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Introduction to Fundamental Analysis

arvind151 (http://www.arvind151.com/author/admin/) - February 7, 2017 (http://www.arvind151.com/1259-2/)

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Introduction to Fundamental Analysis http://www.arvind151.com/1259-2/

Fundamental analysis is the foundation of investing. In a very simple terms we can say that fundamental analysis is

an ability to know the structure of a business that is how a business is performing, what are its source of revenues,
what are its assets and liabilities, how much it is spending, how much are the debts of the company etc. In other
words, we can say that Fundamental Analysis is a tool to make quantitative analysis of every financial aspects of a

company. We can use results derived from fundamental analysis to gain insight of the future performance of the
company.

Before we move further, lets understand some financial terms in very simple language:

Question : What is an Asset ?

Answer : An Asset is something that puts money in your pocket. For e.g. if a house is giving rent, then that house is
an asset. Whatever things that put money in your pocket comes under an Asset whether its a renting house, your

business, your investments, your job etc.

Question : What is a liability?

Answer: A liability is something that takes money from your pocket. For e.g. when you buy a car, then its your

liability because it is not putting any money in your pocket. But if you put that same car on rent and it gives you
some form of income then that car becomes an asset.

Important: The biggest mistake we make is that we think the house that we live in is an asset but it's not an asset

rather it's a liability because it doesn't put any money in our pocket.

A major part of Fundamental Analysis will be spent learning about the Balance Sheet, Income Statement, Cash
flow statement and how they all fit together.

A company which is fundamentally sound with good management most often generate a lot of wealth for its

investors. Therefore, its extremely important for an investor to invest only in companies which have good sound
fundamentals. In Indian stock market many fundamental sound companies have delivered a 20% or more

Compounded Annual Growth Returns (CAGR) in last 10 to 12 years.

Question: What is CAGR?

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Answer: CAGR stands for Compounded Annual Growth Returns, It is the mean annual growth rate of an

investment over a specified period of time longer than one year.

Sounds confusing, dont worry, we will make it simpler. Lets understand about CAGR with help of an example.

Suppose you bought 100 Shares of company XYZ at Rs. 700/- on Jan 1, 2014 and after 3 years Stock price of XYZ is
at Rs. 1200/-.

Now to calculate the CAGR of your portfolio from the period from Jan 1, 2014 to Jan 1, 2017, you would divide the

final value of your portfolio by the portfolios initial value (1,20,000 / 70,000 = 1.71). Next, you would raise the

result to the power of 1 divided by the number of years (1 / 3 = 1/3 or 0.3333). Finally, you would subtract 1 from the
resulting value.

Doing the math, you would calculate:

[(1,20,000 / 70,000) ^ (1 / 3)] 1

= (1.71 ^ 0.3333) 1

= 1.195 1

= 0.195, or 19.5 %.

Therefore, Stock XYZ has given a CAGR of 19.5% from Jan 1,2014 to Jan 1,2017.

Important: Higher is the CAGR, higher are the returns.

Portfolio of 15-20 Multibagger

Let us look at the past 10-year performance of some fundamentally good companies and learn how much
returns they have given to the investors:

1. Infosys : Infosys has given CAGR of approx. 18% in last 15 years.

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2. Titan Company : Titan has given CAGR of approx. 49% in last 10 years.

3. Symphony Ltd. : Symphony has given CAGR of 102% in last 10 years.

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Now lets also look at some companies who have degraded investors wealth and have given Negative CAGR :

1. JP Associates : JP Associates have given CAGR of -28% in last 10 years.

2. Suzlon Energy : Suzlon Energy has given CAGR of -22% in last 10 years.

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From above examples, we see how companies like Infosys, titan, symphony etc. have created wealth for investors

where as companies like JP Associates, Suzlon Energy etc. have destroyed wealth of investors.

Therefore, from above we can see that how important is to select a company which is fundamentally sound which

can create wealth for investors.

The major part of all the posts in this series will be dedicated in learning about the Balance Sheet, Income Statement,

Cash Flow Statement and how they all fit together when we do fundamental analysis of a company.

But there is more than just number crunching when it comes to analysing a company. This is where qualitative
analysis comes in - the breakdown of all the intangible, difficult-to-measure aspects of a company.

We will learn about each and every aspect of Fundamental Analysis in detail in next posts.

In next post we will learn How to Read Annual Report of any Company in very simple language.

Portfolio of 15-20 Multibagger

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