FINANCE CLUB

Your one-stop destination for learning how

to pick and analyse stocks!

Equity
Research
Guide

Equity Research simplified for anyone

without any finance knowledge
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INTRODUCTION TO EQUITY RESEARCH

What is Equity Research?

Equity research is the process of analyzing and evaluating the

financial performance, prospects, and valuation of publicly traded
companies' stocks. Equity research involves a comprehensive
analysis of various aspects of a company, including its financial
statements, industry trends, competitive landscape, management
team, growth potential, and overall market conditions. The aim is to
gain a deep understanding of the company's operations and
financial health, as well as its potential for generating future returns.

Who conducts Equity Research?

Equity research is conducted by professionals known as equity

research analysts or equity analysts. These individuals work for
investment banks, brokerage firms, asset management companies,
and independent research firms. Stock investors also conduct
equity research, especially those who are actively involved in
managing their investment portfolios.

Why is Equity Research conducted?

Equity research is conducted by stock investors to make informed

decisions about buying, selling, or holding stocks. It provides
insights into a company's financial health, growth potential, and
risks. By assessing these factors, investors can evaluate the value
of a stock, manage risks, align with long-term strategies, and
diversify portfolios.

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Three steps involved in conducting Equity Research

Research: This initial step involves gathering information about the

company you're analyzing. This includes understanding its business
model, industry, competitors, market trends, and overall economic
conditions. It forms the foundation for the qualitative and quantitative
analyses that follow.

Qualitative Analysis: In this step, you delve into the qualitative

aspects of the company. This includes assessing the company's
management team, corporate governance practices, brand
reputation, competitive advantages, growth strategies, and any
unique factors that might impact its future prospects.

Quantitative Analysis: This step involves analyzing the company's

financial statements and performance metrics. The goal is to gauge
the company's financial health, profitability, efficiency, and how well
it's utilizing its resources.

By combining these three steps, equity research analysts gain a

holistic view of a company's overall health, strengths, weaknesses,
opportunities, and threats. This information forms the basis for
making informed investment decisions and providing
recommendations to investors. This guide will help you understand all
these steps in detail and will help you make a detailed report for the
equity research competition.

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CONTENTS
1. Qualitative Analysis of a stock

1. Understanding and evaluating an Industry - How to select the right industry

2. Identifying a Company and evaluating its business - How to pick a stock

3. Figuring out if this is the best stock in the industry - Company and Competitor Analysis

2. Quantitative Analysis of a stock

1. Where are financials of a company found - 3 Financial Statements

2. How to make sense of so much financial Data - Fundamental Analysis

3. When should a stock be bought - Technical Analysis

3. Glossary

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How to use the guide to build an
Equity Research Report ?
In this guide, we’ve covered
all the essential skills to build
your own equity research
report in a chronological
manner.
One usually starts with a
qualitative analysis of an
industry to identify which
industry one is interested in
based on how fast it is
growing and any external
factors that make the industry
look exciting. One goes about
this by reading the news
about industries and
companies and the annual
reports of those companies.
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After this, we analyze the
financials of a company. We
understand if a company makes
good profits or is at a loss. Then
we see if the stock price is too high
and has a chance to fall, or vice
versa. All of this is done by
analyzing the financial ratios that
we’ll be teaching you about in the
guide. Each company is analyzed
by comparing its ratios with
respect to other companies in the
same industry to see which one is
the best!
You will understand that each
industry is driven by different
factors; figuring out which factors
to look at and how to compare
ratios is what this guide will help
you learn! With all your data, you
can conclude if an industry is good
to invest in, and then you can
calculate the various ratios we’ve
spoken about, compare them to
other companies, and figure out
which company you want to invest
in.
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How to make a stock

recommendation
The primary objective of this equity research guide is to
provide individuals with limited to no prior financial knowledge
with a structured and accessible pathway to understand and
master the essential components of stock analysis.

We've described in detail the entire analysis, now one might

be thinking, "How do I put together this information and make
a final recommendation in my report?"

1. One sees if their conclusion about an industry says that

the risks are low and opportunities for growth outweigh
all the cons. Use the technical indicators mentioned here
to figure out when to buy and sell your stock
2. Then one judges companies in the industry, by analysing
if the company has any unique product or service, or if
they have greater or more unique revenue streams and
any other advantages
3. After this, the financial ratios of a company are analysed. If
the ratios that one feels are more important, seem better
than the industry average, you're closer to your
recommendation!
4. After a final checkup to see if you trust a company's
overall strategy and management based on one's own
understanding via all prior research

Vice Versa to figure out if you want to sell the stock!

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HOW TO PICK A STOCK ?

