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Fundamental-analysis

A word of caution for Investors, Nifty's downside targetsin.tradingview.com Nifty has been performing poorly since the last three months, even if we leave the index constituents aside, the situation is even more dire in midcap and small cap indexes some of which can be attributed to the Adani stocks. Adani stocks, put pressure on the banking index and banking index constituents especially SBI collapsed due to the grenade explosion orchestrated by Hindenburg's report. Meanwhile Nifty IT, Nifty metals, Nifty AUTO did try to give support to the market, despite these sectors performing there was a broadway midcap sell off conducted in the last 3 months. Recently China opened its borders and said it was ready to shrug off covid(finally!) and open its borders for business. This news set the Chinese markets blazing and were up nearly 40% from their near time lows. Moreover the valuation comfort in the chinese markets which were nearly half as expensive as their Indian counterpart, gave fuel to the FIIs sell off. As Indian markets was the place where FIIs could book their yearly profits and pocket their fat bonus cheques. Now coming to the mother market, US. DOW Jones had been a failure for the 5th time last week to give a weekly close above 34k levels.(link to the explanation below). The inflation numbers had been blazing hot, new mortgage applications at a 25 year low, fed's target rate 4.5-4.75 % already high enough to give US residents a headache and further talks to increase it by 50 bips, phew ! It is now becoming highly probable that there might not be any soft landing now and the fall, consuming many , will be a hard one. Since US would be raising rates further, despite the situation being fine in India, Indian RBI governor will have to raise rates in India to arrest any declines in Rupee vs US dollar, which will ultimately put pressure on Indian equity markets too. Many Indian banks are already offering fixed deposit rates as high as 7-8.5%(and further high if you are a senior citizen). If you look deeper, soverign gilt funds are offering good options too and Indian treasuries are offering yields as high as 7.4%, imagine what the equity markets have to compete with ! Alas, I would like to say, overall macros and micros do not look good for the equity markets across globe. For all the investors/traders who entered the markets post covid, and "BUY on dips", was their holy sentence, my suggestion to hold your horses for the time being , take a step back and assess what the markets are trying to convey. My targets for Nifty over the next 6 months might seem to be disturbing but I have tried to chalk out the scenari that Im able to foresee. Let me know in the comments what do you think about market future.
NSE:NIFTYShort
by TanmayAggarwal
4
What should I look at in the Income statement?The famous value investor, Mohnish Pabrai , said in one of his lectures that when he visited Warren Buffett, he noticed a huge handbook with the financial statements of thousands of public companies. It's a very dull reading, isn't it? Indeed, if you focus on every statement item - you'll waste a lot of time and sooner or later fall asleep. However, if you look at the large volumes of information from the perspective of an intelligent investor, you can find great interest in the process. It is wise to identify for yourself the most important statement items and monitor them in retrospect (from quarter to quarter). In previous posts, we've broken down the major items on the Income statement and the EPS metric: Part 1: The Income statement: the place where profit lives Part 2: My precious-s-s-s EPS Let's now highlight the items that interest me first. These are: - Total revenue The growth of revenue shows that the company is doing a good job of marketing the product, it is in high demand, and the business is increasing its scale. - Gross profit This profit is identical to the concept of margin. Therefore, an increase in gross profit indicates an increase in the margin of the business, i.e. its profitability. - Operating expenses This item is a good demonstration of how the management team is dealing with cost reductions. If operating expenses are relatively low and decreasing while revenue is increasing, that's terrific work by management, and you can give it top marks. - Interest expense Interest on debts should not consume a company's profits, otherwise, it will not work for the shareholders, but for the banks. Therefore, this item should also be closely monitored. - Net income It's simple here. If a company does not make a profit for its shareholders, they will dump its shares*. *Now, of course, you can dispute with me and give the example of, let's say, Tesla shares. There was a time when they were rising, even when the company was making losses. Indeed, Elon Musk's charisma and grand plans did the trick - investors bought the company's stock at any price. You could say that our partner Mr. Market was truly crazy at the time. I'm sure you can find quite a few such examples. All such cases exist because investors believe in future profits and don't see current ones. However, it is important to remember that sooner or later Mr. Market sobers up, the hype around the company goes away, and its losses stay with you. - EPS Diluted You could say it's the money the company earns per common share. So, I'm finishing up a series of posts related to the Income statement. This statement shows how much the company earns and how much it spends over a period (quarter or year). We've also identified the items that you should definitely watch out for in this report. That's all for today. In the next post, we will break down the last of the three financial statements of a public company - the Cash flow statement. Goodbye and see you later!
