How can an investor determine the efficiency of a company's working capital management?

There are a number of tools that determine how efficiently a company is managing its working capital, principally by looking at measures of inventory and cash flow.

Analysts and investors look at a company's working capital to determine its overall efficiency and financial health. Working capital is essentially the money necessary for a company to maintain its operations on a day-to-day basis. It is composed of a number of components, the three most important being:

• Accounts payable
• Accounts receivable
• Inventory levels

Read more at:

https://www.investopedia.com/ask/answers/041015/how-can-investor-determine-efficiency-companys-working-capital-management.asp

How to Analyse a Company's Inventory

Inventory represents products a company possesses on its premises or goods consigned to third parties. Inventory plays an important role in the smooth functioning of a company's business since it acts as a buffer between the production and completion of customers' orders.

... Inventory represents a current asset since a company typically intends to sell its finished goods within a short amount of time, typically a year. Inventory has to be physically counted or measured before it can be put on a balance sheet. 

Read more at:
https://www.investopedia.com/articles/investing/020116/how-analyze-companys-inventory.asp

8 Ways Companies Cook the Books

Every company manipulates its numbers to a certain extent to make sure budgets balance, executives score bonuses, and investors continue to offer up funding. Such creative accounting is nothing new. 

However, factors such as greed, desperation, immorality, and bad judgment can cause some executives to cross the line into outright corporate fraud.

... investors should ... know how to recognize the basic warning signs of falsified statements. While the details are typically hidden, even from accountants, there are red flags in financial statements that can point to the use of manipulating methods.

Read more at:
https://www.investopedia.com/articles/analyst/071502.asp

How to Evaluate a Company's Balance Sheet

For stock investors, the balance sheet is an important financial statement that should be interpreted when considering an investment in a company. 

The balance sheet is a reflection of the assets and the liabilities owned by the company at a certain point in time. 

The strength of a company's balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy, asset performance and capitalisation structure.

Read more at:
https://www.investopedia.com/articles/basics/06/assetperformance.asp

The Most Crucial Financial Ratios For Penny Stocks

Given adequate financial disclosure, we can apply some of the same analytical methods we use for larger companies to determine if a given penny stock is worth our investment dollars. 

Strong numbers and a positive trend on the balance sheet, income statement, and cash flow statement, are important because so much of the penny stock’s value is based on future expectations of performance.

Read more at:
https://www.investopedia.com/articles/investing/061915/most-crucial-financial-ratios-penny-stocks.asp

Warren Buffett: How He Does It

Buffett follows the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth.

There isn't a universally accepted way to determine intrinsic worth, but it's most often estimated by analyzing a company's fundamentals. 

Like bargain hunters, the value investor searches for stocks that they believe are undervalued by the market, or stocks that are valuable but not recognized by the majority of other buyers.

Read more at:
https://www.investopedia.com/articles/01/071801.asp

What is a good or bad gearing ratio?

A gearing ratio is a general classification describing a financial ratio that compares some form of owner equity (or capital) to funds borrowed by the company. Gearing is a measurement of a company's financial leverage, and the gearing ratio is one of the most popular methods of evaluating a company's financial fitness.

Though there are several variations, the most common ratio measures how much a company is funded by debt versus how much is financed by equity, often called the net gearing ratio. A high gearing ratio means the company has a larger proportion of debt versus equity. Conversely, a low gearing ratio means the company has a small proportion of debt versus equity.

Read more at:
https://www.investopedia.com/ask/answers/121814/what-good-gearing-ratio.asp

How ROA and ROE give a clear picture of corporate health

With all the ratios that investors toss around, it's easy to get confused. Consider return on equity (ROE) and return on assets. (ROA). Because they both measure a kind of return, at first glance these two metrics seem pretty similar. 

Both gauge a company's ability to generate earnings from its investments. But they don't exactly represent the same thing. A closer look at these two ratios reveals some key differences.

Together, however, they provide a clearer representation of a company's performance. Here we look at each ratio and what separates them.

Read more at:
https://www.investopedia.com/investing/roa-and-roe-give-clear-picture-corporate-health/ 

Understanding the Cash Conversion Cycle

"The cash conversion cycle (CCC) is one of several measures of management effectiveness. It measures how fast a company can convert cash on hand into even more cash on hand. 

The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. Generally, the lower this number is, the better for the company. 

Although it should be combined with other metrics (such as return on equity and return on assets), the cash conversion cycle can be especially useful for comparing close competitors because the company with the lowest CCC is often the one with better management."

Read more at:
https://www.investopedia.com/articles/06/cashconversioncycle.asp

A Cautionary View on Future Group stocks

The erstwhile promoter of Pantaloon Retail - a debt-laden company subsequently sold to the Aditya Birla Group - used to be a market darling. 

