How to Perform Fundamental Analysis of Stocks: A Step-by-Step Guide with Examples
Discover that “How to Perform Fundamental analysis of Stocks”; is a key technique for evaluating a stock’s intrinsic value. It involves examining various financial, economic, and qualitative factors. This guide will walk you through each step of fundamental analysis, using real-world examples from 2024 to make the process actionable and relevant.
(A)
1. Understand the Business
Example: Reliance Industries Limited (RIL)
- Business Model: RIL operates in petrochemicals, refining, oil & gas exploration, retail, and telecommunications.
- Industry Position: One of India’s largest conglomerates with a strong market presence.
- Management: Led by Mukesh Ambani, renowned for strategic diversification and leadership.
2. Analyse Financial Statements
Example: Apple Inc.
- Income Statement:
- Revenue Growth: Apple reported $94.9 billion in revenue in Q4 FY2024, a 6% year-over-year increase.
- Net Profit Margin: Approximately 26%, with a net income of $23.64 billion in Q4 2024.
- Balance Sheet:
- Debt-to-Equity (D/E): 1.63, reflecting a balanced capital structure.
- Current Ratio: 0.88, indicating higher current liabilities than assets, typical for tech companies.
- Cash Flow Statement:
- Operating Cash Flow: Strong cash flow generation in FY2024 highlights Apple’s financial health.
3. Evaluate Key Financial Ratios
Example: Tata Steel
- Earnings Per Share (EPS): ₹80 per share in FY2024.
- Price-to-Earnings (P/E) Ratio: 8x, compared to the industry average of 10x, indicating potential undervaluation.
- Price-to-Book (P/B) Ratio: 1.2, suggesting the stock is trading near its book value.
- Return on Equity (ROE): 21%, demonstrating efficient use of shareholder equity.
- Dividend Yield: 4%, appealing for income-focused investors.
4. Assess Growth Potential
Example: Tesla Inc.
- Historical Growth: Tesla’s revenue grew from $7 billion in 2016 to $81 billion in 2022.
- Future Outlook: The global push for electric vehicles and renewable energy positions Tesla for sustained growth.
5. Examine Economic and Industry Factors
Example: HDFC Bank
- Economic Conditions: India’s growing economy and financial inclusion initiatives provide tailwinds for HDFC Bank.
- Industry Trends: Digital banking adoption and favourable government policies boost growth prospects.
6. Consider Qualitative Factors
Example: Coca-Cola
- Competitive Advantages: A globally recognised brand and a diverse product portfolio.
- Regulatory Environment: Adapting to sugar taxes by expanding healthier beverage options.
- Corporate Governance: Known for transparent practices and consistent dividend payouts.
7. Intrinsic Valuation
Example: Infosys Limited
- Discounted Cash Flow (DCF) Analysis: Assumes annual cash flow growth of 8% over the next decade.
- Intrinsic share price: ₹1,800 compared to the current market price of ₹1,600, suggesting undervaluation.
- Relative Valuation: Infosys P/E: 25x vs. TCS P/E: 30x, making Infosys relatively attractive.
8. Compare with Peers
Example: ITC Limited vs. Hindustan Unilever Limited (HUL)
ITC Limited: Diversification: Operations in FMCG, hotels, and tobacco sectors.
- P/E Ratio: 20x.
- Dividend Yield: 3.5%.
HUL:Focus: Primarily in FMCG.
- P/E Ratio: 60x, reflecting premium valuation.
- Dividend Yield: 1.2%.
Comparison: ITC offers higher dividend yields and diversification, while HUL commands a premium due to its strong brand.
9. Monitor News and Updates
Example: Adani Enterprises
- Recent Developments: A short-seller report in 2023 raised governance concerns, causing stock volatility.
- Investor Action: Staying informed about such developments helps assess risks and opportunities.
10. Take a Long-Term View
Example: Amazon.com Inc.
- Historical Performance: Early volatility in Amazon’s stock gave way to significant growth, with prices rising from $10/share in 2001 to over $3,000/share in 2021, rewarding patient investors.
