffett

A business’s ability to maintain competitive advantage over other companies

for long run

a) Brand power
b) Pricing power
c) Network
d) Economies of scale (costing)
e) Corporate governance – must put shareholders stake foremost
f) Business model- with current demands
g) Customer base
h) Market share

23. Qualitative aspect of fundamental

analysis part-2
What if new company issuing IPO?

- Each company must share their historical data

- The character of management of the company will be always
available

What is business model?

 - Sometimes most profit are not coming from the main source of
business like McDonald’s main source of revenue is real-estate.

Promoter is prime minister of India

- The govt companies hold shares in the name of PMO

24. Quanttative aspect of fundamental

analysis
a) Understanding business model
b) Which cycle it grows at a simple interest and which cycle it grows at
compound interest
c) Upto what market size compound interest can multiply in the favor of
company
d) We need to check the following statements – quarterly result, balance
sheets, profit and loss statements, and cash flow statement
e) Which statement is appropriate for which sector of companies
f) Check the book value of the company.

Book value
If a company thinks to sell all their assets and after paying off their liabilities
they will distribute the money to all shareholders then the amount each
shareholders will receive is called the book value.

Years Market Book Return

price value perc
1 100 65 12%
2 65*112%
= 72.8
3 72.8*112
%= 91
91*112%
= 111.75

25. Financial statements

It’s the core of fundamental analysis

Written record of financial and business activities of the company.

Published after auditing in every quarter and also annually.

Some business may be functional in some quarter so we have to check
overall annual statement.

3 types of statements

Profit and loss statements (P&L)

Also known as income statement

Overview of revenue, expenses, net profit and earnings per share.

Balance sheets
Overview of what company owes and owns and also the investment of
shareholders .

How the company is making return for its capital.

Cash flow statement

Understanding the fluidity of cash in a company. How well a company
manages it’s cash flow. When the company receive cash from their client and
pays off the debts on time or not. Can check the character of the company.

26. Profit and loss statements

Revenue Gross sales 100
COGS Cost of 30
goods sold
(COGS)
includes all
of the costs
and
expenses
directly
related to
the
production
of goods.
Gross profit Revenue- 100-
COGS 30=70
Operating Operational 10
expenses 1 expenses
Operating Operational 5
expenses 2 expenses
Other Other than 5
income core sales
 like FD, real
estate
EBIDTA Earning 70-
before 15+5=
Interest, 60
Tax,
depreciation
and
amortization
Depreciation Depreciatio 10
n of assets
over time
Amortization Amount to 15
repay the
loan part of
principal
and interest
EBIT Earning 60-25=
before 35
Interest and
tax
Interest Interest to 15
repay debt
PBT Profit before 35-15=
tax 20
Tax PBT*30% 20*30
%= 6
Net profit PBT-tax 20-6=
14

Two websites to check

Moneycontrol

Screener.in

Go to website> choose a company> click on Profit and loss> get the tables
quarterly and annually

Standalone- based on the prior company

Consolidated- based on the primary company along with acquired companies

data

TTM- sum of last 4 quarters = mar+ jun+ sep+ dec

OPM%- operating profit/sales

Screener.in
Revenue Sales
COGS Expenses
 Manufactur
ing cost
 Employee
cost
 Other cost
Gross Operating
profit profit
-OPM%
(operating
profit/sales)
Operating -
expenses
1
Operating -
expenses
2
Other Other income
income  Exceptional
items
 Other
income
normal
EBIDTA -
Depreciati Depreciation
on
Amortizati -
on
EBIT -
Interest Interest
PBT Profit before
tax
(Operating
income+
other income-
depreciation-
interest)
 Tax %
Tax -
 Net  PBT-tax%
profit  Profit after
 tax
 Reported
net profit
 Profit for
EPS
 Exceptional
items AT
 Profit for
PE
EPS in Rs

27. Balance sheets

Asset= equity+ liability

Equity is the promoters capital plus capital raised from other investors as
well as markets

Liabilities are like debts

Screener.in
Equity capital Raised fund from
investors
Reserves Raised fund from public Net worth of company
shares. if company shuts down
this money will be paid
back to shareholders
Borrowings
Other liabilities
Total liabilities
Fixed assets
CWIP
Investments
Other assets
Total assets

 In balance sheets total assets= total liabilities

 We have to check for a particular month or quarter,
reserve value from balance sheet and net profit from P/E statement
then-
ROE= (net profit/ reserve)×100%
 Check the compound growth of net profit also
 28. Cash flow statement
Cash coming to company is positive and going out is negative