TOP-DOWN APPROACH

Before delving into individual The idea is to identify

stocks, top-down investors specific industrial sectors
examine macroeconomic issues that are expected to
such as monetary policy, inflation, outperform the market. Top-
economic growth, and larger down investors direct assets
events, as these factors affect to outperforming economic
the growth of industries. regions rather than betting on
Monetary policy is a set of tools specific companies based on
used by a nation's central bank to these qualities. Instead of
control the overall money supply starting with the complete
and promote economic growth universe of individual
and employ strategies. A company stocks, top-down
monetary policy decision that cuts investment can better use an
interest rates, for example, lowers investor's time by looking at
the cost of borrowing, resulting in large-scale economic
higher investment activity and the aggregates before deciding on
purchase of consumer durables. regions or sectors and then
After examining global specific companies. However,
macroeconomic conditions, by excluding specific
researchers assess general companies that beat the
market conditions to identify high- overall market, top-down
performing sectors, industries, or investors may miss out on
areas within the economy. numerous potentially
profitable possibilities.

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HOW TO PICK A STOCK ?

BOTTOM-UP APPROACH

In this technique, we analyze individual companies

before constructing a portfolio based on specified
criteria. In this approach to investing, investors tend to
focus on microeconomic aspects such as supply and
demand, taxes and regulations. Bottom-up investors
select a company and then examine its financial
health, supply, demand, and other aspects over a
given time period. Bottom-up investing assumes that
individual companies can outperform their
industries, at least in terms of relative performance. A
company's distinctive marketing strategy or
organizational structure, for example, is a leading
indicator that prompts a bottom-up investor to invest.

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Industry Analysis
What is industry analysis?
Industry analysis means A macroeconomic factor is an
assessing a market or industry influential fiscal, natural, or
to understand its competitive geopolitical event that broadly
dynamics. It helps investors affects a regional or national
understand a company’s economy. Macroeconomic
position compared to its factors tend to impact wide
peers. It helps gauge the swaths of populations rather than
overall attractiveness of the just a few select individuals.
industry and the factors that Examples of macroeconomic
determine a company’s factors include economic
success. outputs, unemployment rates,
Industry analysis tells what is and inflation. For example Rising
happening in an industry in interest rates can reduce a
terms of demand and supply, business’s ability to service debt,
competition within the industry as rising costs are incurred by
and with other industries, the organization with no
prospects considering corresponding increase in
technological changes, and the revenues to offset. Businesses
influence of macroeconomic may be placed in a precarious
factors. All in all, it helps situation if too much of their
identify opportunities and capital is consumed paying off
threats for a company in the high-interest debt. These
current scenario and the indicators of economic
future. performance are closely
monitored by governments,
businesses, and consumers
alike.

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What does this analysis entail?

Before spending big bucks on any company, understanding
the industry is extremely important. If you are investing in a
pharmaceutical company, there are a few things you will have
to keep in mind to ensure that your investment will give you
good returns.

For example, drug regulations and patenting, the demand

situation for medicines, FDA regulations, and more.

Such factors tell investors which threats the pharma

industry faces, which factors go in its favor, and the
competitive landscape of the industry. A thorough industry
analysis will help you understand the unique aspects of
any industry.

It is very important to note, that qualitative &

quantitative factors to give preference vary from
industry to industry and the stage a company is that

How to Conduct Industry Analysis?

Industry analysis involves examining the various factors
that influence and shape an industry's performance,
dynamics, and competitive landscape. There are many
ways in which you can do this. However, we have zeroed
in on two of the best methods to help you analyze an
industry.

1. Porter's Five Forces Analysis

2. SWOT Analysis

We will discuss these methods in detail later.

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company analysis
Read the history of the company to find out how it
was founded and how it grew. Find out about the
type of product sold and target consumers to have a
clear understanding of the possible customers that
might purchase a product or service in order to
direct marketing efforts.

Analyze the business model of the company. The

term business model refers to a company's plan for
making a profit. It identifies the products or services
the business plans to sell, its identified target
market, and any anticipated expenses.

Business models are important for both new and

established businesses. Business model is
important because it provides the investors with the
knowledge about the competitive edge of the
company and provides better insights.

A strong business model leads to cash generation and

future expansion.

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Important points to analyze in a business model

1. How does the company earn its revenue?

2. Who are its competitors?

3. Who are the major customers of the company?

4. What is its unique selling point?

5. What are the major expenses of the company?

Let's take an example of DMART (Avenue Supermarkets)

Avenue Supermarkets is a one-stop supermarket chain

that aims to offer customers a wide range of essential
home and personal products under one roof.

The company was founded by Radhakishan S. Damani in

2002 and is headquartered in Mumbai, India.

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Unique Selling Proposition (USP): A distinctive

shopping experience, consisting of a wide range of
everyday-value retail products sold in a modern
ambience and with the feel of a large retail mall.

Each DMart store stocks home utility products at

competitive prices. The three main categories of
products are food, non-food FMCG, merchandise and
apparel.

DMart follows a cluster-based expansion approach. The

focus is on deepening their penetration in the areas
where they are already present before expanding to
newer regions.

DMart has 330 stores across India. The company started

diversifying store locations across various states and now
has 14 state locations.

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DMart's business model is based on the concept of

offering value retailing to customers using the Everyday
Low Cost/Everyday Low Price strategy, which offers low
prices on an everyday basis by achieving low procurement
and operations costs.

