8 Things You Should Look When You Analyze Shares In India

We often look for recommendations from stock brokers and market experts/analysts.However, did you ever think of analyzing a particular stock? Here are a few parameters which most analysts and stock brokers will be concentrating on and which you can use to analyze a share.Always keep in mind stocks are like humans, they are not perfect and you have to find a better stock by comparing them with the stocks in the same industry. 20 years ago our elders could only get a limited amount of stock data in the daily newspaper. Today, you have access to a seemingly unlimited amount of data on every publicly traded stock, which can be confusing, but, if you know where to look then the information is a blessing. P/E ratio or price to earnings ratio is the first thing that analysts look for. To get the p/e ratio you need to first arrive at the EPS. Earnings per share or EPS is got by dividing the number of shares by the net profit. If company A has 10,000 floating shares and its net profit is Rs 1 lakh, we say the EPS is Rs 10. After getting the EPS we divide the same by the market price to arrive at the p/e. So, if company A has a market price of Rs 100 and an EPS of Rs 10, we say the p/e is 10. If the promoter holding in a share is very high, it is good sign. Many companies like Wipro have promoter holding as high as 75 per cent. So, look for a decent promoter holding. These days promoters tend to pledge their shares to avail loans. In case you find a company where the promoters holding is pledged, it is best to avoid buying the shares. Look for a company that does not have the shares of the promoters that are pledged. If a company is not paying dividend avoid the stock. Dividend yield is nothing but the dividend that you would receive after taking your purchase consideration. A stock like Coal India gives a dividend yield of almost 8 per cent. If you buy the stock at Rs 305, the company returns back as much as Rs 27 by way of dividends. However, high dividend yielding stocks does not mean your share price will always rise. A positive cash flow is always good for stocks. Look for companies that have a positive cashflow. Make sure the cash flow is from normal business operations. Look to see if the cash flow has been boosted by other methods. Price to book value is another popular method to analyze a stock in India. However, you need to be very careful here. For example, public sector banks are trading at price to book values of 0.5 times. However, due to losses the book value may get eroded over a period of time. So, you need to be careful. A bank like HDFC Bank commands a hefty premium. This is because the company reports a quarter on quarter growth of as much as 20 to 25 per cent. This is when the p/e multiples are much higher, because of the solid growth. If you find quarterly net profits are growing at above industry standards, you can pay a premium for such a stock. Always start with an industry or a company thats familiar to you as you can easily analyze it and understand how those companies plan to make money. Risk comes from not knowing what youre investing in. An established company thats growing slowly will be more cheaper than a company thats expected to grow exponentially. Compare a companys Price/Earnings to other companies in the same industry to see if its cheaper or more expensive.