NSE:NIFTYEducation
by Be_Capy
My precious-s-s-s EPSIn the previous post , we began looking at the Income statement that the company publishes for each quarter and year. The report contains important information about different types of profits : gross profit, operating income, pretax income, and net income. Net income can serve both as a source of further investment in the business and as a source of dividend payments to shareholders (of course, if a majority of shareholders vote to pay dividends). Now let's break down the types of stock on which dividends can be paid. There are only two: preferred stock and common stock . We know from my earlier post that a stock gives you the right to vote at a general meeting of shareholders, the right to receive dividends if the majority voted for them, and the right to part of the bankrupt company's assets if something is left after paying all debts to creditors. So, this is all about common stock. But sometimes a company, along with its common stock, also issues so-called preferred stock. What advantages do they have over common stock? - They give priority rights to receive dividends. That is, if shareholders have decided to pay dividends, the owners of preferred shares must receive dividends, but the owners of common shares may be deprived because of the same decision of the shareholders. - The company may provide for a fixed amount of dividend on preferred shares. That is, if the decision was made to pay a dividend, preferred stockholders will receive the fixed dividend that the company established when it issued the shares. - If the company goes bankrupt, the assets that remain after the debts are paid are distributed to the preferred shareholders first, and then to the common shareholders. In exchange for these privileges, the owners of such shares do not have the right to vote at the general meeting of shareholders. It should be said that preferred shares are not often issued, but they do exist in some companies. The specific rights of shareholders of preferred shares are prescribed in the founding documents of the company. Now back to the income statement. Earlier we looked at the concept of net income. Since most investments are made in common stock, it would be useful to know what net income would remain if dividends were paid on preferred stock (I remind you: this depends on the decision of the majority of common stockholders). To do this, the income statement has the following line item: - Net income available to common stockholders (Net income available to common stockholders = Net income - Dividends on preferred stock) When it is calculated, the amount of dividends on preferred stock is subtracted from net income. This is the profit that can be used to pay dividends on common stock. However, shareholders may decide not to pay dividends and use the profits to further develop and grow the company. If they do so, they are acting as true investors. I recall the investing formula from my earlier post : give something now to get more in the future . And so it is here. Instead of deciding to spend profits on dividends now, shareholders may decide to invest profits in the business and get more dividends in the future. Earnings per share or EPS is used to understand how much net income there is per share. EPS is calculated very simply. As you can guess, all you have to do is divide the net income for the common stock by its number: - EPS ( Earnings per share = Net income for common stock / Number of common shares issued). There is an even more accurate measure that I use in my analysis, which is EPS Diluted or Diluted earnings per share : - EPS Diluted ( Diluted earnings per share = Net income for common stock / (Number of common shares issued + Issuer stock options, etc.)). What does "diluted" earnings mean, and when does it occur? For example, to incentivize management to work efficiently, company executives may be offered bonuses not in monetary terms, but in shares that the company will issue in the future. In such a case, the staff would be interested in the stock price increase and would put more effort into achieving profit growth. These additional issues are called Employee stock options (or ESO ). Because the amount of these stock bonuses is known in advance, we can calculate diluted earnings per share. To do so, we divide the profit not by the current number of common shares already issued, but by the current number plus possible additional issues. Thus, this indicator shows a more accurate earnings-per-share figure, taking into account all dilutive factors. The value of EPS or EPS Diluted is so significant for investors that if it does not meet their expectations or, on the contrary, exceeds them, the market may experience significant fluctuations in the share price. Therefore, it is always important to keep an eye on the EPS value. In TradingView the EPS indicator as well as its forecasted value can be seen by clicking on the E button next to the timeline. We will continue to discuss this topic in the next publication. See you soon!