The business is consumer-driven with a strong promoter

background (an individual or a group of people who come
up with the concept of starting a business are the
promoters of a company). and an experienced senior
management team that has helped to offer high standards
of customer service and a pleasant shopping experience.

Taking advantage of consumer behavior, they keep a

product at a cheaper price than others, but as they have a
variety of products, many consumers also purchase other
products when they come to buy one product.

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Porter’s Five Forces
Rivalry with Peers
It is important to know about
the position of a company
compared to peers from the
same industry. You cannot
rank a manufacturing
company against a
pharmaceutical company for
comparison.
For the same reason, one
needs to look at the
competition levels.
Competition and the fear of
losing out on business to a
peer company keep
companies on their toes and
help them innovate.
According to Porter,
competition is intense when
there are more players, when
the products are similar and
the companies are fighting to
find an edge over other
products, in the case of
perishable products, etc.
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The Threat of New
Competition
The second competitive force
that Porter emphasizes is the
ability of new companies to
enter the industry and
intensify the competition.
Industries where it is difficult
for new competitors to enter,
benefit from extended periods
of profitability and very limited
rivalry.
Competition tells us how
difficult it is for the company to
make money and how far it
has been successful. The
success, therefore, will
translate into stock prices.
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Porter’s Five Forces

Bargaining Power of
Buyers
This power refers to the power

Threat of Substitutes buyers have to force the sellers

to give them better-quality
products at lower prices. The
Substitutes are products that
bargaining power is high in the
can be used in place of each
following cases:
other. For example, Domino’s
If the number of buyers is
Pizza and Pizza Hut Pizza are
less than the number of
substitutes for each other. If
suppliers in the market, which
the price of one rises, the
means demand is less than
demand for the other one will
supply, companies will have
increase.
to make some changes to
Since it is so easy to switch to
avoid losing money.
a substitute on account of any
If the buyer has more similar
change, such as a price rise
products in the market and
or quality drop, the threat
depends less on a particular
remains and the pressure to
supplier, and if the switching
continuously perform better
cost is low. In this case, the
and in a cost-efficient way is
buyer has many options to
essential.
choose from, so the seller
The better the company
has to take some steps so
executes against its
that the buyer will choose his
substitutes, the higher it goes.
product.

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Porter’s Five Forces

Bargaining Power of Suppliers

Many small and mid-sized companies face a threat from an

industry where suppliers hold bargaining power.

Imagine a fashion company that has a specific dress line and

design that make it famous but needs a specific cloth type
available only from a handful of suppliers. In such cases, the
suppliers can raise the prices, which will impact the dress’s
final cost and the brand’s business.

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Swot Analysis
SWOT analysis is the process of identifying the Strengths,
Weaknesses, Opportunities & Threats a company has over its
competitors.

Let's understand this by taking an example of the airline industry;

Strength of the Airline Industry Weakness of the Airline Industry

Under this, you have to look for
the unique factors in an industry
that will help it stand out against
other competitors. The biggest
strength of the airline industry is
its safe and fastest mode of
transportation.
Here you have to identify the
weakness that can take the
airline industry downhill. The
most common weakness is
poor aviation infrastructure in
most of the developing
countries. Also, airlines face a
very high rate of cancellations.

Opportunities for the Airline Industry Threats to the Airline Industry

This section covers the growth Well, the best example to

factors in an industry. As far as explain this is, just to take a
airlines are concerned, the look at how Covid19 situation
opportunities in this space threatened the Airline industry.
include tourism growth, how So, this section deals with the
cheap airline fares are potential dangers an industry
becoming, and more. can face.

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Resources :
How to do an industry analysis? | Groww academy
Industry Analysis | Learn with Upstox ft. CA Rachana Ranade
Industry Analysis | Small Business Accelerator (ubc.ca)

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financial statements
BALANCE SHEET

PROFIT LOSS STATEMENT

CASH FLOW STATEMENT

Financial statements are written records that convey

the business activities and financial performance of a
company.

The balance sheet provides an overview of assets,

liabilities, and shareholders' equity as a snapshot in
time.
The income statement primarily focuses on a
company’s revenues and expenses during a particular
period. Once expenses are subtracted from revenues,
the statement produces a company's profit figure,
called net income.
The cash flow statement (CFS) measures how well a
company generates cash to pay its debts, fund its
operating expenses, and fund investments.

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While analyzing the financial statements we need to keep in

account the fundamental analysis, noting the various ratios
and understanding their impacts on the financial health of the
company.

Here are some key reasons why financial statements are

important in equity research:

FINANCIAL STATEMENTS
Financial statements, such as
the income statement and
statement of cash flows, help
assess a company's financial
performance over a specific
period. These statements
provide information on VALUATION ANALYSIS
revenues, expenses, profits,
Valuation is the process
and cash flows, allowing equity
of determining the worth
researchers to evaluate the
company's profitability,
of an asset or company.
efficiency, and ability to Valuation is important
generate cash. It gives an because it provides
idea about whether the prospective buyers with
company is utilizing the money an idea of how much
prudently or not and whether it they should pay for an
is able to generate enough asset or company and
capital to repay debts and for prospective sellers,
smoothly run its daily how much they should
operations. sell for.

