13.1 – What to expect?

Having set the context in the previous chapter, we will now develop a methodology for conducting a ‘limited resource’ equity research. The reason why I call it ‘limited resource’ is because you and I, as a retail investor, have access to just a few resources to conduct equity research. These resources are – internet, company annual report, and MS Excel. Whilst an Institution has access to human resource (analyst), access to company management, financial database (such as Bloomberg, Reuters, Factset etc.), industry reports etc. So my objective here is to demonstrate how one can better understand a company and its business with the limited resources at hand. Of course, we will do this exercise keeping the end objective in perspective, i.e., deciding whether to buy or not to buy a stock.

As mentioned in the previous chapter, we will structure the equity research process in 3 stages-

  1. Understanding the Business
  2. Application of the checklist
  3. Intrinsic Value estimation (Valuation) to understand the fair price of the stock

Each stage mentioned above has several steps within it. One must understand that there is no shortcut to this, and one must not compromise any of these steps.

13.2 – Stock Price vs Business Fundamentals

When we take up a company for research, the first step is to understand the business as much as possible. People often miss this crucial step and go directly into the stock price analysis. Well, just analyzing the stock price is great if you have a short term perspective. However, for long term investments, understanding the business is essential.

Why is it important you may wonder? Well, the reason is simple: the more you know the company, the higher is your conviction to stay put with the investment, especially during bad times (aka bear markets). Remember, during bear markets, the prices react and not the business fundamentals. Understanding the company and its business well gives you the required conviction to reason why it makes sense to stay invested in the stock even though the market may think otherwise. They say bear markets creates value, so if you have a high conviction on the company, you should consider buying into the stock during bear markets and not really selling the stock. Needless to say, this is highly counter-intuitive, and it takes years of investment practice to internalize this fact.

Anyway, moving ahead the best source to get information related to the business is the company’s website and its annual report. We need to study at least the last 5-year annual report to understand how it is evolving across business cycles.


13.3 – Understanding the Business

As a first step towards understanding the business, we need to make a list of questions we need to find answers to. Do note, the answers to all these questions can be found out by reading through the company’s annual report and website.

Here are a bunch of questions that I think helps us in our quest to understand the business. I have discussed the rationale behind each question.

Sl No Question The rationale behind the question
1 What does the company do? To get a basic understanding of the business
2 Who are its promoters? What are their backgrounds? To know the people behind the business. Sanity check to eliminate criminal background, intense political affiliation etc
3 What do they manufacture (in case it is a manufacturing company)? To know their products better, helps us get a sense of the product’s demand-supply dynamics
4 How many plants do they have and where are they located? To get a sense of their geographic presence. Also at times, their plants could be located in a  prime location, and  the value of such location could go off-balance sheet, making the company highly undervalued
5 Are they running the plant in full capacity? Gives us an idea on their operational abilities, demand for their products, and their positioning for future demand
6 What kind of raw material is required? Helps us understand the dependency of the company. For example, the raw material could be regulated by Govt (like Coal) or the raw material needs to be imported either of which needs further investigation
7 Who are the company’s clients or end-users? By knowing the client base, we can get a sense of the sales cycle and efforts required to sell the company’s products
8 Who are their competitors? Helps in knowing the competitors. Too many competing companies means margin pressure. In such a case, the company has to do something innovative. Margins are higher if the company operates in – monopoly, duopoly, or oligopoly market structure
9 Who are the major shareholders of the company? Besides the promoter and promoter group, it helps to know who else owns the company’s shares. If a highly successful investor holds the shares in the company, then it could be a good sign
10 Do they plan to launch any new products? Gives a sense of how ambitious and innovative the company is. While at the same time a company launching products outside their domain raises some red flags – is the company losing focus?
11 Do they plan to expand to different countries? Same rationale as above
12 What is the revenue mix? Which product sells the most? Helps us understand which segment (and therefore, the product) is contributing the most to revenue. This in turns helps us understand the drivers for future revenue growth
13 Do they operate under a heavy regulatory environment? This is both good and bad – Good because it acts a natural barrier from new competition to enter the market, bad because they are limited with choices when it comes to being innovative in the industry
14 Who are their bankers, auditors? Good to know, and to rule out the possibility of the companies associated with scandalous agencies
15 How many employees do they have? Does the company have labour issues? Gives us a sense of how labour-intensive the company’s operations are. Also, if the company requires a lot of people with a niche skillset, then this could be another red flag
16 What are the entry barriers for new participants to enter the industry? Helps us understand how easy or difficult it is for new companies to enter the market and eat away the margins
17 Is the company manufacturing products that can be easily replicated in a country with cheap labour? If yes, the company may be sitting on a time bomb – think about companies manufacturing computer hardware, mobile handsets, garments etc
18 Does the company have too many subsidiaries? If yes, you need to question why? Is it away for the company to siphon off funds?

These questions are thought starters for understanding any company. In finding answers, you will automatically start posting new questions for which you will have to find answers to. It does not matter which company you are looking at if you follow this Q&A framework. I’m very confident your understanding of the company would drastically increase. This is because the Q&A process requires you to read and dig out so much information about the company that you will start getting a greater understanding of the company.

Remember, this is the first step in the equity research process. If you find red flags (or something not right about the company) while discovering the answers, I would advise you to drop researching the company further irrespective of how attractive the business looks. In case of a red flag, there is no point proceeding to stage 2 of equity research.

From my experience, I can tell you that stage 1 of equity research, i.e. ‘Understanding the Company’ takes about 15 hours. After going through this process, I usually try to summarize my thoughts on a single sheet of paper which would encapsulate all the important things I have discovered about the company. This information sheet has to be crisp and to the point. If I’m unable to achieve this, then it is clear that I do not know enough about the company. After going through stage 1, I proceed to stage 2 of equity research, which is “Application of Checklist”. Please do bear in mind the equity research stages are sequential and should follow the same order.

We will now proceed to stage 2 of equity research. The best way to understand stage 2 is by actually implementing the checklist on a company.

We have worked with Amara Raja Batteries Limited (ARBL) throughout this module. Hence I guess it makes sense to go ahead and evaluate the checklist on the same company. Do remember, the company may differ, but the equity research framework remains the same.

As we proceed, a word of caution at this point – the discussion going forward will mainly revolve around ARBL as we will understand this company better. The idea here is not to showcase how good or bad ARBL is but instead illustrate a framework of what I perceive as a ‘fairly adequate’ equity research process.

13.4 – Application of checklist

Stage 1 of the equity research process helps us understand how, what, who, and why. It helps us develop a holistic view of the company. However, as they say – the proof of the pudding is in the eating; so no matter how attractive the business looks, the numbers of the company should also look attractive.

The objective of the 2nd stage of equity research’s objective is to help us comprehend the numbers and actually evaluate if both the nature of the business and the business’s financial performance complement each other. If they do not complement each other, then clearly the company will not qualify as an investible grade.

We looked at the checklist in the previous chapter; I’ll reproduce the same here for quick reference.

Sl No Variable Comment What does it signify
1 Net Profit Growth In line with the gross profit growth Revenue growth should be in line with the profit growth
2 EPS EPS should be consistent with the Net Profits If a company is diluting its equity, then it is not good for its shareholders
3 Gross Profit Margin (GPM) > 20% Higher the margin, higher is the evidence of a sustainable moat
4 Debt Level The company should not be highly leveraged High debt means the company is operating on high leverage. Plus the finance cost eats away the earnings
5 Inventory Applicable for manufacturing companies A growing inventory, along with a growing PAT margin is a good sign. Always check the inventory number of days
6 Sales vs Receivables Sales backed by receivables is not a great sign This signifies that the company is just pushing its products to show revenue growth
7 Cash flow from operations Has to be positive If the company is not generating cash from operations, then it indicates operating stress
8 Return on Equity >25% Higher the ROE, better it is for the investor, however, make sure you check the debt levels along with this

Let us go ahead and evaluate each of the checklist items on Amara Raja Batteries and see what the numbers are suggesting. First, we will look into the P&L items – Gross Profit, Net Profit, and EPS of the company.

Revenue & Pat Growth

The first sign of a company that may qualify as the investable grade is the rate at which it is growing. To evaluate the growth of the company, we need to check the revenue and PAT growth. We will evaluate growth from two perspectives –

  1. Year on Year growth – this will give us a sense of progress the company makes every year. Do note; industries do go through cyclical shifts. From that perspective, if a company has a flat growth, it is ok. However, just make sure you check the competition and ensure the growth is a flat industry-wide.
  2. Compounded Annual Growth Rate (CAGR) – The CAGR gives us a sense of how the company is evolving and growing across business cycles. A good, investable grade company is usually the first company to overcome the shifts in business cycles. This will eventually reflect in a healthy CAGR.

I prefer to invest in growing (Revenue and PAT) companies over and above 15% on a CAGR basis.

