Fundamental analysis methodology

Qualitative analysis
The first step in fundamental analysis is to analyse the company qualitatively.
For this purpose, the answers to the following questions are determined.

1. How efficient is the company in terms of operations?

2. What is the quality of its key management personnel?
3. How does the brand value of a company appear?
4. Does the company use any exclusive (proprietary) technology?
5. What socially responsible initiatives is the company undertaking?
6. What is the company’s vision for the future?
After determining the answers to these questions and considering the answers
are good, you move on to the next step.

Quantitative analysis
There are various factors that are analysed in quantitative analysis. Let’s look
at all of them step-by-step.

Check financial statements

There are numerous financial statements of a company. However, there are
three primary financial statements that a company presents to display its
performance.

1. Profit and loss statement

P&L statement of ITC on Tickertape
The profit and loss statement is commonly referred to as the income
statement, P&L statement, operation statement, and earnings statement. It
usually consists of –
 The revenue of the company for a certain time period (quarterly or
yearly)
 Tax and depreciation
 The Earnings Per Share (EPS) number
 The expenses incurred to generate the revenues
It gives you insight into a company’s profitability and articulates the
company’s bottom line. There are various parameters in a P&L statement.
Depending on the industry, we measure different parameters. However, the
main parameters that we measure for all companies to check the profitability
are revenue, Profit Before Interest and Tax (PBIT), and net income.

For a successful company, these three factors should always appreciate. After
analysing these three factors, you can also analyse the trend in net profit for
the last 5-10 yrs and operating profit to have a deeper understanding of the
P&L statement.

2. Balance Sheet
Balance Sheet of ITC on Tickertape
A balance sheet displays a company’s assets, liabilities, and shareholder’s
equity at a specific point in time. In a balance sheet, at any point in time, the
total assets of a company should always be equal to the company’s liabilities,
including shareholder’s equity. Hence, the name ‘balance sheet’.

If they are not balanced, there may be some issues, including incorrect or
misplaced data, miscalculations, or exchange rate or inventory errors. Hence,
in a balance sheet,

Assets = Liabilities + Shareholders’ Equity

A balance sheet tells what a company owns, what it owes, and what it is
worth as a company. To determine if a company is worth investing in, we
look at the total assets and total liabilities of the company.

If a company’s assets are higher than the liabilities, you can mark the
company as ‘good for further assessment’. However, if the liabilities are
higher, it is usually considered ‘not worth investing’. For a deeper analysis of
the balance sheet, various financial ratios, such as debt to equity ratio, return
on equity, etc., are used.

3. Cash-flow Statement
Cash flow statement of ITC