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Financial statements are vital for valuation analysis, which is a

fundamental aspect of equity research. Statements like the balance
sheet provide information on a company's assets, liabilities, and
equity, enabling analysts to determine the company's net worth and
calculate various valuation metrics, such as the price-to-earnings
(P/E) ratio, the price-to-sales (P/S) ratio, and the price-to-book (P/B)
ratio. It gives an idea about whether it is overvalued or undervalued,
which can determine the direction of stock's movement in the near
future.

TREND ANALYSIS FINANCIAL HEALTH ASSESSMENT

By comparing financial Financial statements offer

statements over multiple
periods, equity researchers
can identify trends and
patterns in a company's
financial performance. This
analysis helps in
understanding the company's
growth trajectory, profitability
stability, and potential risks or
opportunities.
insights into a company's
financial health and stability. By
analyzing key financial ratios,
such as liquidity ratios (e.g.,
current ratio and quick ratio),
solvency ratios (e.g., debt-to-
equity ratio and interest
coverage ratio), and profitability
ratios (e.g., return on equity and
gross profit margin), equity
researchers can assess the
company's ability to meet its
short-term obligations, manage
long-term debts, and generate
sustainable profits.

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3. Contingent
RISK ASSESSMENT liabilities
(liabilities which include
liabilities that may occur
Financial statements help
depending on the
equity researchers evaluate outcome of an uncertain
the risk associated with future event)
investing in a particular
company. Risk and
vulnerability to economic Comparision and
downturns can be assessed by
analyzing following factors:
Benchmarking

1. Debt : When a corporation Financial statements enable

borrows money to make equity researchers to
big purchases or compare a company's
investments that are performance and financial
normally unaffordable and metrics with those of its
has to be repaid within a peers and industry
certain time, along with benchmarks. This analysis
helps in understanding a
interest, such a borrowed
company's relative position
sum is called debt.
within the industry, identifying
2. The degree to which a firm its competitive advantages or
can increase its operating disadvantages, and making
income by increasing informed investment
revenue. decisions.

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Overall, financial statements provide the quantitative

foundation for equity research, offering valuable
information and insights that assist analysts in
evaluating companies, valuing stocks, and making
informed investment decisions.

Resources:

4. Understanding the P&L statement

5. Understanding balance sheet
6. The Cash Flow statement
7. The connection between balance sheet, P&L
statement and cash flow statement
How to Read Financial Statements: A Beginner’s
Guide | HBS Online

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fundamental analysis
Fundamental analysis (FA) measures a security’s
intrinsic value by examining related economic and
financial factors. Intrinsic value is the value of an
investment based on the issuing company's financial
situation and current market and economic conditions.

In order to decide whether to invest in the stock or not,

it is important to analyze important financial ratios. We
will cover the most important financial ratios.

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P / E RATIO
The price-to-earnings ratio is
the ratio for valuing a
company that measures its
current share price relative to
its earnings per share (EPS).
It essentially tells us how
costly the share is compared
to how much an investor
earns per share.
Earning per Share (EPS) :
Earnings per share (EPS) is a
company's net profit divided
by the number of common
shares it has outstanding.
You can also easily calculate
outstanding shares by
dividing a company’s market
capitalization by its share
price. A company’s market
capitalization and share price
are just a Google search
away.
A high P / E could mean
that a stock's price is high
relative to its earnings and
possibly overvalued.
Conversely, a low P/E
might indicate that the
current stock price is low
relative to earnings.
It could also mean that
investors see growth
potential in the company
and are willing to pay a lot
for the stock compared to
how much they presently
earn from it in anticipation
of a lot of future growth
and an increase in the
stock price.

EPS of Tata Motors in

March'23 was 7.11, which
means for every share, the
company earned a profit of
Rs 7.11.

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Think of it this way: A P / E ratio holds the

The market price of a stock tells
you how much people are willing
to pay to own the shares, but
the P / E ratio tells you whether
the price accurately reflects the
company’s earnings potential or
its value over time.
most value when
compared against similar
companies in the same
industry to check if it’s
higher or lower than the
average P / E ratio and
hence over or
undervalued. (Read about
the limitations of this ratio
for a better understanding!)

P / B RATIO
The price-to-book (P / B) ratio Book value ; It is the
measures the market company's value as
valuation of a company reflected in its financial
relative to its book value. It books of accounts. Books
essentially tells us how costly of accounts include
the share is compared to its documents and books
book value. used in the preparation of
financial statements.

Book value of a company

P / B ratio = Market value per = total assets - total
share / book value per share liabilities / total number of
shares.

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If the P / B is under 1.0, A high P / B ratio could

then the market is thought
to be underpricing the
stock since the accounting
value of its assets, if sold,
would be greater than the
market price of the shares.
Therefore, value investors
typically look for
companies that have low
price-to-book ratios,
among other metrics.
mean that the company is
overvalued since its market
share price is much higher
than its book value.
A good P/B ratio is relative
to a business and its
industry. In order to decide
whether a company’s P/B
ratio is good, we have to
compare it with its
competitors.

