Mon. Mar 4th, 2024
How to evaluate a stock in India

Confused about the term Nifty 50? Get the feel of the basics of Share Market in India and understand how to evaluate a company stock against the benchmark Index for Indian Stock Market of the 50 Indian Largest Companies on the National Stock Exchange.  

Have you ever invested in company stock in India? If yes, was it on the recommendation of a friend or was it your hunch? The reason for a volley of questions is to bring forth the point that investment in company stock requires a very conscious decision, arrived at after carefully evaluating a lot of information regarding the Company. 

This article attempts to answer questions like, how to evaluate a company stock and what are the points to be considered if you have to evaluate a stock in India ? Before you decide to invest in the stock market in India make sure you do a thorough check on the past, present and the future corporate health of the company whose stock you intend to buy currently. 

Key pointers worth considering 

Get information on the company, its products and/ or services. If it manufactures a product, look for whether it has other products in its basket so that if the revenue from the sales of a particular product is not coming through, it can fall back to aggressively market the other products. Read further to understand the fundamentals of how to evaluate stocks listed on the Indian Share Market and of course, how to evaluate stock price.   

Gather more information about the diversification plans of the company, who its promoters are, what is their stake in the company? This is one of the primary considerations which will decide on further steps on how to evaluate stock price?  

Browse through the company’s financial reports for evaluating its financial performance over a period of years. Look at consistent financial performance.

Its balance sheets will answer your questions regarding the assets and liabilities of the company.

Try to search for any issues in corporate governance that the company had faced or was involved in.

Compare the performance of similar companies in the same line of business or the same industry segment. Evaluate the Industry segment’s overall current performance, both in the domestic and the global market.

So basically, you need to analyze before deciding to invest in a company’s stock.

A Structured Approach towards How You Should Analyze Before Investing In Company Stock 

Analyze the Company

  • Look for the detailed bio-data of the top management and the promoters, their experience in the domain/industry segment in which the company is operating.
  • Scan for the compensation levels of the top executives viz-a-viz across the same industry segment (check to see whether it meets the norms set by the Indian regulatory body/ies)
  • What is the shareholding pattern of the promoters, and who are the other shareholders?
  • Are any of the promoters also shareholders with the competitor company having conflicting interests?
  • Understand the management’s philosophy on customer service and check its commitment towards the same.
  • Try to find out whether any of top management or any one of the promoters has been involved in a corporate scandal.
  • Seek to find out information on how the interests of all the stakeholders are met and balanced. (Apart from the shareholders, this includes employees’ welfare, customer support and environmental sustainability of the company’s operation in the geographical area). For it is not sufficient for companies to be able to only generate revenue but it is equally important that it does so within the overall societal fabric, lest it should land up in serious trouble in the future.
  • While analyzing the company’s past and recent financial reports, look to assess the company’s past debts and how it was able to service it? Check if its debts are mounting and how it plans to pay off its debts- its debt servicing capability, or is there any possibility of the company filing insolvency soon?
  • It is important to understand the debt-equity ratio to assess if the company is in a sound financial footing to be able to tied-over periodic spells of losses.
  • Understand whether the share price is underpriced or overpriced. The Price/Earnings (P/E) ratio will be an indicator of this. A higher ratio may mean the company is projected to earn higher future revenue. Thus the market has shown a bullish effect on the company’s share price in the secondary market. Whereas a lower P/E Ratio is a sign of poor future financial performance by the company, thus leading to a bearish trend of the share.
  • What is the return on equity, ROE considered by the company? Is there any amount reserved for reinvestment for future growth and more revenue earnings?
  • Look at the company’s earnings before deduction of interest, tax and amortization (EBITA). This will indicate its possible profitability and operating efficiency. 

Analyze the Industry Segment in which the Company is Operating

Besides analyzing the company it makes sense to also analyze the industry segment in which the company is doing business in, its prospect, opportunity and threats as well as its past performance. This is the prime factor when you are faced with the question “how to evaluate stock price”?

  • Compare the performance of other companies in the same industry. It will be a more meaningful financial comparison to decide whether you should at all invest in a company which is in the industry segment that is in the red and showing no signs of project recovery. Rather its death-knell has already been sounded and it is sure to make a nosedive landing.
  • But before that look at the company’s efforts to deal with such storms in the past.  

A quick scan of the above points (most of the information being available on the internet) will surely help you to take a more informed and decisive consideration whether you should invest in the company’s stock or reconsider your decision.

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