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Fundamental analysis

How to look through the ticker at the actual business — its economics, its balance sheet and its management.

The three statements

Every public company publishes three financial statements every quarter and year:

• Profit & Loss (P&L) — revenue minus the costs incurred to earn it, ending in net profit. Tells you how the business performed over a period.
• Balance sheet — a snapshot at one point in time: assets the business owns, liabilities it owes, and shareholders' equity (the difference). Tells you what the business is.
• Cash flow statement — actual cash moving in and out, split into operating, investing and financing activities. Often the most honest of the three; profits can be massaged, cash is harder to fake.

Reading an annual report

Indian listed companies publish an annual report (PDF on their investor-relations site, and on NSE/BSE). The most useful sections, in order:

1. Management Discussion & Analysis (MD&A) — narrative on what happened and why.
2. Risk factors — what management thinks could go wrong.
3. The three statements with notes.
4. Auditor's report — any qualifications are worth a careful read.
5. Related-party transactions — money flowing to entities connected to promoters.

Key ratios (and what they tell you)

• EPS (Earnings per Share) = Net profit ÷ shares outstanding. The slice of profit per share.
• P/E (Price / Earnings) = Share price ÷ EPS. Roughly, how many years of current earnings the market is paying for. Only useful when compared to history and to peers.
• P/B (Price / Book) = Share price ÷ book value per share. Most informative for asset-heavy businesses (banks, real estate).
• ROE (Return on Equity) = Net profit ÷ shareholders' equity. How efficiently the business turns equity into profit.
• ROCE (Return on Capital Employed) = EBIT ÷ capital employed. Adds debt to the denominator — useful for capital-intensive businesses.
• Debt / Equity = Total debt ÷ shareholders' equity. Leverage. High is not automatically bad, but it amplifies both gains and losses.
• Operating margin = Operating profit ÷ revenue. Whether the core business itself is profitable, before financing.

Qualitative factors

Numbers alone don't tell the story. Pay attention to:

• Business model — what does the company actually sell, to whom, and what stops a competitor from doing the same?
• Industry tailwinds & headwinds — is the market growing or shrinking? Is the company gaining or losing share?
• Management quality — capital allocation history, promoter shareholding trends, related-party transactions.
• Regulatory environment — many Indian sectors (banking, telecom, pharma, fintech) are heavily regulated.

A simple workflow

1. Read the most recent annual report's MD&A and risk factors.
2. Pull 5 years of revenue, EBITDA, net profit and operating cash flow. Look for steady growth and cash that tracks profit.
3. Check the balance sheet: net debt trend, working-capital days, contingent liabilities.
4. Compute the ratios above and benchmark against two or three direct competitors.
5. Ask: "What has to be true for this business to look very different five years from now?" Write your answer down before you read anyone else's view.