DEBT TO EQUITY RATIO

This ratio shows how much debt a
company has compared to its assets.

D / E ratio = total debt / total shareholder equity

Total shareholder equity is equal to a company's total assets

minus its total liabilities.
A high debt-to-equity ratio generally means that, in the case
of a business downturn, a company could have difficulty
paying off its debts. The higher the D/E, the riskier the
business.

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A very low D / E ratio So it’s important to look

suggests that the company is
not taking advantage of debt
financing to expand. (You
can read more about its
limitations for a better
understanding.)
Startups or companies
looking to grow quickly may
have a higher D/E naturally,
but they could also have
more upside if everything
goes according to plan.
at other factors as well.
D / E ratios vary by
industry and are best
used to compare direct
competitors or to
measure changes in the
company’s reliance on
debt over time.

RETURN ON EQUITY RATIO

Return on equity (ROE) is a The higher the ROE, the
measure of financial more efficient a
performance calculated by company's management
dividing net income by is at generating income
shareholders' equity. It and growth from its
simply means how much equity financing. Equity
income the company financing is the process
generates based on its of raising capital through
share price. the sale of shares.

ROE = Net Income / average shareholder equity

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Sometimes an extremely high As with all tools used for

ROE is a good thing if net
income is extremely large
compared to equity because
a company’s performance is
so strong.
However, an extremely high
ROE is often due to a small
equity account compared to
net income, which indicates
risk. If the price of the stock
has significantly fallen due to
some reason, ROE will
increase, but this increase is
not a positive sign as it's not
due to an increase in net
profits.
investment analysis,
ROE is just one of many
available metrics that
identifies just one portion
of a firm's overall
financials. It is crucial to
utilize a combination of
financial metrics to get a
full understanding of a
company's financial
health before investing.

CURRENT RATIO
The current ratio is a Liquidity ratio that measures a company’s
ability to pay short-term obligations, or those due within one year.
It tells investors and analysts how a company can maximize the
current assets on its balance sheet to satisfy its current debt and
other payables.
More assets imply that a company has more resources to
generate revenue, so it will be easier to pay off its debts.

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Current ratio = current assets / current liabilities

In simple words, the current The current ratio helps

ratio tells us the value of investors understand more
assets a company possesses about a company’s ability
for a liability of 1 rupee. to cover its short-term debt
with its current assets and
The current ratio measures a make apples-to-apples
company’s ability to pay comparisons with its
current, or short-term, competitors and peers.
liabilities (debts and payables)
with its current, or short-term, If a company is unable to
assets, such as cash, pay the debt, it might have
inventory and receivables. to sell some assets in order
to repay it. This leads to a
Inventory refers to a negative image of the
company's goods and company among investors
products that are ready to sell, and a decrease in its share
along with the raw materials price.
that are used to produce
them. When customers One weakness of the
purchase products on credit, current ratio is its difficulty
the amount owed gets added in comparing the measure
to the accounts receivable. It’s across industry groups.
shown as a liability on the
balance sheet.

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EV / EBITDA
The EV / EBITDA metric is EBITDA or Earnings Before
a popular valuation tool that Interest, Taxes, Depreciation,
helps investors compare and Amortization, is a financial
companies in order to make metric. Companies use it
an investment decision. extensively to compute their
business performance in terms
EV (enterprise value) of finances, and it is also often
calculates a company's used as an alternative to net
total value or assessed income.
worth, while EBITDA
measures a company's Amortization is an accounting
overall financial technique used to periodically
performance and lower the book value of a loan
profitability. or an intangible asset over a
set period of time. In simple
It's best to use the EV / words, when you pay off the
EBITDA metric when debt on a fixed repayment
comparing companies schedule in regular
within the same industry or installments over a period of
sector. time.

EBITDA = net profit + interest + taxes

+ deppreciation + amortization

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EBITDA can be used to A high EV/EBITDA means

track and compare the that there is potential for
underlying profitability of the company to be
companies, regardless of overvalued since its
their depreciation enterprise value is much
assumptions or financing higher compared to its
choices. overall financial
EV explains how much a performance and
business is worth in terms of profitability. It is important
purchase price. Essentially, to remember that when
if you wanted to buy a public using the ratio, you can
company, you would need only really apply it
to pay off all the company's comparatively in a specific
debts and buy out all the sector.
current shareholders' equity,
enterprise value shows how
much that would cost.

DIVIDEND
A dividend is the distribution Mature companies are the
of a company's earnings to most likely to pay dividends.
its shareholders and is
determined by the Companies in the utility and
company's board of consumer staple industries
directors. often have relatively higher
dividends.

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It's important for investors to Paying dividends sends a

keep in mind that higher
dividend yields do not
always indicate attractive
investment opportunities
because the dividend yield
of a stock may be elevated
as a result of a declining
stock price.
clear, powerful message
about a company's future
prospects and performance,
and its willingness and
ability to pay steady
dividends over time provide
a solid demonstration of
financial strength.

