Fundamental Analysis

I know you are eager to learn fundamental analysis. But before diving into the proper fundamental analysis, we must have to understand some basic terminology. These terminologies are very important to do fundamental analysis, Such as Market Cap, Enterprise Value, Debt, PE Ratio, Consolidated and Standalone, PB Ratio, etc… Let’s understand these ratios one by one.

Market Cap

Market capitalization or Market Cap is an aggregating value of the particular company. In other words, Market Cap is a total value of No. of shares multiplied by No. of total shares. Here we take a real-life example of Reliance Industries Limited. RIL’s market price was settled down on 2,424.40₹ as of 18, Feb 2022. Also, the company has almost 676.60 crore shares. If we multiply the total no of shares to the current market price then we get the Market Cap. Here RIL’s Market Cap was calculated as 16,40,347.59 crores. We can say that if we want to buy a 100% stack in a particular company then we have to pay the Market Cap value amount to the shareholders.

Enterprise Value

Enterprise value is slightly different than Market Cap. In Enterprise value, we also include net cash which is currently held by the company and debt along with Market Cap. In the above example, Reliance Industries Market Cap was calculated as 16,40,347.59 crores. To calculate the Enterprise value of RIL than we have to consider Debt and Net Cash present with the company. As of 18, Feb 2022 RIL has 5,573 crores in Cash and 2,21,698 crores as debt. We have to add the total debt to Market Value and subtract the Cash. In our example, if we add the cash in Market Value and subtract the Cash then we got the RIL’s Enterprise Value at 18,56,472.59 crores.

Standalone Vs Consolidated

If you see any company annual report or quarterly reports you definitely find out these two terms which is Consolidated and Standalone. Some companies only focus on their core business but, most of the companies either invest in some other business or acquire other companies. Let’s understand it with the example of Tata Motors. Tata motors have its own business of passenger and commercial vehicle manufacturing and selling. If you compare the sales figures of tata motors as consolidated then it stands on 2,49,794.75 crores as of FY21 with Standalone than it stands on 47,031.47 crores. There is a huge gap in these two figures but the question is Why?

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Because Tata Motors Standalone figures do not include its subsidiaries sales figures. Here Tata Motors has a well-known subsidiary named Jaguar Land Rover. If we analyse the consolidated sales figures then it also includes the sales of subsidiaries such as Jaguar Land Rover. So, if we analyse any company based on its fundamentals then we have considered both standalone figures as well as the consolidated figures.     

PB Ratio

PB Ratio is very easy to understand. In PB Ratio ‘P’ stands for Price which is the current market price of the company. And the ‘B’ stands for the Book Value. Let’s understand this with an example of RIL. Every company has some assets and some cash reserved in banks. RIL also have some kind of assets and some cash which are reserved in the Bank. Suppose if one-day RIL decides to sell everything then as a shareholder what do you get? You get some amount of money. Which is the total value of their assets plush their cash divided by the total no of shares. Which is known as PB value. It will never happen but for the understanding purpose, we can say that if a company sale each and everything then as a shareholder you get some amount which is known as the PB ratio.

Conclusion:

Here we understand some of the basic Ratio which is extremely important to analyse a company. Here we can learn about Market Cap, Enterprise Value, Consolidated and Standalone terms and PB Ratio. Apart from these many more ratios are there. Which is equally important such as PE Ratio, CASA Ratio, NPA, etc… You can learn it here.

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