The Three Core Financial Statements
Fundamental stock analysis relies on three interdependent reports: the Balance Sheet (a snapshot of assets, debt, and equity at a specific date), the Income Statement / P&L (revenue, expenses, and net profit over a period), and the Cash Flow Statement (actual cash moving into and out of operations, investing, and financing).
A profitable company on paper can go bankrupt if its cash flow is tied up in uncollectible receivables or unsold inventory. Always cross-check Net Profit with Cash Flow from Operations (CFO).
5 Financial Ratios Every Indian Investor Must Know
1. Price-to-Earnings (P/E) Ratio: Compares current share price to earnings per share. Compare a stock's P/E against its historical 5-year median and industry sector peers.
2. Return on Equity (ROE): Measures how efficiently management generates profit from shareholder equity. Look for consistent ROE above 15% to 18%.
3. Return on Capital Employed (ROCE): Evaluates total operating profit generated across both debt and equity. Ideal for capital-intensive manufacturing companies.
4. Debt-to-Equity (D/E) Ratio: High debt (>1.0) increases bankruptcy risk during economic slowdowns. Look for companies with low or declining leverage.
5. Current Ratio: Measures short-term liquidity (Current Assets / Current Liabilities). A ratio above 1.5 indicates healthy working capital.
Spotting Balance Sheet Red Flags
Watch out for promoter share pledging exceeding 20%, sudden spikes in trade receivables growing faster than revenue, and frequent auditor resignations.