NSE:RELIANCEEducation
by Be_Capy
4
The income statement: the place where profit livesToday we are going to look at the second of the three main reports that a company publishes during the earnings season, the income statement. Just like the balance sheet, it is published every quarter and year. This is how we can find out how much a company earns and how much it spends. The difference between revenues and expenses is called profit . I would like to highlight this term "profit" again, because there is a very strong correlation between the dynamics of the stock price and the profitability of the company. Let's take a look at the stock price charts of companies that are profitable and those that are unprofitable. 3 charts of unprofitable : 3 charts of profitable : As we can see, stocks of unprofitable companies have a hard enough time growing, while profitable companies, on the contrary, are getting fundamental support to grow their stocks. We know from the previous post that a company's Equity grows due to Retained Earnings. And if Equity grows, so do Assets. Recall: Assets are equal to the sum of a company's Equity and Liabilities. Thus, growing Assets, like a winch attached to a strong tree, pull our machine (= stock price) higher and higher. This is, of course, a simplified example, but it still helps to realize that a company's financial performance directly affects its value. Now let's look at how earnings are calculated in the income statement. The general principle is this: if we subtract all expenses from revenue, we get profit . Revenue is calculated quite simply - it is the sum of all goods and services sold over a period (a quarter or a year). But expenses are different, so in the income statement we will see one item called "Total revenue" and many items of expenses. These expenses are deducted from revenue gradually (top-down). That is, we don't add up all the expenses and then subtract the total expenses from the revenue - no. We deduct each expense item individually. So at each step of this subtraction, we get different kinds of profit : gross profit, operating income, pretax income, net income. So let's look at the report itself. - Total revenue This is, as we've already determined, the sum of all goods and services sold for the period. Or you could put it another way: this is all the money the company received from sales over a period of time. Let me say right off the bat that all of the numbers in this report are counted for a specific period. In the quarterly report, the period, respectively, is 1 quarter, and in the annual report, it is 1 year. Remember my comparison of the balance sheet with the photo ? When we analyze the balance sheet, we see a photo (data snapshot) on the last day of the reporting period, but not so in the income statement. There we see the accumulated amounts for a specific period (i.e. from the beginning of the reporting quarter to the end of that quarter or from the beginning of the reporting year to the end of that year). - Cost of goods sold Since materials and other components are used to make products, accountants calculate the amount of costs directly related to the production of products and place them in this item. For example, the cost of raw materials for making shoes would fall into this item, but the cost of salaries for the accountant who works for that company would not. You could say that these costs are costs that are directly related to the quantity of goods produced. - Gross profit (Gross profit = Total revenue - Cost of goods sold) If we subtract the cost of goods sold from the total revenue, we get gross profit. - Operating expenses (Operating expenses are costs that are not part of the cost of production) Operating expenses include fixed costs that have little or no relation to the amount of output. These may include rental payments, staff salaries, office support costs, advertising costs, and so on. - Operating income (Operating income = Gross profit - Operating expenses) If we subtract operating expenses from gross profit, we get operating income. Or you can calculate it this way: Operating income = Total revenue - Cost of goods sold - Operating expenses. - Non-operating income (this item includes all income and expenses that are not related to regular business operations) It is interesting, that despite its name, non-operating income and operating income can have negative values. For this to happen, it is sufficient that the corresponding expenses exceed the income. This is a clear demonstration of how businessmen revere profit and income, but avoid the word "loss" in every possible way. Apparently, a negative operating income sounds better. Below is a look at two popular components of non-operating income. - Interest expense This is the interest the company pays on loans. - Unusual income/expense This item includes unusual income minus unusual expenses. "Unusual" means not repeated in the course of regular activities. Let's say you put up a statue of the company's founder - that's an unusual expense. And if it was already there, and it was sold, that's unusual income. - Pretax income (Pretax income = Operating income + Non-operating income) If we add or subtract (depending on whether it is negative or positive) non-operating income to operating income, we get pretax income. - Income tax Income tax reduces our profit by the tax rate. - Net income (Net income = Pretax income - Income tax) Here we get to the income from which expenses are no longer deducted. That is why it is called "net". It is the bottom line of any company's performance over a period. Net income can be positive or negative. If it's positive, it's good news for investors, because it can go either to pay dividends or to further develop the company and increase profits. This concludes part one of my series of posts on the Income statement. In the next parts, we'll break down how net income is distributed to holders of different types of stock: preferred and common. See you soon!
