Question: How do I learn fundamental analysis of stock market (Reading annual report, balance sheet) etc?
Answer: Always try to keep things simple.
Lets find a target price for a stock until next quarterly results.
We all know that Trailing PE ratio= Market Price/ Sum of Last four quarters EPS
To find the target price,
Target price= Annualized latest Quarter EPS × Average PE ratio of the stock
Annualized latest Quarterly EPS x Industrial Average PE.
The above formula is valid for a good health company with good growth, Profitability ratio and decent valuation ratio.
Let’s take example of Bata India.
Bata India Posted EPS of 2.9 in Dec quarter.
Target price= 2.9 ×4 ×48 = ~ 560.
Stock was trading below 500 in December, stock had moved past 545 in March 2018.
The stock posted EPS of 4.4 in Q2 2017.
Target price= 4.4 ×4 ×48= ~ 844.
Stock was trading around 585 in August 2017, it had moved above 800 in oct-Nov 2018.
The stock posted EPS of 3.34 the recent quarter and the target price is 3.34 x4 x48= ~ 640.
It doesnt mean the stock should rally from 500 to 545 then to 840 then fall back to 640, this gives us a confidence to hold or exit a stock. It gives us the range in which a stock can trade in next 90 days.
Once the recent results was posted by Bata, we had updated
Stock was trading at 780 and currently the stock is at 728.
If you see good results coming in an good economy, you can buy good stocks on bad results. Suppose you see Bata posting good numbers in coming 3-4 quarters. Bata can oost 5 or 5.5 EPS then forward target price is
Future target price= 5 x4 x48= 960.
So any dips towards 680 can be bought with a sl of 620 for a target of 960 in 9 to 12 months.
Please share and comment below on how you go through the fundamentals.