Let us see how ARBL fares here…

FY 09 -10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
Revenue (INR Crs) 1481 1769 2392 3005 3482
Revenue Growth 19.4% 35.3% 25.6% 15.9%
PAT (INR Crs) 167 148 215 287 367
PAT Growth (11.3%) 45.2% 33.3% 27.8%

The 5-year CAGR revenue growth is 18.6%, and the 5-year CAGR PAT growth is 17.01%. These are an interesting set of numbers; they qualify as a healthy set of numbers. However, we still need to evaluate the other numbers on the checklist.

Earnings per Share (EPS)

The earnings per share represent the profitability on a per-share basis. The EPS and PAT growing at a similar rate indicate that the company does not dilute the earnings by issuing new shares, which is good for the existing shareholders. One can think of this as a reflection of the company’s management’s capabilities.

FV Rs.1 FY 09 -10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
EPS (In INR) 19.56 17.34 12.59 16.78 21.51
Share Cap(INR Crs) 17.08 17.08 17.08 17.08 17.08
EPS Growth   – -11.35%  – 27.39% 33.28% 28.18%

The 5 year EPS CAGR stands at 1.90% for the FY14.

Gross Profit margins

Gross profit margins, expressed as a percentage is calculated as a –

Gross Profits / Net Sales


Gross Profits = [Net Sales – Cost of Goods Sold]

Cost of goods sold is the cost involved in making the finished good; we had discussed this calculation while understanding the inventory turnover ratio. Let us proceed to check how ARBL’s Gross Profit margins have evolved over the years.

In INR Crs, unless indicated. FY 09-10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
Net Sales 1464 1757 2359 2944 3404
COGS 1014 1266 1682 2159 2450
Gross Profits 450 491 677 785 954
Gross Profit Margins 30.7% 27.9% 28.7% 26.7% 28.0%

Clearly, the Gross Profit Margins (GPM) looks very impressive. The checklist mandates a minimum GPM of 20%. ARBL has much more than the minimum GPM requirement. This implies a couple of things –

  1. ARBL enjoys a premium spot in the market structure. This may be because of the absence of competition in the sector, which enables a few companies to enjoy higher margins
  2. Good operational efficiency, which in turn is a reflection of management’s capabilities

Debt level – Balance Sheet check

The first three points in the checklist were mainly related to the company’s Profit & Loss statement. We will now look through a few Balance sheet items. One of the most important line items that we need to look at on the Balance Sheet is the Debt. An increasingly high level of debt indicates a high degree of financial leverage. Growth at the cost of financial leverage is quite dangerous. Also do remember, a large debt on balance sheets means a large financial cost charge. This eats into the retained earnings of the firm.

Here is how the debt stands for ARBL –

Debt( INR Crs) Evaluation –

FY 09-10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
Debt 91.19 95.04 84.07 87.17 84.28
EBIT 261 223 321 431 541
Debt/EBIT (%) 35% 42.61% 26.19% 20.22% 15.57%

The debt seems to have stabilized around 85Crs. In fact, it is encouraging to see that the debt has come down in comparison to FY 09-10. Besides checking for the interest coverage ratio (which we have discussed previously), I also like to check the debt as a per cent of ‘Earnings before interest and taxes’ (EBIT). This just gives a quick perspective on how the company is managing its finance. We can see that the Debt/EBIT ratio has consistently reduced.

I personally think ARBL has done a good job here by managing its debt level efficiently.

Inventory Check

Checking for the inventory data makes sense only if the company under consideration is a manufacturing company. Scrutinizing the inventory data helps us in multiple ways –

  1. Raising inventory with raising PAT indicates are signs of a growing company
  2. A stable inventory number of days indicates management’s operational efficiency to some extent

Let us see how ARBL fares on the inventory data –

FY 09-10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
Inventory (INR Crs) 217.6 284.7 266.6 292.9 335.0
Inventory Days 68 72 60 47 47
PAT (INR Crs) 167 148 215 287 367

The inventory number of days is more or less stable. In fact, it does show some sign of a slight decline. Do note; we have discussed the calculation of the inventory number of days in the previous chapter. Both the inventory and PAT are showing a similar growth sign which is again a good sign.

Sales vs Receivables

We now look at the sales number in conjunction with the receivables of the company. A sale backed by receivables is not an encouraging sign. It signifies credit sales, and therefore many questions arise out of it. For instance – are the company sales personal force selling products on credit? Is the company offering attractive (but not sustainable) credit to suppliers to push sales?

FY 09-10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
Net Sales(INR Crs) 1464 1758 2360 2944 3403
Receivables (INR Crs) 242.3 305.7 319.7 380.7 452.6
Receivables as a% of Net Sales 16.5% 17.4% 13.5% 12.9% 13.3%

The company has shown stability here. From the table above we can conclude a large part of their sales is not really backed back receivables, which is quite encouraging. In fact, just like the inventory number of days, the receivables as % of net sales has also shown signs of a decline, which is quite impressive.

Cash flow from Operations

In fact, this is one of the most important checks one needs to run before deciding to invest in a company. The company should generate cash flows from operations; this is, in fact, where the proof of the pudding lies. A company which is draining cash from operations raises some sort of red flag.

In INR Cr FY 09-10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
Cash flow from Operations 214.2 86.1 298.4 335.4 278.7

The cash flow from operations through a bit volatile has remained positive throughout the last 5 years. This only means ARBL’s core business operations are generating cash and therefore, can be considered successful.

Return on Equity

We have discussed at length about Return on Equity in chapter 9 of this module. I will encourage you to go through it again if you wish to refresh. Return on Equity (ROE) measures in percentage the return generated by the company keeping the shareholder’s equity in perspective. In a sense, ROE measures how successful the company’s promoters are for having invested their own funds in the company.

Here is how ARBL’s ROE has fared for the last 5 years –

In INR Cars FY 09-10 FY 10-11 FY 11-12 FY 12 -13 FY 13 – 14
PAT 167 148 215 287 367
Shareholders’ Equity 543.6 645.7 823.5 1059.8 1362.7
ROE 30.7% 22.9% 26.1% 27.1% 27.0%

These numbers are awe-inspiring. I personally like to invest in companies that have an ROE of over 20%. Do remember, in case of ARBL, the debt is quite low. Hence the good set of return on equity numbers is not backed by excessive financial leverage, which is again highly desirable.


Remember, we are in stage 2 of equity research. I see ARBL qualifying quite well on almost all the required parameters in stage 2. As an equity research analyst, you have to view the output of stage 2 in conjunction with your finding from stage 1 (which deals with understanding the business). If you can develop a comfortable opinion (based on facts) after these 2 stages, the business surely appears to have investable grade attributes and therefore worth investing.

However, before you buy the stock, you need to ensure the price is right. This is exactly what we do in stage 3 of equity research.

Key takeaways from this chapter

  1. ‘Limited Resource’ Equity Research can be performed in 3 stages
    1. Understanding the Business
    2. Application of the checklist
    3. Valuations
  2. The objective of stage 1, i.e. understanding the business requires us to gather all business information. The best way to go about this is the Q&A way
  3. In the Q&A way, we begin with posting some simple and straightforward questions for which we find answers
  4. By the time we finish stage 1, we should be through with all the information related to the business
  5. Most of the answers required in stage 1 are present in the company’s annual report and website
  6. Do you remember while researching the company in stage 1, if there is something not very convincing about the company, it is often a good idea to stop researching further
  7. You need to get convinced (based on facts) about the company in stage 1. This is how you will develop a strong conviction to stay put during bear markets
  8. Stage 2 of Equity Research requires you to evaluate the performance of the company on various counts.
  9. You will proceed to stage 3 only after the company clears in stage 1 & 2.


  1. raman says:

    Very informative
    When is next chapter being uploaded ?

  2. Harshad Salvi says:

    In gross profit margin calculations, i think COGS figure seems to have been considered instead of Net Sales Figure while computing the GP Ratio. GP Ratio is much lesser (more than 10%) in all cases although above norm.

  3. Harshad Salvi says:

    Is it possible for you to explain on how to write research report/paper?

  4. Harshad Salvi says:

    Don’t know. But yeah.. It’s my dream to write a Professional Research Report/Paper on my own..
    Hope this is possible one day.
    Going by your credibility & forte in this financial world, need your help in accomplishing this objective

    • Karthik Rangappa says:

      It is just a matter of practice of identifying good opportunities..you will soon realize a report is just a formality 🙂

      • Harshad Salvi says:

        Yup.. But in today’s world a lot of emphasis is placed on the presentation. Hence, it is essential that identification of good opportunity being translated into proper presentation.
        I would love to make a career in this… Is it possible?

        • Karthik Rangappa says:

          Sure why not. There are many firms that require research analyst. Getting yourself a CFA certification is a good start.

  5. kumar sunil says:

    very informative and summrize tutorials.hats off for your honest efforts to aware peoples

  6. nagaraja says:

    Nice to go through user friendly simple explanation. Great effort by Zerodha and u.

  7. GK says:

    Great info Karthik garu.

    Thank you for making us to understand these difficult subjects nd procedures very easily.