These ratios will aid your understanding of a business, but

they should always be looked at in totality rather than
focusing on just one or two ratios.

PROFITABILITY RATIOS
The profitability of a business is determined using
profitability ratios. Profitability ratios assess a
company's ability to earn profits from its sales or
operations, balance sheet assets, or
shareholders' equity.

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GROSS MARGIN
The amount of money a company retains after
incurring the direct costs associated with producing
the goods it sells and the services it provides.
The higher the gross margin, the more capital a
company retains, which it can then use to pay other
costs or satisfy debt obligations.

Gross Margin percentage = (Revenue−Cost of

goods sold) / Revenue.

A higher gross margin typically indicates that a

company is more efficiently run and more financially
stable than others in the same business.
Typically, the gross profit margin of a business is a
measure of its efficiency. It indicates how well a
company is utilizing its raw materials and direct
labour.
By using its money efficiently, a business can meet
its everyday business needs and avoid taking debt.
That way, the business has more control over its
activities.

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OPERATING MARGIN
The operating margin measures how much profit a
company makes on a dollar of sales after paying for
variable costs of production, such as wages and raw
materials, but before paying interest or tax.
The operating margin represents how efficiently a
company is able to generate profit through its core
operations.
Higher margins are considered better than lower
margins and can be compared between similar
competitors but not across different industries.

Operating margin = Operating Income / Revenue

A company needs a healthy operating margin in

order to pay for its fixed costs, such as interest on
debt or taxes.
A high operating margin is a good indicator that a
company is being well managed and is potentially
less of a risk than a company with a lower operating
margin.

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Resources :

Basics Of Fundamental Analysis Lecture 1 P1 by CA

Rachana Phadke Ranade

Fundamental Analysis Lecture 2 by CA Rachana

Phadke Ranade

Stock Market for Beginners: Must know Financial

Ratios Before Investing in a Stock | CA Aleena Rais

Fundamental Analysis: Principles, Types, and How to

Use It (investopedia.com)

https://www.investopedia.com/terms/p/price-
earningsratio.asp

https://www.theforage.com/blog/skills/current-
ratio#:~:text=The%20current%20ratio%20describes%
20the,current%20liabilities%20four%20times%20over

https://corporatefinanceinstitute.com/resources/accoun
ting/operating-margin/

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Resources :

https://www.investopedia.com/terms/p/price-to-
bookratio.asp#:~:text=The%20Bottom%20Line-,The%20p
rice%2Dto%2Dbook%20(P%2FB)%20ratio,market%20pri
ce%20of%20the%20shares.

https://economictimes.indiatimes.com/defaultinterstitial.c
ms

https://www.5paisa.com/stock-market-guide/stock-share-
market/what-is-ev-
ebitda#:~:text=EV%2FEBITDA%20is%20a%20financial,c
ompany's%20EV%20by%20its%20EBITDA.

https://groww.in/p/return-on-equity-ratio

https://www.shopify.com/blog/what-is-debt-to-equity-
ratio#:~:text=The%20debt%2Dto%2Dequity%20ratio,hard
er%20time%20covering%20its%20liabilities

https://tradebrains.in/fundamental-analysis-of-adani-
enterprises/
https://tradebrains.in/fundamental-analysis-of-ihcl/

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how to analyze annual reports of the company

An annual report is a detailed report that shows a company's

operations and financial performance in the preceding 12
months. Annual reports are key marketing tools for investors
that companies put out, which includes illustrations, letters
from the chair or CEO, and financial overview.
Potential investors should also consider any risk factors
associated with the company, including litigation and
customer concentration.

What To Look For In An Annual Report?

Company Profile

It is important to know the company’s structure to make

qualitative interpretations. For example, by knowing their
competitors, we can compare two companies to shortlist the
best one.

The company's vision and mission statements

In this section, you will get to read the vision and mission
statement, values and goals of the company. These
statements are general in nature.

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Take a look at the vision and mission statements of Infosys:

Vision: “We will be a globally respected corporation.”
Mission: “Strategic Partnerships for Building Tomorrow’s
Enterprise. ”Some companies also set a vision like “To
touch revenues of Rs 5000 crore in 5 years.”

Overview of products and financial highlights over the

last 5 to 10 years

Get details of products being manufactured by a company,

segment-wise performance in the last two years, key raw
materials consumed, etc. Some companies publish financial
highlights of 5 to 10 years in annual reports.

Director's Report

This part includes a financial summary, an explanation of

the financial results, and major company developments.

Management discussion and analysis (MDA)

The management commentary, or MD&A is one of the most

useful parts of a company’s annual report. The company’s
management shares their opinions, challenges & outlook in
this section. Further, the management discusses the
company's goals and new projects they intend to undertake.

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It is recommended that you read at least 3-5 years of MDA

to gain a better understanding of the company’s tendencies
in various economic scenarios.

