Analyze company based on 25 Fundamental Parameters

How to analyze the company?
1. Add data for each fundamental parameter.Most of the financial data is already prepopulated
2. Add rating to each fundamental parameter, refer to help icon while deciding the rating.
3. Analyze graphs and analyze fundamental analysis cloud to identify weak/strong points about the company
4. Give your overall fundamental rating and valuation rating to the company.
5. Submit your analsis sheet
6. You can go to my account section to view/modify your anlayis sheets.

How to analyze the company?

Some Sample Analyzed Companies
Company Name - titan industries Company Number - 6494 BSE Script ID - 500114
Standalone Data is considered for analysis ,please modify data to consider consolidated data
S.No Parameter Name Data Rating Remarks
GP Margin
Gross Profit(GP) Margin = GP/Sales For colgate india FY11 = GP/Sales = 1109/2381 = 45%
GP Margin varies from industry to infustry.Companies in Service industry may have high GP Margin like
infosys has GP margin of 45 , TCS has around 40.
Automobiles companies like Maruti has GP margin of 16-17%.
For Titan it is 20% , as cost of raw material (gold) is very high in this case.
Companies with GP Margin of 40% or better tend to be companies with some sort of durable competitve advantage. GP margin below 20% is a indicator of very competitive industry, where no one company can create a sustainable competitive advantage over others.
Great companies generally show consistent GP margin years over years.You should avoid companies which shows lot of variations on GP margins unless you understand the company business very well and if you have got an edge in the industry.
1 Gross Profit Margin
OP Margin
Operating profit or operating income is a measure of a firm's profit that excludes interest and income tax expenses.It represent the money which firm makes from operations.
Operating Profit (OP) = Revenue Operating expenses.
Operating expenses = SGA + Depreciation + R&D Cost.
For e.g Suppose Company A has sale of 100 Cr, Cost of Goods - 60Cr , SGA - 10Cr, Depreciation - 5Cr , R&D expense - 5Cr
Then OP Profit = Sale - Cost of Goods - SGA - Depreciation - R&D expense
= (100 - 60 - 10 - 5 - 5 )/100 = 20Cr
OP Margin = OP / sales *100 = (20/100)*100 = 20%
In a given industry , Company With greater OP Margin is supposed to be better as the company is generating greater amount of income from Operations.
For e.g in IT industry Infosys has OP margin of 32-37% , TCS 27-34% , HCL 20% , Mindtree 13%.
In 2 wheeler industry , Hero MotroCorp has OP Margin 11-16 in lasy 3 years whereas Bajaj Auto shows 19-24 in last 3 years.
Great companies show steady Operating Profit Margins years after years and their OP Margin are generally best in the industry
2 Operating Profit Margin
NP Margin
Net Profit or Net Income is a measure of the profitability of a venture after accounting for all costs.
Net Profit = Sales - Cost of Goods - SGA - Depreciation - Interest - Tax.
NP Margin = Net Profit/Sales * 100
For e.g is a Company is doing sales of 100Cr and Net profit is 22Cr then it NP Margin is 22%.
Infosys NP Margin is 27% , Colgate 15%, Maruti Suzuki 5-7% , Eclerx Services 34% in Fy11.
If a Company is Showing NP Margin greater than 15% consistently for last 5 years then it is very much likely that this company has some competitive advantage.
If NP Margin is less than 10% then company is either in very competitive industry or it is in industry which requires lot of cost on raw material , property, plant and machinary or it may be spending lot of money on R&D.
For e.g Titan has NP Margin of 6%.It is because that main source of Income for Titan is its jewellery business in which the cost of raw material , which is gold or diamond, is very high.So Despite being a Great Company , it has NP Margin of 6%.
NP Margin can very from industry to industry, for e.g Pharma and IT companies has high NP Margin but Automobiles and Heavy Machine industry has low NP Margin. The key is to look for the company with one of the best NP margin in the industry and moreover consistency in NP Margins for 5-10 years.
3 Net Profit Margin
SGA means Selling , General and Admin Expenses
Under which company reports its cost for direct and indirect selling expenses and all general and administrative expenses.These includes management salaries , advertising travel costs . legal fees, commissions, all payroll cost.
SGA% = SGA cost /Gross Profit
Infosys SGA% cost is 16%, Titan 37%, Colgate 42%.Maruti Suzuki 14-23%.
Great companies do not show much variance in SGA cost , you can refer last 5 year data for these companies.
Ideally SGA cost should be less than 30% of Gross profit.