  8. Suneeth says:

    For FY11 the operating cash flow was low compared to previous year, even though other numbers like sales, Ebit etc remains strong in FY11. what does that imply what can effect the operating cash flow of a company but still that company can be “Investment Grade”..


    • Karthik Rangappa says:

      Operating cash flow is also dependent on how well the costs are controlled by the company and therefore the margins. So a strong sales does not really translate to great operating numbers. Also, there will be business cycles which can alter the cash flow in operations…this needs to be studied as well.

  9. yogesh says:

    When I calculating CAGR all CAGR comes different from annual report Why?Like as Business Growth 18.60%,Shareholder Value Accretion 17.07% .

    • Karthik Rangappa says:

      Yogesh – Thanks for pointing this. We are in the process of re-editing the whole module. I guess there has been some mistake while exporting these numbers to excel. For now, please ignore the calculations and only look at the central idea. Also, please do continue to point out any errors you spot. Thanks.

  10. Matrix says:

    When is Stage 3 going to be explained ?

  11. RV2180 says:

    Hi Karthik , All your lessons are Very Informative and simple to understand.
    I have a question on how to perform FA to compare the performance of PSU or Private banks. What all aspects of a bank business we need to evaluate ?

    • Karthik Rangappa says:

      Banks are a little tricky to understand. To begin with look at – Book Value, Net Interest Income, NPA etc.

  12. surendra says:

    In your investment due diligence process , you mentioned macros only for domestic scenarios .

    How to deal with Global Macros in the due diligence process ?

    Example : Present Stock Market Meltdown !!!!!

    • Karthik Rangappa says:

      Good point this one :). Honestly global macros is something that is very difficult to get a grasp on. Requires one to understand Sovereign economic balances and the interconnectivity with other countries. This is much difficult than understanding companies. I don’t think I can do justice to this topic here. But on the contrary, irrespective of what happens fundamentally strong companies always survive the toughest economic conditions!

  13. Suresh says:

    To check debt level of the stock, should we take short term and long term borrowing or only short term borrowing?

  14. rohan says:

    plz explain this, how come prime location price can go off balance?

    “To get a sense of their geographic presence. Also at times their plants could be located in a prime location, and the value of such location could go off balance sheet, making the company highly undervalued”

    • Karthik Rangappa says:

      Well, cant think of an example for you right now, but please do be aware that such a thing could happen…maybe transfer to a subsidiary.

  15. rohan says:

    Are they running the plant in full capacity?
    How to find this from annual report. Please explain from ARBL example

    • Karthik Rangappa says:

      Read the management discussion and analysis section in the annual report, the management will usually share information on this.

  16. rohan says:

    “Who are their bankers, auditors?”

    As a retail investor how to know who is a good auditor or not and those auditors have any malafide intention or not /

    • Karthik Rangappa says:

      Hard to answer given the fact PWC were the auditors of Satyam. But yes, you will get the name in the annual report….auditors have to sign off below the financial statements.

  17. rohan says:

    “What are the entry barriers for new participants to enter the industry?”

    where to find this information, for example for batterry companies where i can I find this information?

  18. rohan says:

    “Is the company manufacturing products that can be easily replicated in a country with cheap labor?
    If yes, the company maybe sitting on a time bomb – think about companies manufacturing computer hardware, mobile handsets, garments etc”

    I am not clear with this statment…can you please elaborate to explain

    • Karthik Rangappa says:

      So if you are a company manufacturing toys in India….then t’row cheap imports from China may harm your business.

  19. ashish chauhan says:

    I am currently working on a bank stock, PNB. how can i calculate the gross profit margin and debt of the stock as it is not directly given in the annual report. do they use other terms for the same?

    • Karthik Rangappa says:

      Yes, banks have a slightly different balance sheet, therefore a bit tricky to analyse. Guess I may not be the right person to talk about banking stocks.

  20. Sai Sreedhar says:

    What should be the ideal/maximum Price to Earnings to be considered while choosing a stock?

  21. P Harish Dixit says:

    ऊपर आपने gross profit margin का, inventory days का, receivables का, cash flow का “Snapshots” लिए हैं ना, वो किधर से लिये हैं? (Source of the snapshots?)

  22. sainudheen says:

    What do you mean by PAT & PAT growth , kindly explain ?

    • Karthik Rangappa says:

      PAT is nothing but the profits after all the deductions. Pat growth is the rate at which PAT is growing.

  23. Isaac Maria says:

    Sir you have mentioned that the equity research stages are sequential, but what if I find that the Stage II Equity Research is not convincing enough ? That means I would be spending 15 hours researching about a company which I would not prefer to invest.

  24. Guruprasad says:

    How did you arrive at the debt in debt to EBIT level table?

  25. MSP says:

    Hi Karthik,

    Debt/Ebit % is coming 719% for Tata Chemical 2015-2016, Debt=8263.68 cr, EBIT=1148.8 , am i comprehending correct?


  26. MSP says:

    Hi Karthik,

    Thanks, in that case, its coming 6.50, what does this mean?


  27. MSP says:

    Hi Karthik,

    This means Tata Chemicals Debt is more than 6.5 times of the profit they are generating, which i guess is a bad sign for the company.

    Am i right ?


  28. MSP says:

    Hi Karthik,

    If that is the case, why people are investing in Tata chemicals?


  29. Prathvi.R says:

    How do we find out the amount of dividend paid out if it is expressed in terms of percentage ? (Eg:Infosys March 2016 div. payout was 40.72% , is it 40.72% of the face value ?)

  30. Krishna.K says:

    Hi Karthik,
    a small doubt, what is meant by SHIFTS IN BUSINESS CYCLE and another doubt is what is CAPPEX CYCLE. Please through some light on this sir.

    • Karthik Rangappa says:

      Shift in business cycle indicates the way business is conducted – for example companies in commodity business. Hindalco’s profits depend on the prices of Aluminium and copper…if the prices increase so would the margins of Hindalco…if they decrease, so would Hindalco’s margin.

      Capex cycle refers to capital investment made by the company.

  31. Abhishek says:

    Sir, what should be the lower limit for Market Capitalization for starting to evaluate a company.
    I mean, Market Cap should be greater than _____. (to avoid scams and find legit comapnies)

  32. Sai Sreedhar says:

    While calculating PEG (Price to Earnings to Growth rate) which growth rate should we consider? Is it EPS (CAGR of last 5 years or so) or Revenue (CAGR of last 5 years or so)? Or is it based on the forecast the company proposes in the annual report?

    • Karthik Rangappa says:

      You will have to take the EPS.

      • Sai Sreedhar says:

        Would that work for ‘Turnarounds’ or ‘Cyclics’?

        • Karthik Rangappa says:

          Yes, it would.

          • Sai Sreedhar says:

            Sorry, Just to be sure that I understood it right – you meant EPS TTM to be considered or EPS CAGR of 5 years?

          • Karthik Rangappa says:

            PE/G requires a growth rate at the denominator…hence EPS TTM does not make sense.

            You can decide if you want to take the last 5 or 7 year EPS CAGR OR you want to take the expected EPS growth going forward. Both the options are acceptable.

          • Sai Sreedhar says:

            Yes, I agree with you. Ben Graham says not to believe in forward EPS growth as it’s not achieved and forecasts are always wrong 🙂 That leaves 5 to 7 years CAGR as the only choice – the more the better I guess – to iron out all uncertainties.

          • Karthik Rangappa says:

            Yup, that makes sense!

  33. Ankit says:

    Best topic ever covered. Most useful of newbies and experienced people can take as refreshment training. Best 😀

  34. Kishore Agarwal says:

    Hi, I had a question regarding diluting the company’s equity, in this example I can see that the company is growing it’s PAT at a CAGR of 17% while EPS CAGR is only 1.9%. So does that mean the company is diluting it’s equity and it’s a bad sign for Minority shareholder’s

  35. Romil says:

    Is there any module coming up on Financial Modelling? Do you teach Financial Modelling?

  36. Romil says:

    Sounds Great…Learning a lot from your website….you guys are doing a wonderful job 🙂

  37. SUNANDA SINGHA says:

    Dear Karthik
    It is found that all equities of NSE are not tradable in Zerodha platform.Eg. I tried yesterday 22-05-17 to trade SHAKTIPUMP, but I found it was blocked by zerodha.What is the reasons of suck blocking ?. How can i get the total list of such blocked equities of NSE and BSE. Please help



    • Karthik Rangappa says:

      Can you check again, Sunanda?

      I just loaded the stock on my market watch and it seems to be working fine!

  38. Rushikesh says:

    Sir can u tell me how u got the eps of 19.65(should be 167/17.08=9.77) and 17.34(148/17.08=8.66) for the year FY10 and FY11 respectively under EPS explanation. The other 3 years values are correct but , how u got the above mentioned values.

  39. Amit says:

    What a great work ! So easy to understand that I have a doubt only in this chapter.
    To get a sense of their geographic presence. Also at times their plants could be located in a prime location, and the value of such location could go off balance sheet, making the company highly undervalued.
    Please clarify .let’s take example of Bhushan steel .it’s plant in Shahibabad is at prime location .if prime location here means somewhere in posh locality ?or prime location means like Orissa plant where raw material like ore ,zinc is available easily ,coal is there so cheap is power generation ?
    Second Question balance sheet vala part.