Corporate Governance Report

This section discusses a company’s corporate governance,

including the board of directors’ composition, background
information on the company’s directors and independent
directors, attendance of directors at board meetings and
annual general meetings, remuneration of directors, re-
appointment of directors after the term ends, and the
composition of sub-committees.

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Resources:
How to read the annual report of a company
How to Efficiently Read an Annual Report (investopedia.com

https://youtu.be/pwF84tPRQu4?si=P-Ke2KAP8KABfV4M

PERFORMANCE
One of the most important
metrics to look at when
evaluating a stock’s
performance is the total
market return over different
periods. A stock may have
increased significantly in
value within the past few
days or months, but it could
still have lost value over the
past year or five years.
Another step investors may
want to take to evaluate a
stock’s performance is
comparing it with the rest of
the stock market.
A stock might seem like an
attractive investment if it has
had a 10% return over the
past 52 weeks, but if the rest
of the stock market has
increased by more than that,
there might be a better choice.
An additional way investors
might consider evaluating a
stock’s performance is by
comparing it to other
companies within the same
industry. One might discover
that an entire industry is doing
well in the current market or
that another stock within the
industry would be a better
investment.

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Looking at stock returns is There are several financial

useful, but it’s also a good idea ratios (explained above) that
to look into the actual revenue can be used to evaluate a
of a company through its profit stock and find out whether it
and loss statement, or is currently under or
earnings reports. Stock prices overpriced in the market.
don’t necessarily follow a
company’s revenue, but
looking at revenue gives
investors an idea about how a
company is performing.

COMPETITIVE BENCHMARKING
Find out other companies in the same sector and compare their
financial ratios. With the financial ratios, you can tell which stock
in a given sector comes at the most value-for-money price right
now against its past sales and earnings, its present book value
and shareholder equity and so on.

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technical analysis
You and I together have
Volume in Technical
Analysis created a volume of 100
shares. Many people tend to
Volume plays a very integral assume volume count as
role in technical analysis as it200 (100 buys + 100 sells)
helps us to confirm trends which is not the right way to
and patterns. Consider look at volumes.
volumes as a means to gain
insights into how other Volume information on its
participants perceive the own is quite useless. For
market. example, we know that the
volume on Cummins India is
Volumes indicate how many 13,49,736 shares. So how
shares are bought and sold useful is this information
over a given period of time. when read in isolation? If you
The more active the share, think about it, it has no merit
the higher would be its and hence would actually
volume. For example, you mean nothing. However
decide to buy 100 shares of when you associate today’s
Amara Raja Batteries at 485, volume information with the
and I decide to sell 100 preceding price and volume
shares of Amara Raja trend, then volume
Batteries at 485. There is a information becomes a lot
price and quantity match, more meaningful.
which results in a trade.

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As a practice, traders usually Low Volume = Today’s

compare today’s volume with
the average of the last 10
days' volume.
Generally, the rule of thumb is
as follows:
volume < last 10 days
average volume
Low volumes mean LESS
investors are interested in
buying or selling.

High Volume = Today’s Average Volume = Today’s

volume > last 10 days volume = last 10 days
average volume average volume

Higher volumes mean MORE The Average Volume is the

investors are interested in total volume for a specified
buying or selling. period divided by the number
of bars in that same period.

Technical Indicators – Momentum Indicators

Moving averages and most other technical indicators are

primarily focused on determining likely market direction, up
or down.

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There is another class of MACD

technical indicators, however, short for moving average
whose main purpose is not convergence/divergence, is
so much to determine market a trading indicator used in
direction as to determine technical analysis of
market strength. These securities prices. It is
indicators include such designed to reveal changes
popular tools as the in the strength, direction,
Stochastic Oscillator, the momentum, and duration of
Relative Strength Index (RSI) a trend in a stock's price.
and the Moving Average
Convergence-Divergence The relative strength index
(MACD) indicator. (RSI) is a momentum
indicators used in technical
analysis. RSI measures the
speed and magnitude of a
security's recent price
changes.

Resources :
The Only Technical Analysis Video You Will Ever
Need... (Full Course: Beginner To Advanced)
What is Technical Analysis of Stocks | Kotak
Securities

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Insights to keep in mind

You must consider different parameters to analyse companies
in different industries and of different sizes

Considering Different Qualitative factors

Let us demonstrate this concept with a simple example!
Consider the automotive industry, what parameters would one
search for to see if the automotive industry is attractive? One
would look at the number of vehicles manufactured in a year
and compare it to the previous year to check for growth. Next,
we would look at manufacturing costs to see if the industry is
facing higher costs and find out why it is facing this issue to form
an opinion on whether the industry is doing well or not. There
are more parameters to analyse, this is just an example!

Now if one looks at the Oil and Gas industry, these parameters
are very different. In this industry one might want to look at
international trade laws and how they have changed the safety
and cost of transporting oil. Logically the next step would be to
judge if consumer demand is shifting towards renewable
energy or stays with oil. In this way, each industry might be
analysed keeping in mind different parameters.

A similar logic applies to comparing smaller companies versus

bigger companies as well.