Aggressive growth at the cost of profits led to his downfall. But you can't keep an ambitious entrepreneur down for long. He reappeared as the promoter of Future Group of companies.

Regular appearances at industry seminars and recent forward-looking statements to various TV channels about becoming one of the leading players in the retail segment had caught my attention.

Two recent articles in moneycontrol.com motivated me to look a little closer at Future Group stocks. The first, published on Dec 7, had a headline: Future Supply Chain IPO subscribed 72% on Day 2.

The second, published on Dec 8, had a headline: Future Consumer Spikes 15%; Morgan Stanley initiates Overweight; sees 61% upside. My mental 'alarm bells' started ringing. Was this article 'planted' to ensure full subscription of Future Supply Chain?

There are already several listed Group companies - Future Enterprises, Future Lifestyle Fashions, Future Consumer, Future Retail, Future Market Networks. Now, Future Supply Chain. What is going on? 

Ambition to succeed is fine - but should it be at the cost of gullible small investors? Future Group can hardly be compared to Tata Group, Birla Group,  Ambani Group or Mahindra Group. So many listed companies seem like a ploy to raise (and siphon off?) money.

Here is a quick look at the fundamentals of Future Group companies (based on Mar '17 annual figures from money.rediff.com):-

1. Future Enterprises: Sales - Rs 3782 Cr; Net Profit Margin - 1.09%; P/E - 59.4
2. Future Lifestyle: Sales - Rs 3877 Cr; Net Profit Margin - 1.18%; P/E - 146.2
3. Future Consumer: Sales - Rs 1645 Cr; Net Profit Margin - 0.46%; P/E - 1359
4. Future Retail: Sales - Rs 17075 Cr; Net Profit Margin - 2.15%; P/E - 67.6
5. Future Market: Sales - Rs 82.5 Cr; Net Profit Margin - (20.8)%; P/E - (36.2)

The five listed companies have a total debt of almost Rs 7000 Cr, and are barely making any profits. How will they service their debt? By raising more equity or, even more debt? The same operating pattern of top line growth at the cost of non-existent bottom line is getting repeated.

Can a leopard change its spots? Caveat emptor.

Top 7 Technical Analysis Tools

Many analysts try to convey the impression that technical analysis is an esoteric practice not meant for investors at large. The more jargon one uses, the more it helps to obfuscate the uninitiated.

Contrary to its name, there is nothing 'technical' about technical analysis. So, what is it? 

A graphical representation of stock prices (or index level) over time leads to certain well-identified price patterns that reveal the underlying supply and demand for the stocks (or index).

But aren't graphs used in mathematics and physics and chemistry? In other words, graphs equals science equals technical, right? That is the mistake that many investors make (probably because they had a bad science teacher in school).

Observing and identifying price patterns as they are forming, and using a few tools/indicators that help to suggest likely changes in the patterns (i.e. the underlying supply and demand) is all that is involved in technical analysis.

May be that's a bit over-simplified. Understanding which combination of tools to use, and identifying which patterns are more reliable in helping to estimate future price changes require lots of practice and real-world experience.

In other words, technical analysis is quite simple but not easy. That should not deter an investor from learning the basics and applying the learning in actual trading and investing.

Fundamental analysis involves detailed study of Annual Reports, the economy, sectoral growth, competitive environment, management competence and integrity to identify which company stocks are investment-worthy.

Just because a stock is investment-worthy doesn't mean it has to be bought at the current price. This is where technical analysis can help. If the price pattern shows supply is exceeding demand, the stock's price may be getting ready for a fall.

If the supply and demand seems equally matched, the stock price may meander sideways for weeks or months. Only when demand exceeds supply can a stock's price start moving up.

A problem faced by many small investors - who have taken the brave step to venture into studying price patterns - is which technical tools/indicators to use when and how.

The KISS principle works well. The fewer indicators you can use to get reliable results the better. Three or four indicators taken together can be adequate.

In the following investopedia.com article, the top 7 technical tools - from the hundreds that have been developed over the years - have been listed. Try them out:
https://www.investopedia.com/slide-show/tools-of-the-trade/

How to use the PEG ratio to evaluate companies

It is that time of the year when annual reports start arriving in mailboxes. With the stock market at a new high, it is becoming increasingly difficult to find stocks available at reasonable valuations.

All the more reason to take some time in going through annual reports in detail to find out which stocks to hold, which stocks to sell and which stocks to add more of.

The Price-to-earnings ratio (i.e. CMP/EPS) is commonly used to evaluate whether a company is fairly priced or over/under-valued. What the ratio doesn't reflect is whether earnings are growing or not.

The Price-to-earnings growth ratio (PEG = PE ratio/Annual EPS growth %) can provide a more realistic valuation metric.