    Thanks again for educating us !

    • Karthik Rangappa says:

      Prime location can be any valuable piece of land which the company owns. It could be the value of the land itself or proximity to resources.

      Happy reading 🙂

  40. VIRAT says:

    For stage 2 of the research, we apply only some of the financial ratios that you taught us in the previous chapter. For example, in Stage 2, ratios like the P/E ratio and such are not included. Which of the other ratios should we be looking at?

  41. Naveen says:

    I wonder why AMARA RAJA remained flat even with such great fundamentals for last 3 years?

  42. Wrik says:

    How to calculate inventory days?

  43. Roji Mathew says:


    Like this module,can you explain in a separate module,how to find turnaround companies and multibagger. Really your expiation about the fundamental analysis is very easy to understand to anyone.

  44. Abhishek Kubal says:

    Thank you for the info.

    For calculating debt you have taken only long term borrowings and short term borrowings.

    Why are trade payables and provisions(short term and long term) not added to calculate debt?

    • Karthik Rangappa says:

      Short term is mainly Çurrent in nature, meaning they will be serviced within the financial year, hence we need not have to consider this. However, to get a sense of the short-term debt condition, we can look at the working capital condition of the company.

  45. JF says:

    Hi Mr Karthik/Zerodha Team,

    There appears to be a minor error in EBIT calculation for FY 13-14 for “Debt level- Balance Sheet Check”. As per my working it is as follows:
    Total Revenue less: Other Income (3482.17- 45.51)=3,436.66 (A)

    Total Expenses less: Finance Cost (2941.62-0.72)=2940.9 (B)


    As per your working, 541 has been considered.

  46. Deepak says:

    Hi Karthik,
    Now I am comfortable in doing the fundamental analysis after reading your materials. Thanks a lot for that. God bless you.

    My doubt here is that, there are some companies which are fundamentally strong. But the price movement does not start suddenly. How to determine the perfect time for buying such stocks.

    I found out one company called APIS India. From my analysis I found out that it’s a very good company. But it’s not being traded in BSE or NSE now. So, I don’t know when will it start trading and that time I would not be knowing. So please mention how can I track all such companies.

    • Karthik Rangappa says:

      You cannot really time the market, Deepak, no one can 🙂

      If the company is not trading, then maybe there is no liquidity at all. Are you sure this company is fundamentally strong?

  47. Ranjan says:

    I recently started going through these modules…but I have been an investor for two years or so.
    I really like the fresh perspectives offered here. BTW, I work with Factset and when I saw this name
    mentioned here I was surprised. I didn’t know that Factset is known to Indian investors 🙂
    As a software engineer, I wrote codes for technical and fundamental analysis, that’s how I developed
    interest in stock market. Anyways, reading the theory part after doing practical is “fresh perspective” 🙂

  48. Uday says:

    Great insights based on the financials docs! This has made the fundamental analysis a cakewalk of sorts 🙂

    One query though – The CAGR calculated in the “Revenue & PAT” section is not correct for the given data. It is assumed that the period is 5 years although its only a 4 year period. Hence, the CAGR (if we take 4 years) will come higher than the ones mentioned above. The above values will come only if we take the start and end values from this data but ASSUME the growth has happened in 5 years!
    Correct me if I’m missing something…


    • Karthik Rangappa says:

      Not really Uday. This is 5 year data, so you need to consider 5 years as the time period.

      Formula is (3482/1482)^(1/5)-1

      • Uday says:

        Hi Karthik,

        Thanks for the prompt response!
        I would beg to differ on this particular thing and urge you to have a look once again deeply.
        Although it’s a 5 years data by looking purely at the number of data points, still this is a 4 year period only – from FY 09-10 to FY 13-14. Hence, we need to take “4” as the time period for calculating CAGR.

        The periods for growth precisely are:

        1 – FY09-10 to FY10-11
        2 – FY10-11 to FY11-12
        3 – FY11-12 to FY12-13
        4 – FY12-13 to FY13-14

        So, we can see that although we have 5 data points (1482 to 3482) but we are growing the revenue for only 4 years (periods here), and hence, it makes sense to take CAGR as {(3482/1482)^(1/4) – 1} which will be a higher value than the one we’ve received above!

        Nevertheless, this write up is awesome & I would recommend it to anyone wanting to deep dive into fundamental analysis.

        Cheers :):)

        • Karthik Rangappa says:

          Uday, another way to look at this is as below –

          1) Number reported on 31st March ’10
          2) Number reported on 31st March ’11
          3) Number reported on 31st March ’12
          4) Number reported on 31st March ’13
          5) Number reported on 31st March ’14

          So 5 different numbers across 5 different years.

          • Uday says:

            Whatever angle we view it from, pl find the calculation (in excel) taking 18.646% as the CAGR… If we start calculating step-wise from 1481, reported on 31st March ’10, then we would get to 3482 on 31st March ’15 and not on 31st March ’14…

            I can share the excel calculation if we can discuss further over email..

            1) Number reported on 31st March ’10 1481.00 18.65%
            2) Number reported on 31st March ’11 1757.15 18.65%
            3) Number reported on 31st March ’12 2084.80 18.65%
            4) Number reported on 31st March ’13 2473.54 18.65%
            5) Number reported on 31st March ’14 2934.76 18.65%

            We’ve reached only till 2934.76 here on 31st March ’14… If we go one more year ahead, we get the desired value:

            6) Number reported on 31st March ’15 3481.99


          • Karthik Rangappa says:

            Cheers 🙂

  49. SACHINN says:

    In screener small case kindly clarify weightage / priority should be given in which order for the following parameters for selection of a particular stock :

    1) Return on Equity.
    2) Return on Assets.
    3) Return on Net Profit Margin.
    4) Return on Investment .
    5) Return on operating profit margin.

  50. Aashish Rana says:

    How do we check, the company is running the plant with full capacity?

    • Karthik Rangappa says:

      Check for the capacity utilization number, usually, the company publishes these numbers in the annual report.

  51. Aashish Rana says:

    Hello sir
    How r u?
    As I was going through of your module,i observed in FY 10-11 to FY 11-12 the EPS shrank from 17.34 to 12.59 but the PAT grew impressively. So how would u justify this? why EPS shrank though PAT was in a uptrend?

  52. Avinash says:

    Is it reasonable to buy a stock which has P/E = 26% ?

  53. Saurabh Sehgal says:

    Hello Sir!

    Should the Revenue CAGR and PAT CAGR rates be somewhat matching / in line with each other.

  54. Akila says:

    HI Karthik Sir,

    Your modules are really good and very useful. Thanks for sharing your knowledge.

  55. Saurabh Sehgal says:

    Dear Sir,

    While calcuating EPS, how should I get total number of shares. For example, if total share capital is 6 Crs. and face value is Rs. 2/-, then Total Number of Shares = 6 / 2 i.e. 30,000,000 (30 Cr shares). Am i correct?

  56. Adishwar says:

    Hi Karthik ! In your 9th point you have mention “Besides the promoter and promoter group, it helps to know who else owns the shares of the company. If a highly successful investor holds the shares in the company then it could be a good sign” Which I don’t think is true.
    Can you tell me why Rakesh jhunjhunwala holds stake of DB realty the very same company whose promoters were linked with 2g spectrum scandal?

  57. Prakhar Pandey says:

    I am a beginner in stock market. and try to understand its basics through varsity. In understanding the business section, where should i go to read and find the answers of all those questions? Is it available in annual report of company or should i refer some other sources also??
    And thank you for these excellent modules.

    • Karthik Rangappa says:

      Yes, usually the annual report will contain all the answers, especially in the ‘Management Discussion & Analysis’ section. Do check it out.

  58. Mr k says:

    I have read near about all your articles
    And thanku very much for this immense knowledge
    I think there is no website available which explain the harsh road of share matket inthis sweet and smooth way

  59. Ranmeet says:

    Hello Karthik.
    I would like to thank you for sharing such beautiful piece of information in the most simplest form.

    Well I was going through the same process of checklist for STRIDS SHASUN PVT LTD.
    While calculating the Net profit growth, I got stuck at the P/L statement for this company.
    We need both REVENUE and PAT for at least 5 years to compare right?
    While checking the PAT i see PAT from discontinued operations, may I know as to what I should consider for PAT Growth calculation, as the P/L statement has both PAT for the current year and PAT from Discontinued Operations.
    Will be waiting for your reply.
    Thank you.

    • Karthik Rangappa says:

      This is a tricky situation and under such circumstance valuation based on traditional approach becomes really difficult. You will have to pay a lot more attention to MD&A and figure out the prospects. Maybe dig deeper into quarterly results as well.

      • Ranmeet says:

        Thank you for your timely reply Kartik.

