Introduction
Investing in the stock market can seem daunting at first, especially for beginners who are just starting to explore their options. You are considered to be financially aware if you know how to.....
Your hard earnt money is losing its purchasing power because of inflation. Just try to check the prices of real estate, gold or even vegetables and compare their prices with what they were 3 years back. Everything is getting costlier. The first rule of financial education is to not allow your money to lose its value. You can protect your money by doing.......
Yes, you read it RIGHT. Most people lose their money even after investing because they don't do the RIGHT investment. People invest in penny stocks, unlisted companies, unregistered real estate and cryptocurrency which can give you returns at low cost but the probability of losing money is very high. This is where fundamental analysis helps in making the right choices and is the first step for investing in the market.
Value Investing
People get confused between PRICE and VALUE. Price is something you pay and value is something you get. Ex: If you purchased an expensive headphone but the quality is poor, the headphone becomes overpriced! This means you have paid for something with a high price but the value it is giving to you is low.
You should always invest in those stocks whose price is less than their intrinsic value. In simple words, you need to buy something which provides quality at less price. Here are some ratios which you need to understand for value investing:-
PE Ratio
PE stands for Price to Earnings. PE ratio is the ratio of the price paid to purchase stock by the amount we earn from the stock. The market sets a high price for some shares because the chances of these companies earning more in the future are high.
PE Ratio = Market Price per Share / Earnings per Share
Example:-
The price of a company is 100 and it earns 10, therefore 100/10 the PE ratio becomes 10. In simple words, to earn 1 Rs. you are paying 10 Rs. If the earning is increased to 20 and the price remains the same then the ratio becomes 5. So you are now paying only 5 Rs. to earn 1 Rs. You can use tickertape which provides you with a screener for all stocks in the market.
Let's look at the PE ratio of Reliance Industries Ltd...
The PE ratio is a little high. Any company below the PE ratio of 20 is more likely to draw buyers. However, it depends on the capital of the individual if he wants to purchase an expensive stock.
PB Ratio
PB ratio= Market Price per Share / Book Value per Share
The price-to-book ratio compares the market price of a company's shares to its book value per share. This is one of the methods to identify the value of a company. If any company is on the verge of getting sold, the book value of the company will determine how much the investor in the stock of that company could make. Let's take a look at the PB ratio of Reliance Industries Ltd.
Lesser the PB ratio better it is to invest. Generally, a PB ratio of 1-2 is considered to be a good PB ratio.
Debt to Equity Ratio
Companies raise money from different sources for their expansion. Two ways in which companies raise money are Debt and Equity.
D/E Ratio = Total Liabilities / Total Equity
They can either take loans or sell their shares to investors to raise money. Generally, a D/E ratio of 1 or less is considered to be a healthy ratio, indicating that a company has a good balance of debt and equity. However, debt is cheaper than diluting equity if the repaying capacity of the company is high. Therefore there is no ideal D/E ratio which will help you in deciding your investment but could be useful after considering other metrics as well.
Similarly, you can add more filters and get everything in the same place.
Current Ratio
Current ratio = Current Assets/Current Liabilities
The greater the current ratio better it is to invest. A ratio less than 1 means liabilities> assets and greater than 1 means assets > liabilities. Generally, a current ratio of 2 or higher is considered to be a healthy ratio.
This is what the ratios should look like ideally for a safe investment.
Here is the ratio of Reliance Industries Ltd.
From those values, we can see that the PE ratio is slightly above 20. Also, the Debt to equity ratio is a little high but Reliance has the highest market capital which increases its repaying capacity. PB and Current ratio fall in the right bracket. So far, Reliance seems like a safe investment.
However, there are some other factors along with the ratios. Checking the balance sheet of a company is equally important. There are 3 things that you need to check:-
Sales
Profit
Total Assets and liabilities
There is growth in Total Revenue(Sales) and Net Income(Profit) in the last 4 financial years which is a good sign.
Here, you can observe all the metrics listed on the screen. The assets are increasing at a greater rate than the liabilities. All the other metrics tickertape provides will surely help in deciding your investments.
In conclusion, investing in the stock market can be a challenging but rewarding experience. By understanding the basics of how the stock market works and doing your research, you can make informed decisions that have the potential to lead to long-term financial growth. Remember that the stock market is always changing, and it's important to stay up-to-date on market trends and news. With patience, discipline, and a sound investment strategy, you can make the stock market work for you. Happy investing!