4 Selling , General and Admin expenses
All machinery and builings eventually wear out over time.This wearing out is recognized on the income statement as depreciation. For e.g a manufacutring company buys building, plant and machinery for 100Cr, assume that life expectancy is 10 years for property , plant and machines. Now (100/10) 10 Cr will be deducted as deprecation amount from income statement.After 10 years company has to buy new building plant and machinery with additional cost.Deprecaition cost vary from industry and tends to be high for manufacturing industry and low for service industry.
Depreciation % = Depreciation/Gross profit.
Cipla has Dep% of 8 , Titan 2-4%, Infosys 5-8%, Maruti Suzuki 14-20%.
Great companies generally have less depreciation and is less than 7-8%.
5 Depreciation %
Interest expense is due the the interest that company has to pay on the debt present on balance sheet.Company may need debt for working capital or may need additional money for increasing capacity.For this debt , company has to pay interest.This interest expense is deducted from Profit of the company. Interest expense can depend on industry type.Automobilies companies like Tata Motors , Maruti need large plants and machinery and hence debt needs to be taken.
Good companies generally have Interest expense less than 15% of Operating Profit.This is not applicable for Banks and Financial institutions as their business in taking debt at low cost and giving loan at higher interest rate.
Interest % = Interest Cost / Operating Profit
Colgate has interest expense 0-2%, Tata Motors 37% for Fy11 , Titan used to pay 20% of its operating income in debt but now this cost has reduced to 8%. In any given industry the company with the lowest ratio of interest payment to operating income is usually the company with competitive advantage.
6 Interest %
Profit growth
Net Profit or Net Income is a measure of the profitability of a venture after accounting for all costs.
Net Profit = Sales - Cost of Goods - SGA - Depreciation - Interest - Tax.
Good companies show consistent Net Profit which increases year after year.
Titan's Net Profit is increasing at a average rate of 34% for last 5 years.For Infosys it is 14% .For Jubiliant foodworks it increased at rate of 100% between 2007 and 2011.
For considering Investment in any given company , please check last 5 years net profit of the company.
Note that if company buy back its shares than its Net Profit may appear less compared to last years but it is very good condition which reflect that company is doing good and it has enough cash to buy back its shares.
You can check if company has bought it shares back by checking number of shares in Balance sheet for previous years.
7 Net Profit growth rate for past years
EPS growth
Earning per Share is equal to Net Profit divided by number of outstanding shares.
EPS = Net Profit / Number of outstanding shares For e.g Titan has profit of 600 Cr in Fy12 , it has 88.77 Cr outstanding shares ,so EPS
= 600/88.77 = 6.75 Rs
We should look for atleast last 5 years of EPS figure to check if the company has competitive advantage. EPS is impacted by bonus shares , splits , issuance of more numbers of shares.
Bonus and Split do not have negative impact on shareholders but if Company keeps on issuing more and more shares to meet its capital needs then the company may be in the business which is capital intensive , requires lot of money for meeting working capital needs and for plants and equipments.The Company is generating less cash than what is needed.We should be very cautious in investing these companies.
8 EPS growth rate for past years
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends. Many corporations retain a portion of their earnings and pay the remainder as a dividend.
We shoud check the dividend history to see if company has been regularly paying dividends to its shareholders. Many companies prefer not to give dividends rather they spend the excess money on future expansions which should be fine till the time the company is able to generate good return on incremental capital invested in the business.
But when we are investing in company for its dividends then we should also check dividend yield.
If face value of Company's share is 10 Rs and stock market price is 800 Rs.
So if a company is paying 100% dividend which is 10 Rs then the yield on dividend will be 10/800 = 1.25% as this is the value which we are getting on our investment of 800 Rs per share.
9 Dividend History
Inventory is the company's product that it has warehoused to sell to its vendors.Since a balance sheet is always for a specific day,
the amount found on the balance sheet for inventory is the value of the company's inventory on that date.
Cost of inventory mentioned on balance sheet may not be correct as the product might have become obsolete/outdated.
For e.g if the Garment company shows inventory of 400Cr then we may not be rely on this number as some of the Garments may have become obsolete and have no significance value but on balance sheet it is shown of full value.On the other hand if we take company in Jewellery business than inventory should be of reasonable value as more than 90% cost of the product is either gold or diamond.
Second important point about inventory that if inventory is increasing year by year then its sales and net profit should have the same or better growth rate than that of inventory.
