What are the best ways to find undervalued stocks?



This answer would probably end up making you a ‘Value Investor’ in real life.
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.
What is P/E ratio: It is calculated by dividing the current market price of the stock by its earning per share (EPS). It shows the sum of money you are ready to pay for each rupee worth of the earnings of the company. PE = Market price / EPS
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.
what is book value: Book value is the total amount of company’s physical assets ( excluding patents, goodwill) minus liabilities. So in absolute terms, book value is the net assets of the company.
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.
What is P/B ratio: The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
1.85 is considerable.

Rule No 4) PAT Margin should be as high as possible.
What is PAT Margin: PAT ( Profit after Tax) is the bottom line profit of the company or net profit for the company after deducting COGS,SG&A, TAX, Interest, Amortization, Depreciation and other expanses from its Revenue. A company's after-tax profit margin is important because it tells investors the percentage of money a company actually earns per rupee of revenue.
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.
What is ROCE: Return on capital employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. ROCE is calculated as:
where EBIT = Company’s revenue - COGS and other other operating exp
Capital Employed : Total Asset - Current liability
The higher the ROCE the better the company is because it is using the capital more efficiently.
Deep has better ROCE than its peers Aban, Jindal, dolphin etc ( which -31% on ).

Rule No 5) Promoter’s stake should be as high as possible.
Who is promoter? : A promoter is the owner of the company Promoter is one who undertakes to form a company with reference to a given object and to set it going, and who takes the necessary steps to accomplish that purpose.
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
  1. Current ratio should be more than 1.
  2. Quick ratios should be more than 1.
  3. Debt/Equity Ratio should be less than 1.
Source: http://www.deepindustries.com/ > Annual Report
What is current Ratio: The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
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.
Source: Stock Screener for Indian Stocks: Screener.in
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.
Source : Deep Ind Annual report > http://www.deepindustries.com/
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.
What is Technical Analysis: Technical analysis is the study of chart patterns and statistical figures to understand market trends and pick stocks accordingly. However, the fundamentals of technical analysis are fairly easy if explained right. Once you know that, you can easily understand how to do technical analysis of stocks.
One day the share price is up, another day it may be down. But over time, if you look at the stock price’s movement, you may see trends and patterns emerge. The study of these chart patterns and trends in stock prices is called technical analysis of stocks. When you learn technical analysis of stocks, you will understand the big role that technical indicators play.
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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