Cash flow from

Operational activities Production Positive is good
Salary expenses
Marketing
Sales
Investment activities Invest in land Company invests-
Bank deposits negative entry.
Acquisition Company dilutes- sells
something and earns
money: positive entry
Positive is warning sign
here.
Financial activities Money raising through Both positive and
equity negative are warning
Money raising through Positive can be bad-
debt more debts are harmful
Dividend payout Negative can be good-
Interest payment paying back more
debts or dividends can
be good.
Should be checked
along with
management
commentry

29. Financial ratios

Types of ratio
Profitability
How company can generate profits

 Return on equity
 Return on capital employed

Liquidity
A company’s ability to pay its debts

 Current ratio
  Quick ratio
 Inventory turnover

Valuation
The market value of the company

 PE ratio
 Price to book value
 Price to Sales

Solvency
How the company can stay in long run

 Debt equity
 Debt assets
 Interest rate

Some ratios may be functional in some sectors or industries.

30. Financial ratio part I

Market capitalization
Market cap= no of shares traded× current share price

Current market price (CMP or P) = current share price= ‘current price’ in

screener.in

Net worth
From balance sheets,

Net worth= share capital+ reserve= Shareholders equity

EPS ratio
Earning per share

No of Shares= market cap/ current market price of share

EPS= net profit/ no of shares

Net profit from P/E statement

PE ratio
Price to earning ratio
PE= price of share/ EPS

= P/(net profit/No)

=(P×marketcap)/(P×net profit)

PE= market cap/net profit

 Lower PE gives higher return with low premium

Price to book value ratio

Book value (BV) of share= Net worth/no of shares= (share capital+ reserve)/
no of shares

Excluding intangible asset like management etc

Price to book value= P/BV= price of share/BV

Debt to equity ratio

D/E ratio= total debt/ total equity

Total debt= long term debt+ short term debt ( short term within 91 days)

Total shareholder equity= share capital+ Reserve and surplus= net worth

 Anything 1 or below 1 is good

 Very low P/E is not good
 Some industries work on debt only still running good and their D/E is
higher than 1.
 Rutherford B Hayes said it’s the debtor who ruins by hard times.

ROE ratio
The profit should be grow in a compounded rate. This rate is calculated by
ROE and ROCE ratio.

Return on equity (ROE)

ROE= net income/ shareholders equity

Net income= Net profit in P/E statement

shareholders equity= share capital+ reserve= net worth in balance sheet

 Higher ROE means the company is not utilizing the fund in good
fashion
ROCE ratio
Return on capital employed ratio (ROCE)

ROCE= EBIT/ capital employed

EBIT= earning before interest and tax

Capital employed= shareholders fund+ borrowings= share capital+

reserves+ borrowings.

[not taken ‘other borrowings’ from balance sheets]

 ROE and ROCE should be equivalent there should not be big difference
 It shows how company is utilizing the fund to run a profitable business.

31. Financial ratio part III

Check PE ratio of each sector to learn quantitatively

 Low PE means good

 If PE is 20 means we have to pay 20rs to earn 1 rs of the stocks
 Check Nifty PE: Google search ‘Nifty PE from NSE’> select indices ‘nifty
50’> choose time period> click on ‘P/E’> click on ‘get details’
 Check FD P/E

5.5% rate of FD means

Price= 100, earning= 5.5
P/E= 100/5.5= 18….

 Check certain sectors and their largest companies P/E

FMCG is always high in P/E because its ROE is very high also because they
are only dependent on marketing

32. Relative valuation vs intrinsic valuation

 Relative valuation based on
 Revenue
 Earning
 Cash flow
 Book value
 Real value of company is not Book value or market price it’s DCF
(discounted cash flow)
  DCF is not only method of finding intrinsic valuation of company there
are other methods also.

What is discounting
 The reverse calculation of compounding.
 Calculating the present value based on future value
 If I tell you will get 120 of return at 20% compounding rate then what will
be the principal amount or present value? Ans is 100. This is discounting.

Cash flow and free cash flow

When they book the order even before getting the cash they showed as
profit. Cash flow is showing the actual profits or actual earning.

Free cash flow- the amount of cash is retained as liquid cash.

WACC
Weightage average cost of capital

Depending on the money raised through equity or debt weightage is being

calculated

Formula

FV is fair market value

Intrinsic Valuation
Intrinsic value of company is= DCF – debt

Share price= intrinsic value/ no of shares

If I calculate intrinsic value of share is 450 and it’s trading at 400 then I will
happily buy it and if its trading in 500 then I must wait to share price to come
back below 450.