Let’s take an example of Deep Industries and find out whether the stock is undervalued or not.
Here are screenshots that I have taken from NDTV profit here Deep Industries Share Price / Stock Price: Live NSE/BSE Share Price Today - NDTV Profit
In the below picture current market price is mentioned in NSE and BSE
Rule No 1) P/E Ratio should be as low as possible.
Sure, if the company’s earnings is high then this ratio would be low.
For Deep Ind it is 8.57 , which is good.
Rule No 2) Book Value should be more than or equal to Current market price.
For deep Ind Book value is 118.21 , which is considerable.
Rule No 3) Price to book ratio should be as low as possible. less than one is preferred.
1.85 is considerable.
Rule No 4) PAT Margin should be as high as possible.
For deep Ind it is 26.68 means if Deep has sold 100 Rs worth of goods and services than 26.68 will be its real profit after deducting the expanses.
26.68% PAT margin is good.
Rule No 5) ROCE should be high and growing per year.
Capital Employed : Total Asset - Current liability
The higher the ROCE the better the company is because it is using the capital more efficiently.
Rule No 5) Promoter’s stake should be as high as possible.
As a rule of thumb, higher promoter’s stake is perceived as positive and a lower equity stake could mean low confidence of promoters in their own company. Rise in promoter stake is considered positive because promoters will commit additional fund only when they are optimistic about future growth of their company.
Rule No 6) Liquidity And Solvency Ratios
Source: http://www.deepindustries.com/ > Annual Report
- Current ratio should be more than 1.
- Quick ratios should be more than 1.
- Debt/Equity Ratio should be less than 1.
What is Quick Ratio: The quick ratio is a measure of how well a company can meet its short-term financial liabilities. Also known as the acid-test ratio, it can be calculated as follows: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.
What is Debt Equity Ratio: The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage.
Rule No 7) Operating cash flow should be positive.
For Deep Industries: It is stable, positive and increasing.
What is Operating cash: The cash which has been generated from company’s core operations is called ‘cash flow from operating activities’.
For Ex- Suppose you own a ice cream shop and you generated 100 Rs. in march quarter. In which 10 Rs has been generated by making profits in stock investment, 20 Rs. received as interest and 70 Rs received from selling ice cream so. 70 Rs. is your operating cash flow.
Rule No 8) Company profit should be consistent and increasing.
This is nothing but PAT or net profit or bottom line of the company per quarter.
Rule No 9) Stock should be BULLISH on charts.
This is not something related to company’s fundamentals but when you buy a stock you should buy it at the right time. The art of ‘what to buy’ along with ‘when to buy’ gives the investors real profits.
Deep is a value stock and hence can be bought for long term.
Fortunately, this is not the end.
The company has lots of things to observe, See the financials, concentrate on ratios and margins, compare with peers, study about promoters, keep an eye on liquidity, make sure you know the debt, know future plans, forecast the scope, speak up with indicators and press BUY button. That's how your wisdom will save you from a massive destruction.
Thrash the market before it thrashes you. All the best!
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