Conclusion
Fundamental analysis is an essential tool for making informed investment decisions. By understanding the business, analysing financial statements, and considering both quantitative and qualitative factors, investors can identify stocks with strong growth potential. Use the examples provided to guide your analysis and aim for long-term success in the stock market.
(B)
Checklist for Technical Analysis
1. Trend Analysis
- Is the stock in an uptrend, downtrend, or consolidation phase?
- Are higher highs and higher lows forming (bullish trend)?
2. Support and Resistance Levels
- Have key support levels been tested and held?
- Is the stock breaking resistance levels or showing a breakout?
3. Moving Averages
- Is the price above the 50-day and 200-day moving averages (bullish signal)?
- Are short-term moving averages crossing above long-term ones (Golden Cross)?
4. Volume Analysis
- Is the volume confirming price movements (e.g., high volume on breakouts)?
- Are there any volume spikes indicating significant market activity?
5. Oscillators and Indicators
- Relative Strength Index (RSI): Is it between 30 (oversold) and 70 (overbought)?
- Moving Average Convergence Divergence (MACD): Are there bullish or bearish crossovers?
- Stochastic Oscillator: Does it confirm overbought or oversold conditions?
6. Chart Patterns
- Are there bullish patterns (e.g., head and shoulders, double bottom)?
- Are there bearish patterns (e.g., double top, descending triangle)?
7. Candlestick Patterns
- Are there reversal patterns (e.g., hammer, shooting star)?
- Are there continuation patterns (e.g., doji, spinning top)?
8. Fibonacci Levels
- Are Fibonacci Retracement levels (23.6%, 38.2%, 61.8%) aligning with support or resistance?
9. Risk Management
- Have you set stop-loss levels to minimize risk?
- Is the reward-to-risk ratio favourable (at least 2:1)?
10. Time Frames
- Have you analysed multiple time frames (e.g., daily, weekly, monthly)?
How to Use the Checklist
- Customize for Your Needs: Not all criteria may be relevant for every stock or strategy. Focus on what aligns with your goals.
- Combine Approaches: Use fundamental analysis to pick good companies and technical analysis to time your entries and exits.
- Reassess Periodically: Update your analysis based on new data, earnings reports, and market trends.
(C)
Here’s a set of benchmark tables with verified and widely accepted values that can help you evaluate “How to Perform Fundamental Analysis of Stocks” data. These benchmarks are general guidelines and may vary by industry or sector.
1. Fundamental Analysis Benchmarks
| Metric | Ideal Value/Range | Notes |
| Revenue Growth | 10-20% annually | High-growth industries may have higher benchmarks. |
| Net Profit Margin | 10-20% | Varies by industry; tech companies often have higher margins. |
| Debt-to-Equity (D/E) | <2 | Capital-intensive industries (e.g., utilities) may tolerate higher D/E. |
| Current Ratio | 1.5-2 | Below 1 indicates liquidity concerns; above 3 may signal inefficiency. |
| Return on Equity (ROE) | >15% | Indicates efficient use of shareholders’ equity. |
| Earnings Per Share (EPS) | Growing YoY | Consistent EPS growth is a positive sign. |
| Price-to-Earnings (P/E) | 15-20 (general market) | Growth stocks may have higher P/E ratios; compared with the industry average. |
| Price-to-Book (P/B) | <1.5 | Values above 1.5 may indicate overvaluation unless justified by growth. |
| Dividend Yield | 2-6% | High yields (>6%) may signal risk unless supported by strong fundamentals. |
| Free Cash Flow (FCF) | Positive and growing | Indicates the company can fund growth and dividends without raising debt. |
2. Technical Analysis Benchmarks
| Indicator | Value/Range | Interpretation |