NSE:BANKNIFTYEducation
by Be_Capy
2
At the beginning was the EquityWith this post, I am concluding the analysis of the company's balance sheet. You can read the previous parts here: Part 1 - Balance sheet: taking the first steps Part 2 - Assets I prioritize Part 3 - A sense of debt Now we know that every company has assets on one side of the balance sheet and liabilities and equity on the other side. If you add liabilities and equity together you get the sum of assets. And vice versa, if you subtract all of the company's liabilities from the assets, you get what? That's right, you get Equity . Let's discuss this important component of the balance sheet. When a company is first established, it must have initial equity. This is the money with which any business starts. It is used for the first expenses of the new company. In the case of our workshop , the equity was the master's savings, with which he bought the garage, equipment, raw materials and other assets to start his business. As sales progressed, the workshop received the revenue and reimbursed expenses. Whatever was left over was used to boost the company's profit. So, our master invested his capital in the business to increase it through profits. Making a profit is the main purpose for which the company's assets work, loans are raised, and equity is invested. Let's see which balance sheet items are in the Equity group: - Common stock (The sum of nominal values of common stock issued). Remember, when our master decided to turn his company into a stock company , he issued 1 million shares at a price of $1,000 per share. So $1,000 per share is the par value of the stock. And the sum of the nominal values of the stocks issued would be $1 billion. - Retained earnings . It is clear from the name of this item that it contains profits that have not been distributed. We will find out where it can be allocated in the next post, when we start analyzing the income statement. - Accumulated other comprehensive income (Profit or loss on open investments). The profit or loss of a company can be not only from its core business, but also, for example, from the rise or fall in the value of other companies' shares that it bought. In our example, the workshop has oil company shares. The financial result from the revaluation of these shares is recorded in this item. So, the equity is necessary for the company to invest it in the business and make a profit. Then the retained earnings themselves become equity, which is reinvested to make even more profits. It's a continuous cycle of the company's life that bets on equity growth. Which balance sheet items are of interest to me in the Equity group? Of course, I am interested in the profit-related items: retained earnings and profit or loss on open investments. The sum of nominal share values is a static indicator, so it can hardly tell us anything. However, it is better to use information from the income statement rather than the balance sheet to analyze earnings, because only this report allows us to see the entire structure of a company's income and expenses. So we conclude the general analysis of a company's balance sheet. To fully understand why it is needed, let's engage our imagination once again. Do you remember the example with the hotel ? We imagined that a joint stock company is a hotel with identical rooms, where you, as an investor, can buy a certain number of rooms (one room = one share). Think about what you would want to look at first before buying? Personally, I'd rather see photos of the rooms. So, the balance sheet can be compared to such photos that we get from the hotel at quarterly and annual intervals. Of course, in such a case, the hotel will try to use special effects as much as possible in order to improve investors' impression of the photos released. However, if we track and compare photos over multiple periods, we can still understand: is our hotel evolving, or have we been watching the same couch in a standard room for 10 years in a row. We can say that the balance sheet is a "photo" of the company's assets, debts and equity at the balance sheet date. And the balance sheet items I've chosen are what I look at first in this photo. In the next series of posts, we will break down an equally important report, the income statement, and explore the essence of earnings. See you soon!
NSE:TATAMOTORSEducation
by Be_Capy