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Insights to keep in mind

One will look at the rate of growth and analyse the marketing
costs required to acquire new customers along with more
intensive competitor analysis as compared to larger companies.
These are just some examples of parameters to help one
develop an understanding of the concept. It is by no means an
exhaustive list.

Considering Different Qualitative factors

Going back to our example of the automotive industry, let us
show the difference in quantitative analysis of companies in this
industry. In an automotive company, investors tend to look at
data on how many vehicles are going unsold - to trace demand.
They might also give more weightage to Return on Assets
compared to Return on Equity, as an automotive company
needs a lot of land and machinery, i.e. assets, to produce
vehicles.

In the Oil and Gas industry, one must look at ratios involving
debt, as companies here take up a lot of debt to fund their
operations. A company with lower debt or higher liquidity ratios
might be more attractive here.

Resources :
https://www.investopedia.com/terms/r/returnonassets.
asp

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Let us look at an example of a company from the healthcare

sector, ‘Fortis Healthcare Ltd’. In order to decide whether to
invest in the stock or not, we need to carry out equity
research.

Fortis Healthcare Limited Fortis is present in India,

– an IHH (Integrated the United Arab Emirates
Healthcare Holdings) (UAE), Nepal & Sri
Healthcare Berhad Lanka. The Company is
Company – is a leading listed on the BSE Ltd and
integrated healthcare National Stock Exchange
services provider in India. (NSE) of India.

It is one of the largest It draws strength from its

healthcare organizations partnership with a global
in the country with 27 major and parent
healthcare facilities, company - IHH, to build
4,300 operational beds upon its culture of world-
and 400 diagnostic class patient care and
centres (including JVs). superlative clinical
excellence.

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Fortis Healthcare has a
good P/E ratio but its P/B
ratio is poor when compared
to its peers. The company
has a good dividend yield
compared to competitors
which is a good sign.
Financial ratios offer
entrepreneurs a way to
evaluate their company's
performance and compare it
to other similar businesses
in their industry.
Ratios measure the
relationship between two or
more components of
financial statements. They
are used most effectively
when results are compared
with competitors.
E Q U I T Y R E S E A R C H
48
Here we have compared the
ratios with peers from the
same sector, like Apollo
Hospitals Enterprise Ltd,
Max Healthcare Institute
Ltd, and Narayana
Hrudayalaya Ltd.
In the past year, the stock
price has mostly seen a
bullish trend (bullish means
an investor believes a stock
or the overall market will go
higher) with Rs 245.5 being
the lowest price and Rs
352.50 being the highest
price thereby giving 7.39%
returns.
If you are looking for stocks
with good returns, Fortis
Healthcare Ltd. can be a
profitable investment option.
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Sample report
Here is an example of a sample report for all our readers to
use as a reference if they wish to:

https://drive.google.com/file/d/1sid8wA04PbkW_Nc4g5-
mNTQDhcsgdhJp/view?usp=sharing

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glossary
Amortization : An accounting technique used to
periodically lower the book value of a loan or an
intangible asset over a set period of time. In simple
words, when you pay off the debt in a fixed repayment
schedule in regular installments over a period of time.
Resources : Amortization: The Mortgage Professor #5

Depreciation : A reduction in the value of an asset over

time, due in particular to wear and tear.

Assets : An asset is anything that has current or future

economic value to a business.

Liability : A liability is something a person or company

owes, usually a sum of money.

Liquid Asset : A liquid asset is an asset that can easily

be converted into cash in a short amount of time.

Accounts Payable: Accounts payable is money owed

by a business to its suppliers shown as a liability on a
company's balance sheet. Some examples of accounts
payable include cleaning services, staff uniforms,
software subscriptions, and office supplies.

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Obligation : An obligation in finance is the responsibility of a

party to meet the terms of a contract or agreement.

Solvency : The state of not owing money to anyone or of

having the ability to pay your debts.

Operating income : Operating income is a company's profit

after deducting operating expenses such as wages,
depreciation, and cost of goods sold.

Operating expenses : An operating expense is an expense

that a business incurs through its normal business operations.

Leverage : Leverage refers to the use of debt (borrowed

funds) to amplify returns from an investment or project.

Cash flow : The term cash flow refers to the net amount of
cash and cash equivalents being transferred in and out of a
company. Cash received represents inflows, while money
spent represents outflows.

Portfolio : Any combination of financial assets such as stocks,

bonds and cash.

Shareholder’s Equity : Shareholders' equity is the amount

that the owners of a company have invested in their business.

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Thanks for Reading

Our Team
MANAGERS

Arjun Simha Priyansh Gopawat

CONVENERS

Aatreyi Druv Nakul

Pratham Raghavi Suchit

We would also like to acknowledge Finance Club's Managers for 2022-23:
Dheer Bhanushali and Sarthak Jain for their invaluable inputs and foresight
in making this guide.

Find us at
Instagram - https://www.instagram.com/finance.iitb/
Website - https://financeclubiitb.in/
Linkedin - https://in.linkedin.com/company/finance-club-iit-bombay

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