        The company every year generates huge profits from the sale of discontinued assets.
        Is it a good sign or a bad sign?
        I read in the prospectus that they don’t want to build a 100 year old company, they just want to grow and then sell the company for profits. The company in 2013 made huge profits by selling one of their subsidiaries and it has around 37 subsidiaries, I find the company bit risky as the management is only concerned to grow the company as quickly as possible to sell. No chance for long term investment.

        • Karthik Rangappa says:

          This depends on how much percentage this would be wrt to the overall profits. If it is a large part, then you need to worry about it. I’m curious to know which company this is. I’d be worried about the management if they are making such statements 🙂

  60. SAMEER GUPTA says:


    It’s a very informative blog. I am getting a little confused between the consolidated financial statements and standalone financial statements. Which ones do we have to consider for doing all the calculations and analysis.

  61. Hammad says:

    Hi 🙂

    So according to the write up above while doing equity research we follow following steps:

    Understanding the Business
    Application of the checklist
    Intrinsic Value estimation (Valuation) to understand the fair price of the stock

    So let’s say I am evaluating Company ABC and it has a competitor Company XYZ. So for comparison with competitor can I skip to step 2 of checklist to see if financial numbers are looking good, or I need to do comparison on the basis of step 1 as well ?


    • Karthik Rangappa says:

      There are times when you figure out the competing company is much better than the one you chose to look into in the first place. So in case, you decide to skip step 2, you may miss on an opportunity 🙂

  62. Arun says:

    Hi, I was going through qualitative analysis of Hero Motocorp Limited. I was evaluating

    Who are their bankers, auditors?

    In the AR 2017-18 it is mentioned that their Statutory Auditors are BSR & Co. LLP (KPMG). I didn’t find any red flags against them.

    Also they have PWC as one of their internal audit partners. PWC were audit partners for Satyam Computers just before the scam broke out, and in 2018 they have been banned from auditing for 2 years in India. Will this be a red flag even though PWC is a well established firm ? How much relevance do you give to such information and what is your preferred technique for digging such information out ?

    • Karthik Rangappa says:

      Arun, the bankers and auditor information will be there in the AR. Look for it in the initial few pages.
      No, PWC was involved in Satyam, but that does not mean they would be running a scam with every company 🙂

  63. Amit mavani says:


    Thank you so much for your quick reply every time

    How can I know bankers or financial institution is a good or bad ?
    Plz give me some example

  64. Ram says:

    As Reliance also has many subsidairies so would it be good ti invest in reliance and by the ways you are doing a terrific job!

  65. Mahesh says:

    Respected sir,
    Am facing the difficulty in calculations of CAGR
    In Revenue and PAT Growth section, you have given 5 year CAGR Revenue Growth as 18.6% & 5 year CAGR PAT Growth as 17.01%. Whereas my calculations are giving negative result for same calculation. Please guide us.


    • Karthik Rangappa says:

      Mahesh, I think you may have missed the brackets. Can you please double check?

      • Mahesh says:

        Thanks sir !
        Got it correct this time.

        Again, is there any way around to get doubts cleared while in applying the theory? Since it wont be always possible to reach this website frequently.


        • Karthik Rangappa says:

          Mahesh, unfortunately, there is no other way. Btw, I usually respond to queries within 24hrs, if not sooner 🙂
          Good luck!

  66. vaibhav says:

    is it possible to pick a multi-bagger stock with the limited resource?

  67. Amit says:

    Hi sir

    BLS international consolidated net profit 49 Cr .standalone 3.10 Cr and companys top management’s person salary is 13.5 Laks annualy .
    Too much high salary is bad but what is indicate a too much low salary ?

    • Karthik Rangappa says:

      Maybe he has shareholding via which he receives a great dividend payout. Please check that as well.

      • Amit mavani says:

        Hi sir
        No not that type here

        Two question
        1.what low salary indication ?
        2.i saw on zee business manpasand beverages management pay low salaries to CFO ,cs etc. Acoorading to zee it’s suspicious .what’s your view about this type of matter?

        • Karthik Rangappa says:

          You cannot isolate salary alone, Amit. Salary could be just one part of the overall earnings. You need to see the dividend income as well.

  68. vaibhav says:

    what should be the 5 year EPS CAGR of a good company.

    • Karthik Rangappa says:

      There is no fixed number for this. The CAGR can be as small as 5%, but within the industry, if this is the best then obviously we are looking at the best company in the industry.

  69. Harish says:

    Is everything that is listed under stage 1 can be checked by reading the annual report?

  70. Shubham says:

    How can a company dilute it’s earnings by issuing new shares? Please elaborate this.

    • Karthik Rangappa says:

      When new shares are issued, the number of outstanding shares increases, when the outstanding share increase the profits are distributed amongst more shareholders, hence the dilution.

  71. Shubham Patil says:

    Also at times their plants could be located in a prime location, and the value of such location could go off balance sheet, making the company highly undervalued.

    Can you please elaborate the above.

    • Karthik Rangappa says:

      That means the real value of the land may not really be included in the balance sheet. Hence the valuation model may not accurately depict the true value of the company.

  72. sunil kumar says:

    sir could you tell me please that what should first we check qualitative analysis or quantitaive?

  73. Akshay Sole says:

    Sir,Where is the Revene of ARBL for FY 09/10 mentioned in the financial statements ?

    • Karthik Rangappa says:

      The very first line in the P&L statement is the revenue number.

      • Akshay Sole says:

        Thanks Sirji
        I have another query about EPS Calculation of FY 09/10 ,FY 10/11,FY 11/12,
        If we calculate the EPS by the 10 years Financials of ARBL why the are different ?Pls correct me if i am wrong

  74. Manav says:

    Hey Kartik…!!! Wonderful job..
    Learning finance was never easy , but you framed it in a much simpler manner and I am finding it really interesting. Thanks a lot.

  75. S PRAKASH says:

    Dear sir, Wishing you my best regards for teaching FINANANCE in
    such a crystal clear manner, with hope to get your another sessions, thanking you

  76. Ram says:

    Hi Karthik,
    When can we expect the 11th module on Financial modeling?

  77. Arpit Dahiya says:

    Hello sir
    I’m pretty convinced by the fundamentals, financial ratios and the growth of these companies, and I think for their market they have monopoly and their future is bright.
    -Colgate-Palmolive (India) Ltd
    -Hindustan Unilever Ltd
    BUT their p/e ratio is very high , like 64 for Hindustan Unilever and 44.6 for colgate-palmolive.
    Help please discuss whether they are a good option or not.

    • Karthik Rangappa says:

      Arpit, markets have always assigned higher PEs to multinational companies. So this boils down to the growth you foresee for these companies and their current growth multiples. In case of a mismatch, then you will have to wait for an appropriate time to buy in.

  78. Nirmal says:

    Where can we get the fundamental data for equity research like ROE, EPS , GPM etc? Is there any resource available where we can get these all the basic information about stock.

  79. Pratibha says:

    Hi Karthik Sir,

    What do we mean by “Promoters have pledged 70% of their holding”. Is it good or bad?

  80. kaushal says:

    Sir,will it be better to set the threshold revenue and pat growth based on the industry i.e revenue growth and pat growth to be best among its competitors rather than fixing absolute number of 15% CAGR which you have done.Because i think 15% is very rare and it causes many fundamnetally strong companies to eliminated from our priority?For example,I have calculated the revenue growth of stocks in FMCG (nifty FMCG) today…of these FMCG stocks the highest growth was observed to be Britania with 7.89 CAGR. And the average CAGR of all these FMCG stocks is around 4% CAGR.Does that mean britania has passed the revenue growth parameter from our checklist or it did not pass because of its growth less than the the threshold of 15%?How should we interpret?

    • Karthik Rangappa says:

      Kaushal, I do agree with you on pegging the values to the industry. However, you need to ensure that there is a decent growth across all parameters – revenue, margins etc. I agree it is not really easy to find these, but then that the point about investments, you will have to keep looking for opportunities 🙂

  81. Satya Prakash says:

    Really very informative and simple to understand concepts for a retail investor. Thank you team Zerodha.

  82. Brijesh Pandey says:

    When you are calculating the CAGR why are you taking the no of years as 5 rather the no. of years would be 4?

  83. Brijesh Pandey says:

    Yes that’s what i m trying to say, starting with base year we are taking the data at the end of the FY .

    2009-10 end to 2010-11- 1 year
    2010-11 end to 2011-12- 1 year
    2011-12 end to 2012-13- 1 year
    2012-13 end to 2013-14 – 1 year

    Total time period – 4 years

    Isn’t it?

    • Karthik Rangappa says:

      1st Apr 2009 – 31st Mar 2010 – 1st year
      1st Apr 2010 – 31st Mar 2011 – 2nd year
      1st Apr 2011 – 31st Mar 2012 – 3rd year
      1st Apr 2012 – 31st Mar 2013 – 4th year
      1st Apr 2013 – 31st Mar 2014 – 5th year

  84. Pratibha says:

    Hi Sir,

    Please suggest if it’s worth buying shares of a company with negative EPS CAGR growth but above 15% PAT CAGR growth.

