I’ve been wanting to write this for a long time now.

There are a lot of ways to actually analyze and invest in

stocks. There is no standard procedure to go about picking stocks and it involves a high level of subjectivity.
Everyone has their own methods. It’s not a question of whether it is good or bad, everyone is right in its own
way. Like they say, to each his own!

However, I’m sharing with you all a very simple and effective way to shortlist stocks for investment. I’ll try to
explain it in the easiest of manner so that it is understood by all even if they are not from a finance
background. So, here we go!

Consider this as an example-

What I have done is, I have picked a few good stocks from the media sector for my analysis and explanation.
We are only going to deal with numbers because numbers don’t lie! Like I’ve said before, there is no standard
procedure but this will definitely help you get started in the field of investing. Even if you use these
parameters to analyze stocks, you will be able to pick good quality stocks from any sector.

The idea is to pick a quality stock with sound fundamentals at a good price! This is the game. There are
a lot of stocks which keeps giving opportunity for us to invest in them. It’s up to us to capitalize on such
opportunities.

I look to invest in stocks keeping these 6 parameters in mind.

1. PE ratio ( Price-Earning ratio)

2. 52 week low/52 week high

3. ROE ( Return on equity )

4. ROCE ( Return on capital employed )

5. ICR ( Interest coverage ratio)

6. PBV ( Price to book value )

We will analyze the stocks on the above-mentioned parameters and then see which is the best stock to invest
in! I’ll be discussing each and every parameter in detail now.

I’ve taken the following stocks from the media sector for my analysis.

1. Sun TV
2. Zee Entertainment

3. TV18 Broadcast
4. PVR

5. Inox Leisure

They all belong to the Media sector. Let’s analyze these stocks based on the above parameters and see which
one looks good to invest now!

Part A: PE ratio
I’m not discussing the formula here rather we’ll see what the ratio means and how do we apply the same in
our analysis.

PE ratio means the price investor is paying for every 1 rupee earning of the company. Let’s look at the PE of
the companies mentioned above and compare its individual PE with the Media Industry PE. When we
compare the individual PE with the Industry PE, we will come to know which stock is undervalued or which
stock is overvalued or which stock is fairly valued. Now, all the stocks mentioned are good stocks. But we
should be interested in which stock? Obviously the stock which is undervalued currently and has good
future upside potential.

Let us do the above analysis with the help of this image below :

(Source: Moneycontol app)

Try to look at consolidated figures rather than standalone figures. Consolidated figures give an overall
result of the group as a whole. If a company has subsidiaries or associates, the company has to prepare
consolidated financial statements. If a company does not have any subsidiary or associates, it prepares only
standalone financial statements.
We have consolidated figures for all except Sun TV. So for Sun TV, we will consider standalone figures. For
others, consolidated.

Have a look at the industry PE. Industry PE of the media sector is 22.66. What does this mean? If a
company belonging to the media sector earns 1 rupee, the investor is willing to pay 22.66 to buy the
stock.

Now, look at the Individual PE of all the stocks and compare it with Industry PE to determine which one is
undervalued.

The stock with the lowest PE is the one which is undervalued. That stock is Sun TV which has a PE of
15.58 followed by Zee tv whose PE is 22.81

The highest PE is of PVR which is 45.81. It means PVR is overvalued now. It does not mean it is not a
good stock to buy. Remember what I had said above. We buy a stock which is undervalued and has good
upside potential.

Can we zero down on a stock just by looking at it’s PE? NO.

There are other 5 parameters which we have to check now before we draw any conclusion.

Part B: 52 week low

The 52 weeks low and high usually acts as support and resistance. There would have been some negative
news about the stock which causes its price to fall and make a new low. Vice versa for its 52 week high which
most probably could be due to some positive news.

I see this as an opportunity to buy a stock which is undervalued and near to its 52 weeks low provided
its fundamentals are sound.

Let us look at the 52 week low of all the stocks mentioned above also its current market price.
You can see the 52 week low and high with respect to the current market price here.

PVR and Inox’s current market price is way ahead than it’s 52 week low. Also, they both are overvalued
looking at their PE.

I’m now looking at Sun TV, Zee TV and TV18.

TV18’s PE is 30 which makes it overvalued currently though its current market price is closer to its 52 week
low.

If you look at Sun TV and Zee TV PE, sun tv is undervalued and zee tv looks to be fairly valued. I won’t say
their current market price is that close to its 52 week low but it’s also not that far as well.

