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Part 3 - Today You will become an Expert Fundamental Analyst

How do you choose the stocks in which you invest your money? Do you invest on the basis
of tips given by your friends, broker or experts in TV? Do you feel nervous while risking your
Hard Earned Money on the basis of someone elses advice?

Do you wish that you knew how to check the True value of a company? If you knew it, then
you can always ensure that your money is Safely invested in good companies having a
promising future.

In todays 8 page installment you will learn to do this. You will learn to do fundamental
analysis of a companys share in Less than 5 minutes.

This study material is written in a simple, step by step format. So even if you do not know
anything about the share market, you will still be able to fully understand this document.
Just read it till the end. It should take you about 40 minutes to read and understand this
installment of the course. So in 40 minutes YOU are going to become a Fundamental
Analyst.

I have considerable experience as a fundamental analyst and I used to monitor the
fundamentals of nearly 500 companies spread over 30 Sectors/Industries. This method
helped me to keep track of the fundamentals of such a large number of companies. I have
uploaded an excel sheet that I had prepared in those days. It contains the fundamental
analysis of over 400 companies in 27 sectors.

In todays study material we will cover the following topics

1. What is Fundamental Analysis?
2. The Attributes (qualities) shown by a company having Good Fundamentals.
3. Getting the data required to do Fundamental Analysis of a Share.
4. How to do Fundamental Analysis of a share/company in 5 Minutes?
5. Results from using Fundamental Analysis.
6. Introduction of the Most Powerful method to analyze the Share Market.


What is Fundamental Analysis

Fundamental Analysis is a technique used to evaluate the merit of an investment option.
The main goals for doing fundamental analysis are

1. To calculate the average return/profit from an investment option.
2. To evaluate the risk of investing in an investment option.

Price by Earning (P/E) ratio of an Investment Option: P/E ratio is the most important
parameter used in fundamental analysis. P/E of an investment option is equal to the amount
of money invested in it divided by the profits earned from it in 1 year. Let us understand
this more clearly with the help of an example.

Investment option A gives a profit of 10 rupees in 1 year if 100 rupees are invested in it.
Investment option B gives a profit of 20 rupees in 1 year if 100 rupees are invested in it.



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So P/E of Investment option A = Money Invested = 100 = 10
Profit Earned 10
So P/E of Investment option B = Money Invested = 100 = 5
Profit Earned 20

In the above case we see that the Investment Option B which gave higher profit has the
lower P/E. So we understand that a Good Investment Option will have a Low P/E. A
low P/E means that we can get higher profits by investing the same amount of money.

Now lets understand the P/E of a company issuing shares.
P/E of a company = Price of the company
Earning of the company

Here is an interesting question. What do we need to do, to buy a company? Well, to buy a
company, we need to buy all the shares of that company.

So the Price of a Company = The total cost of buying all the shares of a company
= Total number of shares issued by the company * Current market price of the share

This value is called as the Market Capitalization (or Market Cap) of the company.

Earning of a Company is the Net Profit earned by the company over the past 1 year.

So P/E of a Company = Market Cap of the company .
Net Profit of the company over the past 1 year


The Attributes (qualities) shown by a company having Good Fundamentals

A company having good fundamentals will show the following 5 attributes.

1. They have lower P/E than the Average P/E of their Industry/Sector

2. They have lower P/E than other companies of similar Size (Market Cap) in their
Industry/Sector

3. They have Higher Net Profit in Recent Quarters

4. They have large amount of Sales of their Product or Services. Their Net Profit is
largely generated from the Sale of their Product or Services.

5. They have a Higher Asset to Market Cap ratio than other companies of similar Size
(Market Cap) in their Industry/Sector.

Let us understand each of these points in detail.

1. They have lower P/E than the average P/E of their Industry/Sector

A company having a lower P/E is usually the better investment option. However before
reaching to this conclusion we need to compare its P/E with the average P/E of its
Industry/Sector. Lets use an example to understand the importance of doing this.


Copyright 2009 invest-in-shares-in-9minute.com. All rights reserved.
A company Mcleod Russel has a P/E of 10.41. Another company Balrampur Chinni has a P/E
of 9.41. So as per their P/Es it seems that Balrampur Chinni is a slightly better investment
option.

