top of page

Key Metrics to Analyse the Indian Stock Market

Key Metrics To Analyse Stock Market

When starting your investing journey in the Indian stock markets, share price fluctuations can often seem random and confusing on a daily basis. But rather than getting caught up in the noise of temporary ups and downs, evaluating some fundamental aspects of a company’s operations can give key signals related to long-term growth potential.

As legendary investors like Warren Buffet emphasises – “In the short run, the market is a voting machine, in the long run it is a weighing machine”. The day-to-day stock price movements reflect ever-changing investor sentiments similar to a popularity poll. However share prices gravitate ultimately over longer periods to corporate earnings growth and fundamentals.

So learning ways to analyse aspects like sales trajectory, profitability indicators and valuations enables retail investors to predict whether a stock will do well in the future with higher accuracy. In this article we cover some key metrics and tools Indian stock market investors should incorporate to determine business performance, gauge management effectiveness and predict price trends better when researching companies to invest in for fruitful long term returns.

So let's get into the things to track while analysing a stock’s performance.

1. Sales Growth, Profit Growth and EPS

Uptrend or rising sales and profit growth in the company gives us the confidence that the company’s business is doing very well and is expected to grow at the same pace. Though with rising sales , profit should also rise and it is a very important point to note that if the rise in profit is growing faster than the rise in sales then it is very likely that the company has a good business with growing operating margins.

EPS = Profits After Tax/ No of Shares in the company

If the company is increasing its profits but not issuing more shares of the  company then the rise in profit is directly related to the EPS. Rise in profits will lead to equivalent rise in EPS assuming No. of Shares is constant in a company.

2. Debt - A double edged sword

Debt is a double edged sword where the interest payment can affect the Profits after Tax of a company very severely. Debt is taken to fund investments in business or for working capital. If the reason for which the debt is taken, that is to invest more in the business helps to increase the profits of a company then that is a positive but in cases where the debt taken is not helping the company to make more profits then it will bring the profits of the company very badly. 

3. Institutional Holding & Promoter Holding

 High investment by big mutual funds and insurance companies reflects their confidence in future growth prospects based on in-depth analysis. Promoter holding is also a very crucial point to check as it shows that the promoters or the owners of the company are having skin the game.

The concept of "skin in the game" essentially refers to having a personal stake or risk associated with a situation or investment decision. In the context of stock investing and analysis, skin in the game means the company's founders, promoters and management team having a sizable ownership or shareholding in the business they are operating.

Now we move onto the metrics of how to value a stock

1. Valuation Ratios

Compare Price to Earnings (P/E) ratio over 5-10 years. See if investors are willing to pay too high for every rupee of profit versus past averages and industry averages. This gauges if the share price is overvalued or undervalued relative to earnings.

2. Earnings Outlook

Brokers closely track listed companies and provide next 2 years profit after tax growth estimates based on management commentary, industry trends etc. Opting  for higher estimated earnings growth rates ends up making the profits up and so the stock price also tends to rise

By assessing parameters like sales, earnings, debt trends, valuation, and institutional holdings, retail investors can gauge overall corporate health and future share price appreciation potential to make better investing decisions.

As an investing beginner, the most critical skill you can build is interpreting numbers beyond the headline share price.  I hope you find practical tips here to help shape your rewarding journey ahead as an empowered equity investor leveraging India’s economic might.

While this is the only primer you’re ever going to need, investing in the stock market can get confusing. If you want an expert to take that tension off your shoulders, just visit our website by clicking on the button below!

9 views0 comments


bottom of page