    What can be the reasons behind a company to have negative EPS CAGR growth and positive PAT CAGR growth?

  85. Ashis says:

    Hi Karthik,

    First of all thanks a lot for putting together such practical content.
    Second, I tried applying the checklist to L&T Finance Holdings. Looks like we would need a different checklist for Banking, Finance etc. Could you suggest such a checklist or direct to the right resource (something as lucid as your content).


    • Karthik Rangappa says:

      Thats right, Ashish. This won’t really work for BFSI companies. I’m not sure, but let me check for content on this online.

  86. Aniruddhsinh Rathod says:

    Hello Karthik ,

    During the result times media houses often mentions slippages in bank’s results. can you explain how to calculate that?


  87. Sumant says:

    Hi Kartik,

    If companies have too many subsidiaries, the company may be siphoning off funds. How many number of subsidiaries would be good enough ?

    • Karthik Rangappa says:

      Its best to look at it the other way i.e. if a company is siphoning off funds, then it is likely to have many subsidies. Not all companies with subsidies siphon off the funds.

  88. Murthhy says:

    How to check promoters/board criminal background and intense political affiliation? Any methods/tools etc to give us quick info on this?

  89. Kiran Shetty says:

    Hi Karthik,

    under inventory check,
    As you mentioned, if Inventory and PAT are growing together, its a good sign. what if there is a great difference between both? like for the data below, what should i incur out of it?
    FY 2014-2015 FY 2015-2016 FY 2016-2017 FY 2017-2018 FY 2018-2019
    Inventory 953.63 826.07 658.05 740.6 788.87
    PAT 130.62 188.63 214.68 219.51 305.92

  90. VIKRAM RADHU says:

    Hi Karthik

    my question is that when I am doing fundamental analysis of a company now ( march 25th), the annual reports that are available are that of FY 2019. the quarterly reports available is till 31st dec 2019. If i want to check the Debt of the company, the values of “debt, other liabilities, reserves …etc” that are available in Screener.in are different. The values in Annual Statement are different. And there is no mention of debt, liabilities, reserves etc in the Quarterly statement published by the company.
    How can i find the current value of above parameters today? Where does the Screener.in sources its data?


    • Karthik Rangappa says:

      Vikram, ensure you are checking the consolidated numbers in the annual report. Also, when you are checking AR, there is no need to check any other source. Btw, these debt numbers don’t change frequently, so its safe to assume you have the lastest number.

  91. Prakash Poptani says:

    Dear Sir, First of all thanks for such an amazing content.

    I had a query regarding Amara Raja Batteries , from screen.in ,I came to know that the promoter holding has reduced significantly over the years ( 24% in last 3 years ). I think its a red-flag , isn’t it..? Also as I assume that you have been following this company over the years what is the reason for reduced promoter holding..?

    • Karthik Rangappa says:

      I’ve not been following that stock, Prakash. It is really hard to say if the reduced promoter holding is good or not. One needs to read through the context in which it has reduced. For example, Infy has very little promoter holding.

  92. Kumar says:

    Hello Sir,
    I have a few Question.
    1. Could you Please explain, Why should we consider only “short term Liabilities” while calculating the DEBT level?
    2. What will the “Ideal EPS” CAGR growth for 5yrs? As in this case it is around 1.9% and there is no comment on that particular note.
    3. As a Long term Investor which annual report should I used for Equity Research for all the Steps? Whether it is a “Standalone Report” or “Consolidated report” or “Both” ?

    • Karthik Rangappa says:

      1) Short term liabilities also include working capital loans and other borrowings right?
      2) Depends on the industry, no ideal ratio as such
      3) Consolidated

  93. Kumar says:

    1. I would agree that Short term liabilities also include working capital loans and other borrowings but What about “Long Term Liabilities” while calculating the Debt Level. Because most of companies have huge Long Term Liabilities?

    • Karthik Rangappa says:

      Yes, long term liabilities has all the big debt component. You need to consider this as well.

  94. Naman says:

    Do stock splits have a similar effect on EPS and subsequetly P/E ratio, as of issuing new shares?
    In the long term, stock splits should be peceived as good thing or bad thing?

    • Karthik Rangappa says:

      EPS yes, because the denominator in EPS is the number of shares. Not for PE though. A stock split does not matter in the longer term.

  95. Aditi says:

    It’s an amazing tutorial on FA. I have not seen any other FA tutorial on Internet including paid one, which is so elaborated like this one. Thanks a lot sir.
    Eagerly waiting for the Financial Modelling course. Could you please tell when it is coming on this platform?
    Thanks and regards

  96. Rahil says:

    Can you please explain to me where i am getting it wrong
    COGS- In the example I can see figure of 2450 for 2013-14 while in Financial report its 2941.
    Link to report : https://www.bseindia.com/bseplus/annualreport/500008/5000080314.pdf

  97. Rahil says:

    To calculate CAGR,
    Excel formula is =( End year/Start Year )^(1/Number of years )-1, Right?
    So here aren’t we supposed to take number of years as 4 instead of 5 because practically we are calculating for 4 years only
    But if we take 4 answer differs from the one in example.
    In example (considered 5 years) = 18.65 years
    As per 4 years it comes to = 23.83%.
    Please clarify Thankyou!

  98. Mahesh says:

    Great fan of you sir!!.sir,please add some more fundamental analysis of different companies like banking sector as it’s analysis is somewhat different

  99. Rupam says:

    Good afternoon sir,
    Thank you so much for such insightful modules. I have a doubt of how do we identify whether plant is operating at full capacity or not?

    • Karthik Rangappa says:

      Rupam, easiest way is to look for the management’s statement on capacity utilization, which they’d state in the MD&A section of the Annual Report.

  100. Mohit Jain says:

    Sir any special course or website through which i can go more deep into financial markets, specially equity market or mutual funds?

  101. Mohit Jain says:

    sir, during FY 11-12, the PAT of the company increased but the EPS went down so there must be diluting in shares i.e issuance of new shares?

  102. Mohit Jain says:

    Already loving what you taught me sir! I want to enter into financial markets, i want to dig more into it!

  103. Ritwik Guha says:

    I must thank you for the kind of courses you have design and the lucid way the things are explained. I never thought I would ever be able to get hang of the things.
    I had a question on this topic. Is there any tolerance level we should consider while evaluating a company? I mean not every company can be good in all the points mentioned in the check list. Is there any points which are more critical to look at from long term perspective and some might be something which we may tolerate to some extent. Would you suggest some guideline related to that?

    • Karthik Rangappa says:

      Ritwik, this is a very tricky spot. Personally I’ve turned a blind eye to a few of the things and its turned ok. For example, management has political exposure…you just live with that fact. So these things should be evaluated on a case to case basis and considered only if you are comfortable.

  104. sandip says:

    While calculating metrics Earnings per Share (EPS) i have observed that for TCS share capital has increased in FY19 which in turn affects the EPS .i,e EPS has decreased . In that case how to analyze this metrics?

    • Karthik Rangappa says:

      It just means that there is an equity dilution (are you sure about this wrt TCS), and therefore the EPS has dropped. You need to understand why there is a dilution and the management reasoning for the same.

  105. Aditya Shrivastava says:


    I wanted to ask that we should use the checklist above only for equity research part 2 for checking the financials or do we have to compare valuation ratios or other financial parameters while researching a stock.

  106. roshan says:

    Hello sir,
    What is meaning of diluting companies equities ?
    Why do companies dilute equities

    • Karthik Rangappa says:

      Suppose you are 100% owner of the company, you want to raise funds, you give a part of your shareholding to raise the funds. This is called dilution.

  107. roshan says:

    Hello sir,
    A) Like GPM more than 20%
    ROE more than 20%
    P/E less than 30%
    what is number for ideal Debt / EBIT

    B) I am confused between co relation of Inventory, Inventory days, PAT
    Inventory should increase
    Inventory days decrease
    PAT increase
    Mi right

    • Karthik Rangappa says:

      There is no ideal ratio, this depends on the sector really. Inventory can increase due to higher sales, does not mean inventory days also increases. So no correlation.

  108. Roshan says:

    Thanks sir,
    How to know company is diluting its shares?
    How does it affect investors

    Regarding inventory and PAT
    Is this right combination
    Inventory should increase
    Inventory days decrease
    PAT increase

    • Karthik Rangappa says:

      The company will announce its intention beforehand that they want to raise money by dilution. When diluted, the profitability reduces. The rest depends on the company and the sector it is operating in.

  109. Roshan says:


  110. Roshan says:

    In certain companies, for eg PGHL
    Revenue CAGR (%)
    10 Years 6.02
    5 years -0.43
    3 Years – 5.07 Years

    PAT CAGR (%)
    10 Years 29.05
    5 years 80.96
    3 years 119.66

    REVENUE CAGR for 3 and, 5 years are negative but PAT CAGR for 3 and 5 years are positive (that also significantly) how to interpret ?