Mcleod Russel comes under the Tea and Coffee sector. The average P/E of the Tea and
Coffee sector is 28.38. This clearly shows that Mcleod Russel has a very low P/E as
compared to the average P/E of its sector. So it is a good investment option.

Balrampur Chinni comes under the Sugar industry. The average P/E of the Sugar Industry is
10.59. So P/E of Balrampur Chinni is nearly the same as its industry. So it is an average
investment option.

The average P/E of an Industry/Sector depends on the growth potential of that Industry
/Sector. A new fast growing sector like Bio Technology will have a high average P/E as it
has great growth potential. A stable traditional Industry/Sector like Consumer Durables will
have a lower average P/E as it has moderate growth potential.

The goal of a Fundamental Analyst is to find companies whose share is Underpriced as
compared to its growth potential and performance. So he needs to compare the P/E of a
company with the average P/E its Industry/Sector to get the True and Complete picture.

2. They have lower P/E than other companies of similar Size (Market Cap) in their
Industry/Sector

It is safer to invest in large companies as the risk that the company may fail and close down
is smaller. So, large companies have a higher P/E as compared to small companies in the
same industry/sector.

Lets use an example to understand this point. Reliance Industries and Cals refinery, both
come under the Refineries Sector. Reliance has a Market Cap of 358,000 crores while Cals
refinery has a Market Cap of just 357 crores. Thus Reliance is 1000 times bigger. This
means that it is much safer to invest in Reliance Industries than in Cals refinery.

A fundamental analyst will consider this point while evaluating the merit of investing in
these 2 companies. He may decide that a P/E of 10 for Cals Refinery is equivalent to a P/E
of 20 for Reliance Industry, as investing in Cals Refinery is much more risky.

If the current P/E of Cals Refinery is 15 then he will decide that it is a bad investment
option. On the other hand if the P/E of Reliance is also the same i.e. 15, then he will
consider it to be a good investment option.

3. They have Higher Net Profit in Recent Quarters

A company with good fundamentals has a low P/E. The formula to calculate P/E is

P/E = Market Cap of the company .
Net Annual Profit of the company over the past 1 year

This formula shows that the P/E of a company will be low if the Net Annual Profit of the
company is high. So companies with good fundamentals will have a High Net Annual Profit.


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It is better to invest in companies which have higher Net profit in recent Quarters as they
will continue to have a High Net Annual Profit in the Future also. Let us use an example to
understand how this happens.

There are 2 companies A and B. Both have the same Market Cap of 1000 crore rupees (10
billion rupees) and the same Net Profit of 100 crore rupees (1 billion rupees). The company
A has recorded higher profits in Recent Quarters while the company B has recorded higher
profits in the Earlier quarters. The following table gives the details.

Quarter Company A Company B
March 2009 -50 90
June 2009 -10 70
September 2009 70 -10
December 2009 90 -50
Total 100 100


Now let us assume that in the Next Quarter i.e. March 2010 both companies make the same
profit of 30 crore rupees. The new annual Net Profit for the 2 companies will be -

Net Annual Profit = Profit for (June 2009 + Sept 2009 + Dec 2009 + March 2010)

Net Annual Profit for A = - 10 + 70 + 90 + 30 = 190 crores
Net Annual Profit for B = 70 - 10 - 50 + 30 = 40 crores

Thus we find that the Net annual profit of the companies is now drastically different, even
though they made the same Net profit in this quarter. The company A which had a higher
Net profit in Recent quarters has a much higher Net Annual Profit now. So companies
having higher net profit in Recent quarters are Better investment options.

4. They have large amount of Sales of their Product or Services. Their Net Profit is
largely generated from the Sale of their Product or Services.

The balance sheet of some companies will show good profits even though their sales are
almost zero. This problem is especially seen in new companies. So where does this profit
come from?

New companies often raise large amount of money to develop their infrastructure, for eg
constructing factories, refineries extra. They are able to invest a part of this money in areas
like debt market, share market etc. The profit earned from these investments is shown in
the balance sheet of the company.

In the future all this money will be used up to set up the infrastructure of the company. So
this source of profit will not continue in the future. Only the profits earned from actual sales
of Products and Services of a company can be expected to continue in the future.

So Good Profits alone do not confirm that a company has good fundamentals. These profits
must come from the Sale of the Products or Services of the company.



