How to do Fundamental analysis of Indian stocks?

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Fundamental Analysis


Have you ever been in the dilemma of how to analyze share market or how to study a stock? You can easily study past price trends and volume traded of any particular stock by doing technical analysis and take the decision based on that only. But what about the particular company’s financial performance and the macroeconomic factors that will affect the business. This is what is being told by studying the fundamentals of a stock. 

How to do fundamental analysis of a company?

Fundamental analysis is the method of finding the intrinsic or true value of a stock based on the external factors and financial statement analysis. There are six steps to analyze the fundamentals of a company in the Indian stock market.  

Understanding the business 

The first step is to do the qualitative analysis of the business. You have to check the products, promoters and competitors of the company. You can study the mission, vision and values of the company on their website.  

Checking Financial ratios  

As there is a long list of companies in the stock exchange. You can easily use the financial ratios to select the healthy company from the stock market. If you know how to check fundamentals of a company from their annual reports then you can go through it. But how to analyze stocks for beginners, they can directly use the calculated ratios available on any website related to finance.   

These are some of the rules on how to do fundamental analysis on stocks, but these rules are not exhaustive and can differ based on the industry. 

S. No.RatiosExplanation
1.EPS (Earning per share)Increasing EPS for last 3-5 years are a good sign
2.Price to earning (PE) RatioLowest among the industry peers
3.Return on EquityAverage 3 years is less than 15% is preferred
4.Debt to EquityLess than 0.5 is preferred
5.Current RatioGreater than 1 is preferred

Past financial results 

You can easily check the past financial results of a company by analyzing its all three financial statements like Balance Sheet, Profit & Loss Statement and Cash FLow Statement.  

The thumb rule is that if revenues or sales, net profit and margin are increasing for the last five years, then it is a good stock to consider for long-term investment purposes. You can also check the operating cost, expenses, assets and liabilities, net cash flow, etc.  

Competitors Analysis 

The next step is to make a comparison of a company with its peers in the industry. You can check the USP (Unique Selling Proposition), competitive advantage, product costing, product pricing, brand value and future strategies of competitors in the industry. 

Debt of the company 

The next step in how to do fundamental analysis of stocks is to check the total debt of the company which means how much money a company owes to its creditors. Before paying you a dividend, they have to pay the debt amount and interest to its creditors or its debenture holders.  

Higher the debt amount to be paid, lower will be chances of paying a dividend on equity. The thumb rule is that if debt to equity ratio is less than 1, then that stock should be preferred.  

Future prospects and strategies 

You should always check the future prospects and strategies of a company because the returns you want to get are based on the future possibilities but not on the past events. 

Therefore, for achieving the long-term goal you should invest in those companies whose products are relevant for the next 10 years from now such as FMCG, healthcare, IT and others.  

You can also check with the quantitative future prospects by making the financial models of a particular company and calculating their DCF valuation and compare the future intrinsic value of a share with the current value of a shar

Types of fundamental analysis 

Fundamental analysis is the process of studying qualitative and quantitative factors that will affect the business. This process can be done in two ways : Top - down and bottom-up approach.  

  • In a top - down approach, investors will first check the macroeconomic factors before analyzing a particular stock. For example, if they are looking at Airtel stock, they will first see the telecom industry sector before checking the details of Airtel.  
  • In a bottom - up approach, investors will first analyze the individual stock and then check the factors affecting it. For example, if they are looking at Airtel stock, they will first see the Airtel stock and then study about the current state of telecom industry.


The two types of fundamental analysis of a company are qualitative analysis and quantitative analysis.  

  1. Qualitative analysis includes studying the industry structure, management analysis, corporate governance, earnings quality and asset-liability analysis. It is the study of qualitative factors of a company and it is also called a hygiene check of a company. 

It is a subjective opinion and can differ from industry to industry. It totally depends on the investor’s choice given on how to analysis stock market in addition to studying the company’s fundamentals.  

S. No.FactorsExplanation
1.Nature of Business
  • Industry profitability
  • Expected industry growth rate
  • Entry barriers for other companies
  • Bargaining power of customers, suppliers and company
2.Corporate Governance
  • Size of board of directors
  • No. of independent directors
  • Relation of independent directors with the management
  • Number of times company’s account are audited in a fair manner
3.Nature of Assets and Liabilities
  • Type of assets invested
  • Investment in the replacement and maintenance of old assets
  • Investment in new assets
  • Financing of assets
  • Debt amount and its uses
4.Quality of Earnings
  • Key source of company’s earnings
  • Amount of cash and cash receivables
  • Expenses and its occurence
  • Amount of non- cash income and expenses
  • Quantitative analysis includes ratio analysis and projected earnings analysis. This is a subjective analysis which includes a numerical basis. All the three financial statements, namely balance sheet, profit and loss statement and cash flow statement will be analyzed. 
  • Balance Sheet is a statement of a company's assets and liabilities at a particular point of time. It will indicate what a company owns and what it owes.
  • Profit and Loss statement or Income statement will indicate about a company's revenues, expenses, sales, profit or loss made during a certain period. It will tell about different sources of the company's income, expenses incurred and its earning capacity to meet its obligations. 
  • Cash Flow Statement will indicate about the inflows and outflows of cash during a year. It will indicate whether its net cash flow is positive or negative. 
S. No.FactorsExplanation
1.Ratio Analysis
  • Activity Ratios
  • Liquidity Ratios
  • Solvency Ratios
  • Profitability Ratios
2.Projected Earnings
  • Use of dividends to estimate share value
  • Estimate company earnings like revenue, income, sales, expenses etc.

Importance of fundamental analysis

Company analysis, industry analysis, future profit outlook and economic conditions are being considered to study the fundamentals of stock market and any company’s stock.  

  • Suppose you want to buy a TCS share and the current market price is ₹ 3000 per share. By doing the fundamental analysis, it is found out that TCS share’s true value is ₹ 4,000 per share. Buying that stock will be advantageous to the investor because it is available at the price less than its intrinsic value.  
  • If the current market price is lower than its intrinsic value, then it is an undervalued stock and indicates buying opportunity.  
  • If the current market price is higher than its intrinsic value, then it is an overvalued stock and indicates selling opportunity. 


The answer to the question of how to analyse share market or how to do fundamental analysis of stock is very subjective and based on the investor’s particular choice. But without any doubt, fundamental analysis is very important for long-term investors and provides help in calculating real or intrinsic value of a stock.

This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.

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