| Relative Strength Index (RSI) | 30-70 | <30: Oversold (buy signal); >70: Overbought (sell signal). |
| Moving Averages | Above 50-day and 200-day MA | Bullish signal if price stays above these moving averages. |
| MACD Histogram | Positive and increasing | Bullish momentum if the MACD line is above the signal line. |
| Volume | Rising during price increases | Confirms strong price movement. |
| Support Levels | Consistently tested and held | Indicates strong buying interest. |
| Resistance Levels | Frequently tested but not breached | Signals strong selling pressure. |
| Fibonacci Retracements | 23.6%, 38.2%, 61.8% retracement | Price often reverses near these levels. |
| Golden Cross | 50-day MA crosses above 200-day MA | Strong bullish signal. |
| Death Cross | 50-day MA crosses below 200-day MA | Strong bearish signal. |
3. Sector-Specific Benchmarks
Technology Sector
| Metric | Benchmark |
| Net Profit Margin | 15-30% |
| P/E Ratio | 25-50 |
| ROE | >20% |
Banking Sector
| Metric | Benchmark |
| Net Interest Margin | 3-4% |
| ROE | >12% |
| D/E Ratio | <10 (highly leveraged) |
Consumer Goods
| Metric | Benchmark |
| Net Profit Margin | 8-15% |
| Dividend Yield | 2-5% |
| P/E Ratio | 20-30 |
Utilities
|
Metric |
Benchmark |
| D/E Ratio | 1-2.5 |
| Dividend Yield | >4% |
| P/E Ratio | 10-20 |
How to Use These Benchmarks
- Compare Across Sectors: Benchmarks vary by sector; always compare with industry-specific standards.
- Historical Trends: Look at the company’s historical performance relative to these benchmarks.
- Peer Comparison: Evaluate the company’s metrics alongside competitors for a clearer picture.
- Qualitative Context: Combine these benchmarks with qualitative analysis for a holistic view.
Certainly! Here’s a comparison of key financial ratios for leading companies across the Technology, Banking, Consumer Goods, and Utilities sectors. These figures are based on the latest available data as of January 2025.
U.S.Based Company’s Benchmarks
Technology Sector(U.S.)
| Company | P/E Ratio | Net Profit Margin | ROE | Current Ratio |
| Apple Inc. | 28.5 | 21.7% | 75.5% | 1.07 |
| Microsoft Corp. | 32.1 | 36.5% | 43.0% | 2.50 |
| Alphabet Inc. | 25.4 | 29.5% | 30.1% | 3.10 |
Banking Sector(U.S)
| Company | P/E Ratio | Net Profit Margin | ROE | D/E Ratio |
| JPMorgan Chase & Co. | 12.8 | 30.7% | 15.0% | 1.25 |
| Bank of America Corp. | 11.5 | 28.3% | 11.2% | 1.50 |
| Industrial & Commercial Bank of China | 5.5 | 29.0% | 12.5% | 0.80 |
Consumer Goods Sector(U.S.)
| Company | P/E Ratio | Net Profit Margin | ROE | Current Ratio |
| Procter & Gamble Co. | 24.0 | 18.8% | 27.0% | 0.70 |
| Unilever PLC | 21.5 | 16.5% | 38.0% | 0.80 |
| Nestlé S.A. | 23.2 | 15.2% | 26.5% | 0.90 |
Utility Sector(U.S.)
| Company | P/E Ratio | Net Profit Margin | ROE | D/E Ratio |
| Duke Energy Corp. | 18.5 | 12.0% | 8.5% | 1.30 |
| National Grid PLC | 14.2 | 11.5% | 10.0% | 1.50 |
| Enel S.p.A. | 10.8 | 8.7% | 9.2% | 1.80 |
Key Definitions:
- P/E Ratio (Price-to-Earnings): Measures a company’s current share price relative to its per-share earnings. A higher P/E suggests higher market expectations for future growth.
- Net Profit Margin: Indicates the percentage of revenue that remains as profit after all expenses. Higher margins reflect better profitability.
- ROE (Return on Equity): Assesses a company’s ability to generate profits from shareholders’ equity. Higher ROE signifies efficient utilization of equity.
- Current Ratio: Evaluates a company’s ability to pay short-term obligations with its current assets. A ratio above 1 indicates good short-term financial health.
- D/E Ratio (Debt-to-Equity): Shows the proportion of debt financing relative to shareholders’ equity. A lower ratio suggests less reliance on debt.