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5. They have a Higher Asset to Market Cap ratio than other companies of similar
Size (Market Cap) in their Industry/Sector.

Assets are the valuable economic resources owned by a company. Assets can be physical
assets like factories, refineries extra or intangible assets like brand name, goodwill of the
customer, a well trained staff extra. The assets of a company determine the price at which
the company can be sold off.

The shareholders of a company may decide to sell off the company in certain situations. For
example they might require money for a more promising business initiative. This money will
then be distributed among the share holders in the ratio of the number of shares held by
them. If a company has a High Asset to Market Cap ratio then it means that the
shareholders will get a larger amount of money for the shares owned by them.

Thus a company which has a Higher Asset to Market Cap ratio is a safer and better
investment option. Let us understand this with the help of the example given in the
following table.

Name Market
Cap
Assets Asset to Market
Cap ratio
Money received by a shareholder
who holds share worth 1000
rupees
A 100 crores 200 crores 2:1 2000 Rupees
B 100 crores 400 crores 4:1 4000 Rupees

This example confirms that the shareholders of the company having higher Assets to Market
Cap ratio will get more money if the company has to be sold off.


Getting the data required to do Fundamental Analysis of a Share

Here is the list of data required to do fundamental analysis of a share

1. P/E of the company
2. Average P/E of the Industry/Sector of the company
3. Quarterly Net Profit made by the company
4. Sales made by the company
5. Market Cap and Assets of the company
6. Market Cap and Assets of the other companies in its Industry/Sector

We can get all this information from a single webpage. So it will take you Just 1 minute to
find it. In fact the information about all companies listed in the Indian Share market can be
found from this website http://www.moneycontrol.com/. Let us get the information for the
company Mcleod Russel.

Just perform the following steps to get this information

1. Go to http://www.moneycontrol.com/

2. Scroll down to the bottom of the page. You will get the following entry

STOCKS A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U |
V | W | X | Y | Z | Others

Copyright 2009 invest-in-shares-in-9minute.com. All rights reserved.

3. As the name Mcleod Russel starts with M, Click on the option M. This will open up the
page - http://www.moneycontrol.com/india/stockpricequote/plantations-
teacoffee/mcleod-russel-india/MRI02 . This page lists all the companies whose name
starts with M. Click on Mcleod Russel.

4. This will open up the Mcleod Russel webpage -
http://www.moneycontrol.com/india/stockpricequote/plantations-teacoffee/mcleod-
russel-india/MRI02. All the required information is present in this webpage.

5. Market Cap, P/E of the company and Average P/E of its Industry can all be found in
one place. All these are present just below the Technical Chart.

6. On the right side there is a column in Grey color running from the Top of the page to
the bottom. Look for the Heading Financials in this grey column, and then look for
the Sub Heading Quarterly Results. Click on this sub heading to get the information
about Quarterly Net Profit and Sales of the company.

7. In the same Grey column towards the bottom you will get the Heading Peer
Comparison and the Sub heading Total Assets and Market Cap. Click on these sub
headings to get information about Assets and Market Cap of all the companies in this
Industry/Sector.


How to do Fundamental Analysis of a share/company in 5 Minutes?

Now that we have collected the required information let us do the Fundamental analysis of
Mcleod Russel.

1. Comparing P/E with average P/E of the Industry
P/E of Mcleod Russel = 9.18
Average P/E of its Industry (i.e. Plantations - Tea & Coffee) = 28.4
This shows that Mcleod Russel is a very good investment option as its P/E is very low as
compared to the average P/E of its industry.


2. Comparing its P/E with the P/E of other companies in its Industry/Sector
having a similar Market Cap.
Market Cap of Mcleod Russel = 2502 crores
Mcleod Russsel is the second largest company in the Plantations - Tea & Coffee Industry.
The largest company is Tata Tea which has a P/E of 17.32 and Market Cap of 6502 crores.
We can see that the Market Cap of Mcleod Russel is comparable to the Market Cap of the
largest company in its Industry and its P/E is much smaller. So Mcleod Russel is a good
Investment option.