    • Karthik Rangappa says:

      The growth can be -ve, but the profitability can be +ve. This means they are not growing in sales, but mainintian status quo.

  111. Roshan says:

    Sir, while considering CAGR, for how many years cagr is good to consider means of 3 years, 5years or 10years

  112. Manish says:

    hello karthik,
    as per checklist debt/ebit% shows a company highly leveraged as per earnings before interest and tax but as per debt/equity ratio is less than 1 making it virtually debtfree .so while taking investment decision what should be given more preference.
    kindly guide.

  113. Manish says:

    hello karthik as per check list
    if debt/ebit% shows a company highly leveraged as per earnings before int and tax and at same time as per debt/equity ratio is low say for eg 0.001 making it virtually debt free .so what has to be given more preference .

  114. Samuel says:

    This is a great article, infact the entire module is great and very informative.
    I had one doubt, what sources to refer to when doing the industry analysis?

  115. Pooja says:

    Most satisfying lesson in the entire module. Learning all about financial statements and financial ratios and finally falling into equity research was the most satisfying part !!!!

  116. Moses says:

    Good day,
    I’m a bit confuse, when you are referring to the ROE Dupont Model: Net Profit/Net Sales x Net Sales/Total Average Asset x Total Average Asset/Shareholders Equity. Net Sales in the formula is actually Operating Revenues am I correct?

    Also on the Computation of Gross Profit Margin: Gross Margin/ Net Sales, the Net Sales is actually the Net Sales of Product. Is this also same with the Net Profit Margin?

    • Karthik Rangappa says:

      Yup, that’s operating margins. You ignore the other income and take in only the revenues from operations.

  117. Moses says:

    Thank you so much for the reply.

  118. Arpit Patel says:

    Hi Karthik,

    Thank you so much for this fundamental analysis module. However I have one question related to qualitative analysis, where we get details like plant capacity, type of raw materials, whether plants are running at full capacity.. I am doing analysis for Ashok Leyland and I am not able to find these details. I got the location of plants and cost of goods(In depth details diff. raw materials have not been provided in schedules/notes either) from AR and their official website.

    Hoping with a favorable reply.

    Thanks and Regards,

    • Karthik Rangappa says:

      Arpit, this information has to be available in the AR, either in the tabular format or in the test description under the MD&A section.

  119. Arpit Patel says:

    Thank you so much for your response, I will look into AR and MD&A section.

  120. Alan Tellis says:

    Dear Sir,
    May I kindly request you to please explain the reason for FY12 EPS resulting in negative inspite of Revenue and PAT for FY12 being positive.

  121. Rahul says:

    The table mentions the major shareholders of a company. From the description, it is clear that we need to look for non-promoter shareholders. However, this information is not easily available online. Do you suggest any particular way to figure this out?

  122. Rahul says:

    Share capital in the table is mentioned as 17.08 crs but balance sheet says 170.8crs. Same goes with most of the values in the table here. Do we divide by 10 to simplify the numbers? Can you explain why are we doing it?

  123. Chandu says:

    Sir when I calculated checklist going through all year annual reports and finding the trend
    Sitting and calculating on book is very difficuly
    Please suggest is there any other way ?
    seeing every year annual report and writing them on book and calculating where the numbers too are in lakhs,Indian ruppes

  124. Chandu says:

    Ok sir, Sir when is financial modelling module coming on varsity?

  125. GOPI CHINNARAJU says:

    surely it is very very worth to study. karthick sir you did great job.

  126. saksham jaiswal says:

    I really like your module its very helpful and valuable for me


    Hello Sir,
    4)How many plants do they have and where are they located? (Question)
    To get a sense of their geographic presence.
    Also at times, their plants could be located in a prime location, and the value of such location could go off-balance sheet, making the company highly undervalued (The rationale behind the question)

    In the above what does the statement mean ” the value of such location could go off-balance sheet, making the company highly undervalued”?
    Can you please help me undetstand.
    Thank you..

    • Karthik Rangappa says:

      As in the company may own prime land, which could be highly valuable and not really come under the balance sheet. Although, I think the chances of this happening is low 🙂

  128. Rajesh says:

    While studying the annual reports, it is important to calculate all the financial ratios or just checklist ratios ?

    • Karthik Rangappa says:

      AS much as you can. Remember, these ratios etc are means to find the answers you are looking for, so ensure you dig for these ratios till you get all your answers 🙂

  129. Rajesh says:

    So right now PE of Nifty 50 is 40-41% is that mean valuations are very high and it’s not a good time to invest.

    What should we do if our planning has to invest in index fund or index shares thorugh SIP.

    • Karthik Rangappa says:

      The good part of SIP is that that you don’t have to worry about things like PE. You invest an amount in a disciplined way over many years, and the timing part is automatically taken care of.

  130. Sherin Gladson says:

    Hey! For ARBL, the PAT has increased while the share capital has remained constant since 2009. But the EPS in your calculations show a decline and then an increase. I think the EPS for FY 09-10 and 10-11 have been miscalculated. Please look into it. Thanks!

  131. Joshua says:

    Sir, regarding understanding the business. There are a bunch of question for which we need to find answers. If you could add a column in the table “Where it can be found” and provide the reference points in the annual report of the company it would be more helpful and it helps us to have it as a reference whenever we do equity research in a different company.

    for eg: “How many plants do they have and where are they located” question, you could add to the column like, This can be found under the heading “Locations” in the annual report.

    • Karthik Rangappa says:

      Most of the answers to such questions can be found in the Director’s report and the Management Discussion and Analysis.

  132. Chandu says:

    Sir hope you are aware of company IRFC
    Sir how to do stage 2 for such nbfc companies
    Their main operation is leasing to MoR because of more of trade receivables receivables on future their cashflow are negative how to value such company and how to compare valuation ratios when there are no peers and I can’t see the trend
    Sir finally when is next module coming
    Thank you😊

    • Karthik Rangappa says:

      Chandu, I’m not too comfortable doing DCF on NBFC/Banks. This sector requires valuations techniques other than DCF. I’m not too familiar with it.

  133. Chandu says:

    Sir I’m degree student have chapter called valuation of shares In that methods like Net asset value method,Yield method I have done that based on sums shall I apply same for valuing this company

  134. Roshan says:

    Hello sir,
    1) I prefer to invest in growing (Revenue and PAT) companies over and above 15% on a CAGR basis. Means?? I guess every year Revenue and PAT should grow by 15% YEAR ON YEAR. Please correct me
    2) Debt level – I am not able to find debt heading (in balance sheet) in site like rate star. Where find debt value in rate star.
    3.) For calculation which debt should be taken current or non current
    4) Is receivable means sundry debtors

    • Karthik Rangappa says:

      1) When you measure the growth on say 10-year basis, CAGR should be 15% or higher.
      2) Look at the balance sheet, its usually called debt or borrowings
      3) Non-current
      4) Yeah

  135. Roshan says:

    Sorry sir, regarding Q2, I could find these heading,
    Non-Current Liabilities

    Secured Loans

    Unsecured Loans

    Long Term Provisions

    Current Liabilities

    Trade Payables

    Other Current Liabilities

    Short Term Borrowings

    Short Term Provisions

  136. Roshan says:

    Thanks sir,
    But I could find the debt or borrowing in above headings.
    Among the above heading which could be consider as debt or the borrowings for the calculation debt/ ebit

  137. Bharath says:

    Sir PAT and revenue are positive for 5 years and its increasing but growth rate is volatile say from 34% growth rate it comes to 1% or negative but overall cagr is 10%. What one must do in that situation.My question is overall CAGR is good but growth rates are volatile and negative but trend is up of last 5 years

    • Karthik Rangappa says:

      Thats too much volatility in earnings, Bharath. I’d ignore the CAGR and inspect why this is happening. Maybe there is a cyclical component?

  138. Bharath says:

    Sir I found 2016 2017 cash flows are very high but from 2018 to 20 due to change in accounting policy IND AS cash flows are decreased what to do here sir shall I take same

  139. Krishna Nair says:

    Could anyone tell me why we should not invest in a company with an intense political affiliation?
    Because let us just say that while a certain car battery manufacturing company is now in a slight hump due to the lockdown, it’s share if bought around 2008 and sold now(2018 for maximum gains)would have yielded an excellent return. But on the other hand…Let’s just say that the man who is the MD, the Vice-Chairman and also the founder’s son is a part of the Lok Sabha and belongs to a certain company, and his mother, the person after the company, quite sweetly in my opinion is named after and who is also the founder and chairman’s wife, belongs to the same party. What do you think about this Karthik?

    • Karthik Rangappa says:

      The only reason to avoid companies with political affiliation is to ensure that the company is not growing due to political favours. After all, we want companies that are growing because of their operations and not due to other factors.

  140. Harish says:

    Hello Sir,

    How is Free Cash flows and Profit after tax related??

    • Karthik Rangappa says:

      Harish, will be discussing this and a lot more topics in the new module on Financial Modelling. Request you to please check that module.

