Important note to readers: Writer specifically taken care of all the below mentioned parameters to shortlist a stock for further analysis and identify the intrinsic value to take buying decisions. For me every parameters and related values should be par or higher to consider the stock to shortlist. I mean 100% suitability required to my personal investment framework.
1. Start with the Company Profile
The first thing I do when evaluating a stock quickly is to get a brief overview of the company profile. This gives me a sense of the company’s core business, industry, and market positioning. Is it a market leader? Does it operate in a growing sector? A company's position in the market is crucial to understanding its future potential.
Look for answers to these questions:
- What does the company do, and how does it make money?
- Is it part of a rapidly growing industry?
- Is the company’s business model sustainable over the long term?
This initial research should take no more than a minute. You can use established financial web sites such as stock exchange websites etc, or the company's own website (I prefer this as company website is my first place to know more about a company) provide a quick company summary that highlights its core business, recent developments, and market position etc.
2. Focus on Sales and Expenses
In the next step, I assess the company’s sales and expenses. A company with high sales and low expenses is more likely to deliver consistent profits. Start by looking at revenue growth. If sales are growing steadily year-over-year, that’s a good sign the company is increasing its market share or improving operational efficiency.
Next, look at the operating expenses. Companies with tighter control over expenses tend to have more room to reinvest in growth. A red flag is if expenses are growing faster than sales, which could indicate management inefficiency or rising costs that the company can’t control.
3. Operating Profit Growth > 20% Year-on-Year (YoY)
One of the key metrics I consider is Operating Profit Growth. If a company’s operating profit has grown by at least 20% year-over-year, it's a sign of strong performance. Operating profit measures the company’s ability to convert its revenue into profit from core operations, excluding interest and taxes.
A consistent operating profit growth of over 20% shows that the company is increasing its earnings power. This often correlates with efficient management, a growing market, or a competitive advantage. If the company cannot maintain this threshold, it may indicate issues in the business model or rising costs.
4. Net Profit Growth > 15% Year-on-Year (YoY)
Net profit growth is another essential criterion. If the company’s net profit has grown by at least 15% year-over-year, it's a strong indication of overall profitability. Net profit reflects the company’s ability to generate earnings after accounting for all expenses, including taxes and interest.
I prioritize companies that show consistent net profit growth of 15% or more, as this signals the company’s ability to manage costs while increasing revenue. Steady profit growth also supports higher dividends and reinvestment in the business, both of which can lead to higher stock prices over time.
5. Return on Capital Employed (ROCE) > 18% Year-on-Year (YoY)
Return on Capital Employed (ROCE) is a measure of how efficiently a company generates profit from its capital. I look for companies with an ROCE greater than 18% year-over-year, as it indicates that the company is making good use of its financial resources to generate returns.
A high ROCE means that for every dollar invested, the company is returning a high proportion of that in profits. This is especially important when comparing companies in the same industry, as it shows which company is utilizing its resources better.
6. Return on Equity (ROE) > 15% Year-on-Year (YoY)
Return on Equity (ROE) measures how effectively the company is using shareholders' funds to generate profits. A consistent ROE above 15% year-over-year indicates that the company is delivering good returns to its shareholders.
ROE is particularly useful for comparing companies within the same industry. If a company has a significantly higher ROE than its peers, it could be a sign of superior management or a competitive edge.
7. EPS Growth > 15% Year-on-Year (YoY)
Earnings Per Share (EPS) is one of the most important indicators of a company’s profitability. A company with an EPS growth of over 15% year-over-year is typically a solid performer. EPS growth is a key metric because it shows the company’s ability to increase profits on a per-share basis, which is what drives stock prices higher.
When analyzing EPS, look for consistency. Sudden spikes in EPS may indicate one-time events like asset sales or accounting adjustments, but steady growth over time reflects sustainable business operations.
8. Free Cash Flow (FCF) Continuous Growth
Free Cash Flow (FCF) is the cash available to the company after covering its capital expenditures. Companies with continuous FCF growth are able to reinvest in their business, pay dividends, and reduce debt. It’s a sign of financial health and operational efficiency.
When analyzing a stock, I prioritize companies with consistent FCF growth because this shows the company is generating cash efficiently. High FCF is often an indicator of potential future growth and stability, even in tough economic times.
9. Promoter Holding > 60%
Promoter holding refers to the percentage of shares owned by the founders or key stakeholders. A high promoter holding, particularly above 60%, signals strong confidence in the company’s future performance. When promoters hold a significant stake, they are less likely to engage in actions that would harm shareholders because they are heavily invested themselves.
I favor companies where the promoters maintain high ownership, as it aligns their interests with those of the shareholders, leading to better governance and long-term performance.
10. Price-to-Book Ratio (P/B) < 1
The Price-to-Book (P/B) ratio compares a company’s market value to its book value. A P/B ratio below 1 typically means the stock is undervalued, as the market is pricing the company lower than the value of its assets. This could indicate a potential buying opportunity, especially if the company is financially sound.
However, I also make sure the low P/B ratio is not due to poor business performance. If the company has strong financials and a P/B ratio under 1, it could be an undervalued gem.
11. Debt-to-Equity (D/E) Ratio < 0.5
A Debt-to-Equity (D/E) ratio below 0.5 indicates that the company is not overly reliant on debt to finance its operations. This is an important metric because companies with low debt are generally more stable, especially during economic downturns. High debt levels can erode profits and increase risk, particularly if interest rates rise.
When analyzing a stock, I prefer companies with a D/E ratio below 0.5, as they are less likely to face financial distress in difficult times.
12. Face Value > 5
The face value of a stock is its nominal or original value. While the face value itself doesn't provide much insight into the company’s current market position, I use it as a quick check to ensure the stock isn't over-manipulated. I prefer stocks with a face value greater than 5, as it often correlates with stability in established companies.
13. PE < Industry PE
The Price-to-Earnings (PE) ratio is a common valuation metric. A PE ratio lower than the industry average indicates that the stock may be undervalued compared to its peers. When the stock’s PE is below the industry average, but other financial metrics like growth and profitability are strong, it may represent a good buying opportunity.
However, I also ensure that a low PE isn’t a reflection of market skepticism about the company’s future prospects.
14. Book Value ≤ Current Price
The book value per share reflects the value of a company’s assets divided by its outstanding shares. If the book value is equal to or greater than the current price, it suggests that the stock may be undervalued. This situation can arise when the market has overly punished the stock, providing a potential buying opportunity.
However, it’s essential to verify that the company’s fundamentals are sound before making any decisions.
Conclusion: Mastering Quick Stock Analysis
By focusing on these key metrics—company profile, sales vs expenses, operating profit, net profit, ROCE, ROE, EPS, FCF, promoter holding, P/B ratio, D/E ratio, face value, PE ratio, and book value—you can efficiently analyze a stock in less than 5 minutes. This practical, fast yet effective approach allows you to screen out poor investments while identifying potential winners, ensuring that your portfolio remains strong and future-focused.