3. Checking the Net Profit in recent Quarters
Net profit of Mcleod Russel over the previous 4 Quarters is given below
March June September December
-88.61 31.18 192.19 137.94
We find that Mcleod Russel has got higher profits in recent quarters. Once again it is
confirmed that it is a good investment option


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4. Checking the Sales in recent Quarters
Sales of Mcleod Russel over the previous 4 quarters is given below
March June September December
217.45 122.29 351.33 347.26
We find that Mcleod Russel has had good sales volume. Its profits have come from the sales
of its products and not through any other source. So once again it is confirmed that it is a
good investment option


5. Comparing its Asset to Market Cap ratio with other companies in its
Industry/Sector having similar Market Cap.
Asset to Market Cap ratio of Mcleod Russel and other major companies in this industry

Mcleod Russel (2
nd
largest Market Cap) = Asset = 1583 = 0.63
Market Cap 2502
Tata Tea (Largest Market Cap) = Asset = 2255 = 0.34
Market Cap 6502
Tata Coffee (3
rd
largest Market Cap) = Asset = 479 = 0.66
Market Cap 725
We find that Mcleod Russel has a better or similar Asset to Market Cap ratio as compared to
other companies in its segment. This again confirms that it is a good investment option.

6. Conclusion
In each of the above 5 steps we found that Mcleod Russel has good Fundamentals. So we
can give out the verdict now. Mcleod Russel is a Good Investment Option.


Results from using Fundamental Analysis

When I started investing in share market, my major method for analysis was Fundamental
Analysis. I have built up considerable experience as a fundamental analyst. I used to
monitor the fundamentals of hundreds of companies. I think that you would be interested to
know about the profits that I made by using fundamental analysis.

On an average my investments used to give 15 percent higher returns than the benchmark
index (i.e. sensex, nifty). For example if sensex rises by 20% in a year then my investments
used to give a profit of around 35%. This is a lot better than the average performance of
mutual funds. Only 10% of the mutual funds are able to equal this performance (And we
cannot predict which of the mutual funds will perform well in the future. The current best
performing Mutual funds can easily become poor performers in the future).

I keep learning new concepts about the share market. I later came across another method
to analyze the share market Technical Analysis. After experimenting with it, I realized that
it was far superior to any other method that I had used previously.


Technical Analysis The Most Powerful method to analyze the Share Market

A companys share price is determined by 2 factors the current performance of a company
and the future growth potential of that company. In our fundamental analysis we evaluate
only the current performance of a company. We are not able to analyze the future growth

Copyright 2009 invest-in-shares-in-9minute.com. All rights reserved.
potential of a company. Due to this limitation, the results from our analysis can be incorrect
in some cases.

Large investors like FIIs and Mutual Funds have the expertise, inside information and
resources required to do detailed and accurate analysis of future growth prospects of all the
companies. Technical Analysis helps common investors to profit from this hard work done
by the big investors.

Technical Analysis helps common investors to easily identify the stocks in which the large
investors are investing. We can then simply follow the large investors and invest in the
same stocks. Thus we can make large profits by just riding on the back of the big investors.

The major advantages of Technical Analysis over Fundamental Analysis are

1. Less Time and Effort required to analyze the share market.
2. Able to Identify the BEST investment options present in the Entire share market. This
means identifying the best shares from the 5000 scrips listed in NSE and BSE.
3. It identifies the shares whose price will increase RIGHT NOW. So our money is never
idle. It is always invested in stocks which are on the rise.
4. It is able to accurately predict the Trend in the share market Bullish or Bearish.
This helped to maximize profits and minimize losses.

We will learn Technical Analysis in the 5
th
installment of this course.

The Most Powerful Technical Analysis System that I have used, is the one developed by
Precision Technicals. Some of the advantages in this system are

1. It required just 10 minutes of analysis per day to use it.
2. It was consistently able to identify shares whose prices rose rapidly.
3. It was Easy to Learn and Master it. Even people with no experience in the share
market were able to master it in just 2 days.
4. It was able to accurately predict the Trend of the share market. Click on the link
given below to see that every Major Trend in the Indian Share Market was accurately
predicted by it. http://www.invest-in-shares-in-9minute.com/sensex-bse.html


You can enroll for the Premium 2 day course about this strategy by clicking on this
link http://www.invest-in-shares-in-9minute.com/order-page.html

You can ask any queries that you have about this course by clicking on the link given below.
http://www.invest-in-shares-in-9minute.com/precision-technical-support.html