Everyone in Stock Market has his own approach. In Fundamental Analysis, I used to look at companies with two simple parameters, which gave good results. This is our ‘simple and happy’ way but giving good results!
The two parameters are:
- Sales to equity at least 10 times. This is because the more the number of times the turnover to equity, the better it is for the company and the shareholders. You can list such companies and choose the best among them.
- Gross Profit ratio> 40%. Obviously without profitability, turnover has no meaning. The reason for choosing gross profit ratio is it shows the operational efficiency. You can list such companies and choose the best amongst them.
If you are a beginner to Fundamental Analysis of the Stock Market, using our ‘simple and happy’ way, learn more about the above ratios from books and other sources. There are a lot of other parameters such as ROI, Net profit Ratio, Inventory turnover ratio and so on. If you try to learn everything, you will get confused.
After learning these ratios, you can shortlist a few companies by combining the above two parameters. After this, you may get the list of companies vetted by an expert for industry prospects, competition, quality of management and past track record and choose, may be the best ten shares. You can do this step in a matter of an hour provided you are able to meet the right expert. You can choose the expert with the help of your Financial Mentor.
Another Risk Management you can bring in is to buy the short listed shares based weekly charts. Weekly charts are safer as compared to daily charts, though at times give late signals, but that is alright for a person with a time horizon of three years or more. As you gain more experience and simultaneously keep studying the market, you will develop your own propriety system and that will be the best for you.
In conclusion, turn over to Equity ratio and Gross Profit ratios are good starting points for beginners in Fundamental Analysis. Slowly you can add other factors, as discussed above. Of course, this entire discussion is strictly for a beginner. If you are a seasoned investor in using Fundamental Analysis, why don’t you share your ideas?
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