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Fundamental

Here’s a simplified and more detailed explanation, tailored to help you understand the terms better in a straightforward way.

Understanding Financial Terms in Simple Words

When we look at a company's performance, we need to check some important numbers or "fundamentals" to understand how it is doing. These numbers tell us if the company is profitable, if it is growing, and how much risk is involved in investing in it. Below, I’ll explain these terms one by one in an easy-to-understand way.

  1. Market Capitalization (Mkt Cap)

 Market capitalization, or market cap, is the total value of a company in the stock market. It is like asking, "How much is this company worth right now in the market?"

 How do we calculate it?

 Take the price of one share and multiply it by the total number of shares the company has.

 For example:

- If a share costs ₹100 and the company has 10 crore shares, the market cap will be ₹1,000 crore.

 Why is this important?

 Market cap tells us if a company is big or small. Companies are usually divided into three groups

: - Large-cap companies: These are big, stable companies worth ₹20,000 crore or more. They are less risky.

 - Mid-cap companies: These are medium-sized companies, worth between ₹5,000 crore and ₹20,000 crore. They have more growth potential but are a bit risky.

- Small-cap companies: These are smaller companies worth less than ₹5,000 crore. They can grow fast but are the riskiest.

 So, by looking at the market cap, you know if you are investing in a big, stable company or a smaller, riskier one.

 2. Price-to-Earnings Ratio (P/E Ratio)

The P/E ratio shows how much money investors are paying for each rupee of profit a company makes.

How do we calculate it?

 Divide the current price of one share by the company’s earnings per share (EPS).

For example:

- If a share costs ₹50 and the EPS is ₹5, then the P/E ratio is 10. This means investors are paying ₹10 for every ₹1 the company earns.

 What does it tell us?

 - If the P/E ratio is high, it means the stock is expensive compared to its earnings. Investors might expect the company to grow in the future.

 - If the P/E ratio is low, the stock might be cheap, or the company might not have much growth potential.

The P/E ratio helps us know if a stock is overpriced or underpriced compared to how much the company earns.

 3. Price-to-Book Ratio (P/B Ratio)

The P/B ratio compares the price of a stock to the company’s book value. The book value is the value of all the company’s assets (like buildings, money, and machinery) minus its liabilities (like loans and debts).

 How do we calculate it?

 Divide the share price by the book value per share.

For example:

 - If the book value per share is ₹25 and the share price is ₹50, the P/B ratio is 2. This means investors are paying twice what the company’s net worth is.

 What does it tell us? –

A high P/B ratio means investors believe the company’s assets will become more valuable in the future.

- A low P/B ratio might mean the company is undervalued, or it could be in trouble.

  4. Industry P/E

The industry P/E is the average P/E ratio of all the companies in a particular sector or industry.

 Why is it important?

 It helps you compare a company to its competitors. For example:

 - If the industry P/E is 30, and a company’s P/E is 50, the company might be overvalued.

- But if the company grows faster than others, a higher P/E might be fine.

It gives context to the company’s valuation.

  5. Debt-to-Equity Ratio

 The debt-to-equity ratio shows how much money the company has borrowed (debt) compared to how much money it has from its shareholders (equity).

 How do we calculate it?

 Divide the total debt by the shareholders’ equity.

 For example: - If a company has ₹27 crore in debt and ₹100 crore in equity, the debt-to-equity ratio is 0.27.

 What does it tell us?

 - A low debt-to-equity ratio (e.g., below 0.5) means the company is using less borrowed money and is safer.

- A high debt-to-equity ratio (e.g., above 1) means the company relies heavily on loans, which can be risky.

 Investors like companies with a low debt-to-equity ratio because they are more stable.

 6. Return on Equity (ROE)

 ROE measures how much profit a company makes with the money that shareholders have invested. It shows how well the company uses shareholders’ money.

 How do we calculate it?

 Divide the company’s net profit by its shareholders’ equity, then multiply by 100.

 For example:

- If a company earns ₹29 crore in profit and has ₹100 crore in equity, the ROE is 29%.

 What does it mean?

 - A high ROE (e.g., above 15%) means the company is good at making profits from shareholders’ money.

 - A low ROE means the company is not using its money efficiently.

 ROE is a key indicator of profitability.

 7. Earnings Per Share (EPS)

EPS tells us how much profit the company makes for each share.

How do we calculate it?

 Divide the company’s total profit by the number of shares.

 For example:

 - If the company earns ₹100 crore and has 10 crore shares, the EPS is ₹10.

 Why is it important?

 A higher EPS means the company is more profitable and gives better returns to its shareholders. It’s a good measure of how much a company is earning.

 8. Dividend Yield (Div Yield)

 Dividend yield shows how much return you get from dividends compared to the current share price.

How do we calculate it?

 Divide the annual dividend per share by the current share price, then multiply by 100.

 For example:

 - If the annual dividend is ₹2 per share and the share price is ₹100, the dividend yield is 2%.

What does it mean?

- A high dividend yield means the company pays good dividends, which is great for investors who want steady income.

 - A low dividend yield means the company pays little in dividends, but it might be reinvesting its profits for future growth.

 9. Book Value

Book value shows the company’s net worth per share. It is the value of everything the company owns (assets) minus everything it owes (liabilities), divided by the number of shares.

How do we calculate it?

Book Value = (Total Assets - Total Liabilities) ÷ Total Shares

 For example:

 - If a company has ₹1,000 crore in assets and ₹500 crore in liabilities, and it has 20 crore shares, the book value per share is ₹25.

What does it tell us?

If the book value is much lower than the stock price, the stock might be overvalued. Book value helps investors understand if a company is worth its current stock price.

 10. Face Value

 The face value is the original value of a share, set when the company issues it. It does not change and is not the same as the market price.

 For example:

 - A share may have a face value of ₹1 but trade in the market at ₹500.

Why is it important?

 Dividends are often declared as a percentage of the face value. For example, a 50% dividend on a ₹1 face value share means a dividend of ₹0.50 per share.

  Conclusion

 By understanding these terms, you can make better investment decisions. Let’s summarize: - Market cap tells you the company’s size and market value. - P/E ratio shows how expensive or cheap the stock is compared to its earnings. - P/B ratio compares the stock price to the company’s assets. - Industry P/E helps you compare the company to its competitors. - Debt-to-equity ratio tells you how much risk is in the company’s finances. - ROE shows how efficiently the company makes profits with shareholders’ money. - EPS tells you the profit per share. - Dividend yield tells you how much return you get from dividends. - Book value shows the company’s net worth. - Face value is the original value of the share. These terms together give you a complete picture of a company’s health, profitability, and potential risks. By combining these metrics, you can decide whether a stock is worth buying or not!