Understanding balance sheets, performance metrics, and P&L statements are some non-negotiable prerequisites for serious stock analysis. You don’t need to hunt through dozens of websites to find this data. Tools like Screener are more than sufficient for a deep dive. The goal is to connect them to tell a story about a company’s past, present, and future.
Here is a breakdown of how to evaluate a company’s performance, financial health, and growth trajectory.
Quarterly Results
The quarterly report is your primary data for identifying short-term trends and immediate momentum.
- Sales & Operating Profit: Look for a consistent “staircase” pattern (increasing QoQ or YoY). If sales are rising but the Operating Profit Margin (OPM %) is shrinking, the company may be struggling with rising input costs (e.g., raw materials) and likely lacks “pricing power.”
- Other Income: This is a frequently overlooked red flag. Watch for sudden spikes here. If a blockbuster quarter is driven by “Other Income” rather than core operations, the growth is likely a one-time event (e.g. an asset sale) and unsustainable.
- The Trajectory Signal: Compare current growth rates to the same period last year. If YoY growth is accelerating (e.g. jumping from 10% to 15%), the stock is on an upward trajectory.
Profit & Loss (P&L)
The P&L statement reveals the company’s DNA. If you are looking for consistent compounders, this is where you find them.
- Compounded Growth: Screener provides this in 3, 5, and 10-year buckets. You want to see double-digit growth in both sales and profit across all timeframes.
- The “Growth Gap” Warning: High sales growth paired with stagnant profit growth is a major warning sign. It suggests the company is “buying” revenue at the expense of the bottom line.
- Tax %: In the Indian Corporate Tax context, this should hover around 25%. If it remains significantly lower for years, investigate whether the company relies on tax holidays or benefits that are nearing expiration.
Balance Sheet
While the P&L measures performance, the Balance Sheet measures resilience.
- Borrowings (Debt) vs. Reserves: Ideally, Reserves should comfortably dwarf Borrowings. A declining Debt-to-Equity ratio over a five-year period is a hallmark of improving financial health.
- Fixed Assets vs. CWIP: High “Capital Work in Progress” (CWIP) relative to Fixed Assets indicates the company is aggressively expanding capacity. This is a leading indicator of future revenue once those investments go live.
- Equity Capital: This should remain constant. If it is increasing, the company is likely diluting existing shareholders (by issuing new shares) to stay afloat because it cannot self-fund its operations.
Peer Comparison
Context is everything. You must determine if a stock is the “leader” or the “laggard” of its sector.
- Valuation (P/E Ratio): Compare the stock’s P/E to the Industry average.
- Value Play: Low P/E relative to peers but higher profit growth.
- Growth Play: High P/E supported by significantly higher ROCE and sales growth.
- Efficiency (ROCE %): Return on Capital Employed is the ultimate “efficiency” metric. If a company boasts a 20% ROCE while peers languish at 10%, it possesses a clear competitive advantage (a.k.a. “Moat”).
Other Key Ratios
- Debtor Days: If this is increasing (e.g. from 60 to 90 days), it means the company is struggling to collect cash from its customers, a major red flag for health.
- Promoter Holding: Look at the “Shareholding Pattern” at the bottom. High promoter holding (>50%) or increasing holding shows management’s confidence. Watch for “Pledged %”; if high, it’s a major risk.
Sector-Specific Deep Dives
Once you master general ratios, you must pivot to sector-specific metrics. Efficiency looks different depending on the industry. Here is how to focus your analysis across some key sectors:
1. Banking & NBFC
Banks and NBFCs do not build and sell products, they “rent” money; therefore, standard revenue and inventory metrics are irrelevant.
- NIM (Net Interest Margin): The spread between interest earned and interest paid. A healthy NIM typically sits between 3-4%.
- CASA Ratio: The proportion of cheap deposits (Current/Savings). This is “cheap” money for the bank. A high CASA (>40%) means lower cost of funds and better margins.
- Asset Quality (GNPA/NNPA): Gross and Net Non-Performing Assets. This tells you what % of loans are “bad.” Declining NPAs over quarters indicate a cleaning balance sheet.
2. IT Sector
In IT, human intelligence is the primary asset and the largest cost.
- Attrition Rate: The % of employees leaving the company. High turnover forces expensive rehiring, which eats into margins.
- Utilization Rate: What % of the workforce is actually billed to a client project? Ideally >80%. If it’s too low, employees are “on the bench,” costing money without generating revenue.
- Order Book (TCV): The total value of signed contracts yet to be executed. Total Contract Value is the direct lead indicator for next year’s revenue.
3. FMCG
Fast-Moving Consumer Goods ((like eatables, toiletries) relies on high volume and brand loyalty.
- Inventory Turnover: How many times the company sells and replaces its stock in a year. Higher turnover means the product isn’t sitting on shelves.
- Volume vs. Value: Is the company making more money because they sold more packets(Volume) or because they raised prices (Value)? True health comes from selling more units (Volume), not just raising prices (Value).
- Ad-to-Sales Ratio: % of revenue spent on marketing. If marketing spend rises but sales stay flat, the brand’s moat is eroding.
4. Hospitality: Travel & Hotels
Hotels face massive fixed costs; they need “heads in beds” (i.e. occupancy) to survive.
- Occupancy Rate: Percentage of available rooms sold. The break-even point is usually 65–70%. Above this, profits explode.
- ARR / ADR (Average Daily Rate): The average price a guest pays per room. Rising ADR during non-peak seasons indicates strong brand power.
- RevPAR (Revenue Per Available Room): The gold standard for comparing how effectively a hotel “sweats” its assets.
5. Automobile
Auto companies are highly sensitive to the economic cycle and commodity prices (steel, rubber)
- Operating Profit Margin (OPM): Highly sensitive to commodity prices. If steel or rubber prices rise and OPM falls, the company lacks the power to pass costs to the customer.
- Capacity Utilization: Auto plants are capital-intensive. Running at less than 60-70% is a drain.
- Inventory Days: How many days of unsold cars are sitting in dealerships? An increase in unsold cars at dealerships often signals an impending economic slowdown or heavy discounting.
Analyzing fundamental data isn’t rocket science, but it does require discipline. Use these metrics alongside technical indicators to make more judicious entry and exit calls.
The next time you’re tempted to place a bet based on a headline or a “hot tip”, remember to zoom out. A quick look into these fundamentals can be the difference between a winning trade and a painful loss of capital.