If inventory is increasing at much higher rate than that of earnings and sales then it may be due to insufficient demand for Company's products and company may be finding it difficult to sell it products on desired prices.
10 Inventory
How stable is the business of the company?
Does the company have any sort of competitive advantage?
Quality of Managment team and is the background clean?
11 Business , Advantage and Quality of Management
Current ratio
Current ratio tells about the liquidity of the company and also tells if it can meet the short term debt obligations.
Current Ratio = Current Assets / Current Liabilities
The higher the ratio , the more liquid the company.
A current ratio of over one is considered good and anything below one bad.
If it is below one , it is believed that the company may have a hard time meeting its short term obligations to it creditors.
Infosys current ratio is above 4, Colgate 1.09 , Cipla 2.26, Titan 1.32
Please note that lot of good companies often have their current ratio less than one. Bajaj Auto has current ratio is .88 , Hero Motorcorp .24 .Some may think that these companies might have difficulties paying current liablities.What is really happening that their earning power is so strong that they can easily cover their current liabilities.
There are many companies which have current ratio less than one but still they may be great companies which have tremendous earning power and they are using their earnings for long investments , good acquisitions instead of using their earnings in meeting working capital needs.So current ratio alone cannot tell much about the company we need to look at consistent earning power of the company also.
12 Current ratio
Debt to Equity
Debt to Equity ratio can tell us the relative proportion of shareholders' equity and debt that company is using to finance its assets.
D/E = Debt/Shareholders Equity.
Debt used above is generally the long term debt and does not include current liablities and provisions.
Great companies generally use their earnings to finance its operations and therefore should have less debt in comparison to equity. For non finance institutions D/E should be preferably less than .8.
Banks and finance institutions borrow large sum of money and then loan it back out, making money on the spread between what they paid for the money and what they can loan it our for.D/E equity ratio is of less relevance for financial institutions.
Infosys has D/E of 0 means no debt, Titan 0 , Maruti Suzuki 0.02 , Kingfisher Airlines(KFA) -2.39 , minus as it has negative shareholder equity. KFA is making losses from last 8 years and all these losses are subtracted from shareholders equity. Vadilal Industries 3.29.
We should note one more point here that some comapnies can show less D/E due to buybacks.
There may be a very good company which is having very low debt but still D/E can be high.This can happen when company has tremendous earnings and company is using its earnings to buy back shares.This buyback decreases its retained earning/equity base leading to superficial high D/E. So we shoud check if company has bought back large amount of shares in past if D/E appears unusual.
13 Debt to Equity
Besides knowing debt/equity ratio , it is also important to know how much debt company needs to pay and whether it has capability to repay its debt.
Consider an example in which a manufacturing company has 5000Cr in Debt.This money was used for building new plant and machinary.Now if this company has shown average net earning of 250Cr earnings in last 2-3 years then it should ideally take around 5000/250 = 20 years to pay its debt.Here we have assumed that earnings are not going to rise exceptionally.
Even if we consider than earnings will increase at a rate of 20% even then it will take 9 years to just pay of its debt assuming that entire earnings is used to just pay the debt.
As a general rule if debt/earnings ratio is greater than 6 then we are dealing with business that require lot of money for operations and moreover the business is not generating enough money
14 Debt/Earnings
Cash Flow
A company can have a lot of sales and Net Profit on income statements but still may be deprived of cash so it becomes important to check cash flow of the income along with income statements.
Cash flow from Operations and Free Cash flow are 2 important parameters which are calculated as
Cash flow from Operations = Net income + depreciation+ amortization+ other non-cash charges(income) - increase in working capital
Net working capital = Net current assets - current liabilities
A company may be showing lot of profit on income statements but it may be having problem in getting money from the sales of goods in this case net recievables will increase drastically so cash from operations can tell us the true picture. We should check how Cash flow from operations is doing against net profit.
Cash from Operations should ideally be greater than net profit so check the track record of net profit vs operating cash flow for past years.
Free Cash Flow = Operating cash flow - capital expenditure
Capital expenditure are outlays of cash in assets that are more permanent in nature - held longer than a year-such as property, plant and equipment.They can also include intangibles like patents , rights.Capital expenditures are recorded on the cash flow statement under investment operations. Great companies use a smaller portion of its net earnings for capital expenditures for continuing operations. If a company is historically using 50% or less of its annual earnings for capital expenditures then it is likely that company has some sort of advantage in its favour.If it is consistently using less than 25% of its net earnings for capital expenditures than even better.
15 Is the Company generating free cash flow? Capital Expenditure?