Fundamental Analysis
Tradevesting Methodology — IV
Fundamental analysis involves evaluating a company’s financial health and performance by analyzing various financial statements. The goal is to determine the intrinsic value of a company’s stock and assess whether it is overvalued or undervalued.
Let’s choose Reliance Industries Limited (RIL), a prominent company in the NIFTY 50 index, to illustrate fundamental analysis.
1. Financial Statements Analysis
Income Statement: This statement shows the company’s revenue, expenses, and profit over a period of time. For RIL, key metrics to look at include revenue growth, operating income, and net profit margins.
For FY 2023, RIL reported a revenue of ₹7,92,756 crore, a significant increase from ₹6,59,205 crore in FY 2022. Net profit for FY 2023 stood at ₹67,845 crore, compared to ₹60,705 crore in FY 2022, indicating strong revenue growth and profitability.
Balance Sheet: This provides a snapshot of the company’s assets, liabilities, and shareholders’ equity at a specific point in time. Key aspects include total assets, total liabilities, and equity.
As of March 2023, RIL’s total assets were ₹15,35,102 crore, with total liabilities of ₹7,86,287 crore. The company has a strong equity base of ₹7,48,815 crore, indicating a solid financial position.
Cash Flow Statement: This statement shows how the company generates and uses cash from operating, investing, and financing activities.
In FY 2023, RIL generated a net cash flow from operating activities of ₹1,19,326 crore, demonstrating strong cash generation capability. Investing activities, including capital expenditures, resulted in an outflow of ₹1,03,145 crore.
2. Key Ratios
Return on Capital Employed (ROCE): This ratio measures the company’s profitability and the efficiency with which its capital is employed.
RIL’s ROCE for FY 2023 is approximately 9.5%. It indicates how well the company is generating profits from its capital.
Return on Equity (ROE): This ratio measures the company’s profitability relative to shareholders’ equity. It’s more relevant for financial businesses.
RIL’s ROE for FY 2023 is around 12%. This shows how effectively the company is using shareholders’ equity to generate profits.
Debtor Days: This ratio shows the average number of days it takes for a company to collect payments from its customers.
RIL’s debtor days is approximately 30 days, indicating efficient collection practices.
Inventory Days: This ratio measures the average number of days a company holds inventory before selling it.
RIL’s inventory days is about 45 days, showing how quickly the company turns over its inventory.
Days Payable: This ratio shows the average number of days it takes for a company to pay its suppliers.
RIL’s days payable is around 60 days, indicating how long the company takes to pay its bills.
Cash Conversion Cycle: This cycle measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
RIL’s cash conversion cycle is about 15 days, calculated as (Debtor Days + Inventory Days — Days Payable). This short cycle suggests efficient cash flow management.
3. Shareholding Pattern
Promoters: Promoters are the primary stakeholders who have significant control over the company.
As of the latest data, the promoter group holds approximately 50.49% of RIL’s shares, indicating strong control and confidence in the company.
Foreign Institutional Investors (FIIs) / Domestic Institutional Investors (DIIs): These investors include mutual funds, pension funds, and other large investors.
FIIs hold around 24.72% of RIL’s shares, while DIIs hold about 14.97%. This significant institutional investment reflects strong interest and trust in the company’s future prospects.
Public: This includes individual investors and other non-institutional stakeholders.
The public holds approximately 9.82% of RIL’s shares, indicating broad-based ownership among retail investors.
Fundamental analysis of Reliance Industries Limited (RIL) reveals a financially robust company. By analysing financial statements such as the income statement, balance sheet, and cash flow statement, along with key ratios like ROCE, ROE, debtor days, inventory days, days payable, and cash conversion cycle, and understanding the shareholding pattern, investors can make informed decisions about investing in RIL.
If you loved this story, please feel free to check my other articles on this topic here: https://ankit-rathi.github.io/tradevesting/
Ankit Rathi is a data techie and weekend tradevestor. His interest lies primarily in building end-to-end data applications/products and making money in stock market using Tradevesting methodology.