  141. Harish says:

    Hello Sir,

    When exactly would the complete module on Financial modelling get released. Will you please teach us how to value a bank/nbfc/insurance/holding company?

  142. Harish says:

    Hello Sir,

    Will you teach us how to value a bank/nbfc/insurance/holding company?

  143. Shreyash says:

    Sir How do we research on the company that is just listed like nazara technologies.

    • Karthik Rangappa says:

      Check their DHRP filed with SEBI at the time of IPO. It will have all the relevant historical data useful for research.

  144. M.S.Kishore says:

    Hi Sir , A little doubt for me why you didn’t include the revenue from services in gross profit margin?

  145. Anirudh says:

    Hey! what if a company has a controversy, but it also involves the government such that they didn’t intend problems? Example the adani green energy company along with the Rajasthani govt. controversy over solar parks on farmers’ lands.

    • Karthik Rangappa says:

      Depends on you as an investor if you want to invest your money in companies that are muddled in controversies or look for opportunities elsewhere.

  146. manhar says:

    sir just a personal question, did you invest in arbl in 2014. if yes are you still holding on it.

  147. Attraya says:

    Karthik, The Face Value of Amara Raja Battery till 2012 was Rs 2. So when calculating the number of outstanding shares in FY 09-10 and FY 10-11 do we need to keep the Face value of Rs 2 or Re 1(current F.V)?
    The EPS for FY10 and FY11 you have considered 19.56 and 17.34 respectively. But while I am calculating of my own (PAT/Outstanding Shares) its coming 9.78 and 8.67 respectively. Even in screener.in it’s showing 9.78 and 8.67. Is that a typo? If not can u explain why the difference?

    • Karthik Rangappa says:

      If you are doing this today, then you will have to consider today’s face value. For historical calculation, use the historical values. As far as the difference is concerned, is that in the historical context?

  148. Attraya says:

    Yeah, when I am calculating the historical data using historical calculations, your data seems correct. I got confused looking at screener.in. Also, the change in face value indicates a stock split that happened in past. As you told that issuing new shares by company by diluting the earnings isn’t good, but this low CAGR in EPS is due to a stock split. How can stock split be bad?

    • Karthik Rangappa says:

      Splits and bonuses are not bad, these are corporate actions. The valuation of the company does not really change with these corporate actions.

  149. Madhan Adavani says:

    How do we actually get to know or get to analyse about the future prospects of the industry/sector to which the company belongs?

    • Karthik Rangappa says:

      That depends on how well you know the industry and the emerging trends and its prospects. The more you study, the better would be your knowledge about the industry.

  150. Jigar Nagda says:

    Sir can you tell the steps by which we can write Equity research reports ?
    As I want to pursue career in Equity research

    • Karthik Rangappa says:

      There are many different ways in which you can write, Jigar…right from 1 pager to a detailed report. Will probably put up a note on this sometime.

  151. Tamizh Selvi S says:

    Hi Karthik,
    Thanx for all your clear explanations. I have started analyzing a stock in Fashion Industry. Here,the profit were consistently increasing for the past 5 years except last year(might be due to the pandemic).Can you please tell me whether I can proceed with the futher analysis.

  152. Nilesh Gaikwad says:

    While calculating the CAGR, you have considered no of years as 5. In my humble opinion, it should be 4 years (Hence CAGR will increase in your tables).
    For examples in Revenue & Pat Growth paragraph, It took ARBL 4 years to achieve revenue of 3482 crores from 1481 crores. Another way to look at it is 1481 crores revenue is in the 0th year.

    • Karthik Rangappa says:

      The formula states that we have to take the starting year, ending year, and raise it by the number of years in between.

  153. Nilesh says:

    Exactly my point, the number of years in between are 4 and not 5 in my opinion. In that case the CAGR revenue growth for ARBL would be 23.8%.
    Am I counting the years wrong?

  154. Nilesh Gaikwad says:

    I guess you should not consider amount in the first year because that is the amount invested to get the returns after 4 years. Hence when you show 5 figures, 1st one is the invested amount and hence the nper = 4 in RRI formula.
    I have also cross checked my theory on Tickertape.

  155. Nilesh says:

    Can you please advise about the discount rate one should consider now when saving rate is at 3.5% and FD rate is at 5 – 5.5%. I guess the cost of capital now a days is around 6.5%. Should I consider discount rate as 6.5%?

    • Karthik Rangappa says:

      Yeah, you can consider around 6.5%. Generally, the 10-year GOI bond is an indicator of the discount rate.

  156. Nilesh says:

    Ok thanks and thank you for taking the time out and responding to our queries.

  157. Vignesharasu says:

    Hi sir for 5years CAGR revenue growth and CAGR PAT am getting the following answer but how did you get 18.6% and 17.01% ??

    (1,481÷3,482)^(1÷5)−1 = 15.71

    The 5-year CAGR revenue growth is 18.6%, and the 5-year CAGR PAT growth is 17.01%.

  158. Vignesharasu says:

    Sorry Mr karthik I got the answer thank you thank you for your great work.

  159. Yogesh says:

    Hello Karthik,
    Thanks for educating newbie investor community on various aspects of investment/trading etc. Just quick observation, EPS for 09/10 and 10/11 is calculated incorrectly. It should be 9.78 and 8.67, can you please relook into this. It should be in sync with PAT CAGR as share capital/volume is constant for the given period.

  160. Vineeth says:

    When i read the Annual report of any bank. In the P & L section, I do not see any tax expense. I see only “Less : Minorities interest” why is that? Please explain.

    • Karthik Rangappa says:

      Bank P&Ls are a little different. I’d suggest you read the schedule notes associated with the line item, Vineeth.

  161. Niraj says:

    Today I show zerodha varsity in my phone to college friends and ask them to pay some money as i buy these by paying money .And they ready to pay for it. 😂
    But after share the link for free. As the motive of zerodha to educate freely.

  162. Gk says:

    Hi sir.How to get/collect the mentioned details in stage 1 about a company?

  163. Manish Arora says:

    Hi Karthik,

    could you elaborate this statement “The earnings per share represent the profitability on a per-share basis. The EPS and PAT growing at a similar rate indicate that the company does not dilute the earnings by issuing new shares, which is good for the existing shareholders. One can think of this as a reflection of the company’s management’s capabilities.”

    Even if company is diluting the earnings by issuing the new shares, investor will be having more no of share (as bonus shares or splt). Could you please explain the above statement with an example ?


    • Karthik Rangappa says:

      So if there is dilution, the profitability per share reduces, right? If PAT is 200 and total number of shares is 20, then EPS is 200/20 = 10. But if there is dilution, and the number of shares is now 40, then, EPS is 5. So higher the number of shares, lower the EPS.

  164. Manish Arora says:

    Hi Karthik,

    while doing the Inventory check of a chemical company for (2018- 22) I can see that inventory days increased from 86 in 2021 to 229 days in 2022 but pat is increased 20% so what inference we can take here ?

  165. Manish Arora says:

    so even that’s also a positive. right ?

  166. Manish Arora says:

    Correct. So I have two questions on this
    – First Why a company will try to lower it’s EPS (higher EPS is a good thing) by diluting it’s no shares
    – second, If I have 10 shares of this company and company’s shares are diluted * 2 and it makes my shares 20. so if earlier I had eps of 10 that means total earning was 100 and even after diluting eps has come down to 5 still my earning is 20*5=100 same. isn’t it ?

    so how diluting is no of shares is impacting our anyalysis ?

    • Karthik Rangappa says:

      1) Dilution can happen on multiple counts – if the company wants to raise more capital, or issue bonus shares, or do a stock split.
      2) Dilution shrinks the profitability ratios.

  167. Manish Arora says:

    “Sorry, I lost context. Whats positive?” – so when I asked “while doing the Inventory check of a chemical company for (2018- 22) I can see that inventory days increased from 86 in 2021 to 229 days in 2022 but pat is increased 20% so what inference we can take here ?” you told “Maybe the company has pricing power here? They increased the price of the goods they are selling?”.

    so that’s what I asked even if they increased the price that’s a positive thing in analysis ?

  168. Nok says:

    In interest coverage ration section you mentioned EBIT=EBITDA – Depreciation and amortozation(560-65 =495). But in this chapter you have mentioned it as 541. Is summin wrong with my understanding?

    • Karthik Rangappa says:

      Ah, I need to double-check. But D&A are non-accounting entries, and its best to factor in that while calculating the interest coverage ratio.

  169. Saravana says:

    Hi Karthik,
    Stage1 – point no 9 says “If a highly successful investor holds the shares in the company, then it could be a good sign”
    what is highly successful investor?

  170. Punit says:

    Sir ji
    Revenue and pAT growth
    The 5-year CAGR revenue growth is 18.6%, and the 5-year CAGR PAT growth is 17.01%.
    How did u calculated 18.6% and 17.01%🤔

  171. Kiran says:

    Hi Karthik,
    How did you calculate “The 5 year EPS CAGR”? Can you pls explain?

  172. Arun raj says:

    You explained everything very well . thank you for sharing valuable information with us

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