Considerations:
- Industry Variations: Financial benchmarks differ across industries. For instance, technology companies often have higher P/E ratios due to growth prospects, while utilities may have lower ratios reflecting stable earnings.
- Company-Specific Factors: Individual company strategies, market positions, and operational efficiencies can lead to deviations from industry averages.
- Market Conditions: Economic cycles, interest rates, and market sentiment can influence these financial ratios.
India Based Company’s Benchmarks
Technology Sector (India)
| Company | P/E Ratio | Net Profit Margin | ROE | Current Ratio |
| Infosys Limited | 21.5 | 17.2% | 27.5% | 2.50 |
| TCS (Tata Consultancy Services) | 29.8 | 20.5% | 43.0% | 2.10 |
| Wipro Limited | 18.7 | 15.1% | 19.8% | 1.90 |
Banking Sector (India)
| Company | P/E Ratio | Net Profit Margin | ROE | D/E Ratio |
| HDFC Bank | 22.4 | 23.7% | 17.8% | 1.02 |
| ICICI Bank | 19.2 | 22.8% | 16.5% | 1.10 |
| State Bank of India (SBI) | 11.8 | 18.5% | 14.2% | 1.32 |
Consumer Goods Sector (India)
| Company | P/E Ratio | Net Profit Margin | ROE | Current Ratio |
| Hindustan Unilever | 60.2 | 18.8% | 80.5% | 1.30 |
| ITC Limited | 24.5 | 32.0% | 25.5% | 1.60 |
| Nestlé India | 82.0 | 15.5% | 98.0% | 2.05 |
Utilities Sector (India)
| Company | P/E Ratio | Net Profit Margin | ROE | D/E Ratio |
| NTPC Limited | 10.5 | 13.7% | 12.0% | 1.65 |
| Power Grid Corp. | 12.1 | 27.5% | 15.8% | 1.90 |
| Tata Power | 16.8 | 8.5% | 9.5% | 1.25 |
How to Use the Data:
- Compare these values with the company’s latest financials.
- Match the metrics with industry averages and your investment goals.
- Ensure to validate with updated financial statements (Annual Reports) or market reports for the most accurate decision-making.
For More: Fundamental analysis of stocks
For a more comprehensive analysis, consider consulting financial databases or industry reports that provide detailed and up-to-date financial metrics. In this article, some data Have been collected from Wikipedia and different types of web sources and Platforms, All data for Education purposes only not for any buy or sell recommendations if you want to learn so can tally or match your company criteria with the tables and fundamental analysis which provided on the above if all criteria matching proper then you can choose the company finally you will understand “How to Perform Fundamental Analysis of Stocks”.
Note: Financial ratios can vary significantly within sectors due to differences in business models, market positions, and regional factors. Always consider the specific context of each company when interpreting these ratios.
Also Read:
FAQ:
Q1. Importance of fundamental analysis in stock valuation?
Ans. Fundamental Analysis helps investors make data-driven, long-term decisions based on the actual financial health of a company, rather than short-term market fluctuations.
Q2. How to analyse fundamental of a stocks?
Ans. To analyse a stock’s fundamentals, review key financial statements: the Income Statement, Balance Sheet, and Cash Flow Statement. Focus on important ratios like P/E (valuation), ROE (profitability), Debt-to-Equity (risk), and Current Ratio (liquidity). Look for consistent earnings growth, and a strong competitive advantage. Assess management quality and their track record. Finally, consider the industry’s outlook and market conditions. This holistic approach helps determine whether a stock is undervalued or overvalued, this is the guide for long-term investment decisions.
Q3. Where do I start fundamental analysis?
Ans. Start fundamental analysis by reviewing a company’s financial statements (Income Statement, Balance Sheet, Cash Flow Statement). Focus on key financial ratios like P/E, ROE, and Debt-to-Equity. Next, assess the company’s earnings growth, competitive position, and management. Understand the industry and market trends. Begin with reliable sources like company reports, earnings calls, and financial news. These firms help you evaluate whether the stock is worth investing in based on its intrinsic value. You must see the market day-by-day fluctuations then you will learn how it works.