Specific Investor Scenario

You’ve found a stock that is trending upwards. But before you invest your life savings, you want to know: “Is this company actually making money? Do they have too much debt? Are they overvalued compared to their competitors?” How do you look “under the hood” of a business like Reliance or HDFC Bank?

Quick Answer

You use Fundamental Analysis. This involves looking at a company’s Financial Statements and calculating Key Ratios to see if the stock price is justified by the company’s performance.

Official Fact: According to the Ministry of Corporate Affairs (MCA), all Indian companies are required to file their audited financial statements annually. These are public records that you can use to verify the “health” of any listed company.

The Three Main Financial Statements

  1. Balance Sheet: A “snapshot” of what the company owns (Assets) vs. what it owes (Liabilities) at a specific point in time.
    • Key Rule: Assets = Liabilities + Shareholders’ Equity.
  2. Profit & Loss (P&L) Statement: Shows the Revenue and Expenses over a period (e.g., one year). It ends with the “Bottom Line” (Net Profit).
  3. Cash Flow Statement: Tracks the actual movement of Cash in and out of the business.
    • Pro Tip: A company can show “Profit” on paper but still run out of “Cash” for daily operations.

Key Financial Ratios Every Investor Must Know

1. P/E Ratio (Price-to-Earnings)

  • What it is: The Current Price divided by the Earnings Per Share (EPS).
  • The Meaning: It shows how much the market is willing to pay for every ₹1 of profit. A high P/E might mean a stock is “Expensive” or that investors expect high long-term growth.

2. Debt-to-Equity Ratio

  • What it is: Total Liabilities divided by Shareholders’ Equity.
  • The Meaning: Shows how much the company relies on borrowed money. A ratio above 1.0 signifies that the company has more debt than its own capital, which can be risky in high-interest environments.

3. ROE (Return on Equity)

  • What it is: Net Income divided by Shareholders’ Equity.
  • The Meaning: Measures how efficiently the management is using the shareholders’ money to generate profit. Traditionally, an ROE above 15-20% is considered excellent in India.

4. P/B Ratio (Price-to-Book)

  • What it is: The Current Price divided by the Book Value per share.
  • The Meaning: Especially useful for banks and MSEI-style exchanges, it shows if the stock is trading near its “Liquidation Value.”

Practical Implication for Investors

  • Compare Apples to Apples: Only compare ratios within the same industry. An IT company’s P/E will naturally be higher than a Steel company’s.
  • Check the Promoter Holding: If the owners (Promoters) are selling their shares, it might be a warning sign, regardless of how good the ratios look.
  • Look for Consistency: Don’t just look at one year. Look for companies that have grown their Revenue and Profit consistently for 5+ years.

Action Items for Investors

  1. Download the Annual Report: Go to a company’s website (e.g., Reliance Investor Relations) and download their latest Annual Report.
  2. Calculate One Ratio: Pick a stock you own. Find the Net Profit and Total Equity in the Balance Sheet, and calculate the ROE yourself.
  3. Verify with Official Portals: Use the BSE/NSE company search to find official “Financial Results” announcements.

Corporate Filings and Financial data at BSE: bseindia.com/corporates

Verify current status at nseindia.com, bseindia.com, or msei.in before trading.