Zee tv ( 55 points - the difference between CMP and 52 week low ) and sun tv ( 67 points )

As of now, Zee TV and Sun TV are still in the fray.

I’m leaving behind TV18 because of its high PE; Inox and PVR, firstly higher PE and also its current
market price being far away from its 52 week low.
Part C: ROE/ROCE

Return on equity means returns earned by the company on the capital contributed by equity shareholders
alone. Higher the better. This also gives an idea about how well is the money of equity shareholder is utilized
by the company.

Return on capital employed means the return earned by the company on the capital contributed by both
equity shareholder and debtholder ( Debentures, loans taken by the company etc ) It’s the total capital
employed by the company in its business and not only equity capital as in the case of ROE.

Both, the higher the better. Also, what I see is the past 5 years trend of both ROE and ROCE. Fluctuations are
okay unless there is too much deviation which will require further and deeper analysis.

Here, I don’t look for a specific percentage rather I look for consistency

Let’s have the look at the ROE and ROCE of the above-mentioned companies.

I have considered 2014–2018 for Zee and Sun as it looks like they have not declared their results for 2019.
Sun TV has been maintaining a consistent ROE and ROCE for the last 5 years.

Also, it’s ROE and ROCE is more than PVR, Inox and TV18 both in terms of percentage and consistency.

When it comes to Zee TV, there’s a drop in it’s ROE but a healthy increase in ROCE.

Because of the slight drop in ROE for Zee TV, at this stage, Sun TV is slightly ahead than Zee tv.

Part 4: Interest coverage ratio ( ICR )

This is very important when it comes to stock picking. In fact, this is the first thing I see before looking at
other factors. If ICR is strong, more often than not, the stock turns out to be really good.

ICR usually means the companies ability to pay off its interest ( repayment of interest on loan taken)
obligations. More the better. A company can fulfil it’s interest obligations provided it has good earnings
before interest and taxes.

Sharing with you an extract of earning statement :

where EBIT is nothing but earnings before interest and taxes

EBT is earnings before tax after paying off the interest and

PAT is Profit after tax, profit after paying the interest and tax.

Higher the EBIT, higher will be the ICR. EBIT is also called as the operating profit, profit earned by the
company from its business operations before interest and tax commitments.

Let’s have a look at the ICR of the above-mentioned companies :

Here also I look at the last 5 years trend!

Look at sun tv. From having a negative ICR in 2014 ( -14.07 ) to a whopping 1570.41 in 2018.

Zee TV’s ICR has reduced ( though still positive ) which also means its profitability would have reduced,
leading to lower ICR.

All the parameters are in favour of Sun TV clearly now.

Part 5: Price to book value ( PBV ratio )

Book value is nothing but the shareholders worth in the company. On the liability side of the balance
sheet, you will see equity share capital and reserves. If you add up equity share capital and reserves, it is
nothing but the shareholders worth in the company. So book value = shareholders money (the capital
contributed by them + money transferred to reserves out of profits )

So the price to book value usually means the price an investor has to pay for 1 rupee worth in the company

It is similar to PE where PE is nothing but a price an investor has to pay for 1 rupee earning of the company
In PE, it’s the earning. In PBV, it’s the worth. Lower the better, just like the PE

Let’s have a look at the PBV of the companies before we draw a conclusion

The PBV looks good for TV18 followed by Inox. But then, if you look at sun tv’s PBV, it has increased but it’s a
marginal one. Just because one parameter doesn’t favour a stock, it does not make it a bad investment.

Now, coming to a conclusion, considering all the factors above, it looks very clear that Sun TV is the
stock that ticks all the boxes.

I will hold it till the stock comes close to its 52 weeks high. Sun TV’s 52 week high is 968.

Disclaimer : This is merely a recommendation based on the above analysis. I won’t be responsible for
your profit or loss.

These parameters are more than enough for you to learn and get started with investing. Of course, there are
a lot of other factors too that I consider before investing in a particular stock which I intend to share with you
all going forward here.
I’ve taken a sector and tried to analyze it from start to end based on the above parameters before deciding
on the stock.

I hope you were able to understand. I’ve tried to keep it simple and also with examples covering all the 5
parameters.

You can take any sector and try to analyze on the basis of the above points. You can send your analysis to me
here on Quora via personal message and I will be happy to help you.

Happy Investing :)

Also, special thanks to Palak Jain (पलक जैन) for helping me with the draft :D