Equity Investment Analyzed

There has been a rapid churn, in the education sector, and the youth have numerous avenues in front of them for making a career choice. They, start earning money at an early age, compared to their predecessors. Rather than spending money in buying the next best smartphone, or paying EMI’s on flashy bikes, they should invest their money. They should invest first, based on the limit that they have decided and post that, they should spend. The youth of today, is spoilt for choice. There are numerous instruments available to invest money and reap the benefits in the form of fabulous returns like Equity shares, Mutual funds, Fixed Deposits, Post office saving schemes, Corporate deposits, corporate debentures etc.

Equity Investment

It has been proved from time immemorial, that equity investments give fabulous returns, provided money is invested in the right stock and at the right price.

How should, one analyse an equity share ? There are numerous ways to do so , and there is no right or wrong method of doing so. However, Every  investment, should be backed by a solid research, and the desire to take calculated, educated risks.

 The youth, can use a blend of different methods to arrive at their decision.

Analyze the financial statements thoroughly

An investor should analyse the profit and loss and the balance sheet of an entity thoroughly. There are numerous ways and parameters, at which he may pay attention to, but to begin with he should, typically analyze the following parameters.

The trend of profits over the last few years and the net profit margin.

A declining net profit margin may be because, revenue growth has not kept pace with the  cost increase, or the market conditions are not conducive for business, which does not augur well for the future growth prospects of the company.

The borrowings of the company.

Borrowings perse are not bad, provided the money so raised, has been invested in creation of assets and those assets are yielding revenue. If the increased debt levels are matched with increased asset turnover ratios, with a reduction in receivables, then the company may be a good bet to  invest. The return on Investment should be more than the cost of capital. However an investor, should pay attention to  the debt equity ratios, with particular emphasis on the amount of money raised, and the amount repaid back in an year.

The amount of cash, the company has on its books.

The investor should pay attention to the cash figure on the assets side of the balance sheet. If the company is sitting on too much cash, then either the company is not finding the current scenario suitable to invest cash or the company is readying for an acquisition and is actively scouting for a target company to add to its portfolio. A huge cash balance drags down the ROI, which would definitely not be beneficial to the investor. The exception to this rule however is Apple computers. That company is sitting on billions of dollars, worth of cash but still delivering superior returns to its shareholders.

In case of a Banking company, investor should pay attention to the trend of Non-performing assets over a period of time. He should stay away from a company which shows an increased trend in the NPA%.                                                                                                                          Companies are engaged in different business lines and so comparing the statement of a company engaged in banking industry, with that of the company engaged in manufacturing or telecommunication would not be a correct practise. Financial statements should be compared, but of companies within the same sector.

Pay close attention to the Management team

The investor should also pay attention to the management team of the entity. The management profile is available in the annual report of the company. The annual report of the company includes the Management discussion and analysis report, wherein the directors give a brief summary, of the past performance of the company and also their future plans to grow the company. If the Management team has a proven track record of executing projects, then it augurs well for the investor. The Investor should pay close attention to their future plans as regards to expansion, debt reduction etc and then take an informed decision.

Study the stock price performance of that share.

The investor should study the trend of the share price. He should also have a look at the PE ratio of the share. PE ratio signifies the ratio of the share price vis a vis the earnings. The Investor should study the PE ratios of different companies within the same sector. If the PE ratio of the share, that the investor is desirous of purchasing is high compared to its peers, with other indicators being ceteris paribus, then the stock is overpriced and so the investor should wait for the stock to correct.

Dividend history

Lastly, the investor should pay attention to the dividend history of the company. If the company is consistently paying dividends, then it is a good bet. If the company is not paying dividends, then the investor should study whether the share price has increased on a year on year, if Yes, then it is worth investing in that company. If No, then that stock has not caught the fancy of the investors, or the market conditions are not conducive for that stock or there are on-going issues within the company, which the street knows and so it is keeping away from that stock. It is best for the investor to keep  away from such a share.

To sum up, Investing in shares is not for the weak hearted. There would be some good days and there are bound to be some , bad days as well. The trick lies in riding the crest and troughs with élan and emerging rich.

All the best to you all and Happy Investing!!!

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