Let us look at the ratios of two FMCG companies - HUL (MNC) and Marico (Indian):

HUL - EPS for FY17: 20.75; for FY16: 19.12; EPS Growth: 8.5%; P/E: 52.8;
Therefore, PEG = 52.8/8.5 = 6.2

Marico -  EPS for FY17: 6.53;  for FY16: 5.36; EPS Growth: 21.8%; P/E: 48.6;   
Therefore, PEG = 48.6/21.8 = 2.2

The P/E ratios of both companies seem high. But Marico's PEG is much lower, making it a better value than HUL (at Jun 1 '17 closing prices).

Read more here.
  

Stock prices are fluctuating wildly - what should small investors do?

To answer that question, one needs to understand why stock prices fluctuate. You can read this article to learn more. 

In an ideal world, a stock's price moves only in one direction. If it is moving up, you make money by 'buying low and then selling high'. If it is moving down, you make money by 'selling high and then buying low'.

But life, and stock markets, are never that simple. In a longer-term up trend, there are periods of correction and consolidation that provide opportunities to buy for experienced investors.

A longer-term down trend has periods when there are counter-trend rallies and consolidations that provide selling opportunities.

If you prefer to look at stock price movements through a filter of fundamental analysis, you look at valuations and ratios. If you rely on technical analysis, you look at trend lines and chart patterns.

But there are times when markets seem to go completely haywire. Valuations go out the window in a frenzy of buying. Technical patterns and support levels lose all meaning amid a wave of selling.

Much like what has been going on for the past couple of days. Why? Primarily due to a couple of reasons that Taleb would call 'black swans' - events for which there were little advance warning and which are likely to cause upheavals in the economy and the stock market.

To make matters worse, these two 'black swan' events - Trump's victory in the US Presidential elections and demonetisation of Rs 500 and Rs 1000 bank notes in India - coincidentally occurred on the same day, viz. 9/11!

The best thing for a small investor to do is not to panic. 'This too shall pass'. 

If you have proper financial and asset allocation plans in place, you should simply follow those plans and invest accordingly.

If you don't have plans in place, the stock market will seem like a casino and you are unlikely to realise any of your your financial and investment goals.

If you are itching to fish in troubled waters, remember that you have to know exactly when to enter, how long to stay and when to exit. That is difficult for even experienced investors.

Is stock investing risky?

To be able to answer that question, one has to understand the meaning of risk. The problem is: there is no clear cut definition of risk, or the best way to measure risk.

Volatility is often considered a measure of risk - particularly by inexperienced investors. But seasoned traders thrive on volatility and make most of their money from it.

One often thinks of a bank fixed deposit as 'safe'. Why? Because there is very little chance of losing your principal amount. 

Compared to a bank fixed deposit, stocks seem more 'risky'. Why? Because during a bear phase the price of a stock can fall below the price at which it was bought.

Many small investors fall into the trap of such a simplified view of risk and choose the 'safe' option. What they fail to realise is that safety also comes at a price.

Returns from fixed deposits are taxable and subject to fluctuations in interest rates. A 3 years deposit earning 8% interest may seem like a good safe return, but the real rate of return is only 2% if inflation is 6%.

There are a couple of ways that risk can be reduced when investing in stocks. The first is by diversification: (i) across market capitalisation, i.e. investing in a mix of large-cap, mid-cap and small-cap stocks; and (ii) across sectors, i.e. buying stocks from auto, pharma, FMCG, financials, etc.

The second is by portfolio diversification through investment in different asset classes, like stocks, funds, fixed income, gold.

Another way to reduce the riskiness of stock investing is by learning the basics of technical analysis. 

While fundamental analysis is a must in understanding the financial robustness and competitive advantage of a company, technical analysis provides signals of when to buy, when to sell and when to sit tight.

Plus, the concept of a 'stop-loss' allows an investor to exit with a smaller loss when a stock's price is tumbling down.

If you are not adept at picking stocks, you can still invest in stocks and diversify your portfolio by buying units of different mutual funds.

By choosing the 'dividend option' in a fund, risk is reduced because the periodic dividend payments act as partial profit booking and freeing up some cash that can be utilised elsewhere.

So, the answer to the question is: No - provided you know what you are doing.

To learn more about risk, here is an interesting article from investopedia.com.

Are the movements of a stock market index predictable?

That may sound like a strange question coming from some one who regularly writes about the movements of Sensex, Nifty, S&P 500, FTSE 100. Nevertheless, it is a pertinent question.

Many small investors spend an inordinate amount of time and energy in trying to figure out in which direction a stock market index is going to move next. Some do it out of curiosity. Others, because they have taken a position in the F&O market. Some are trying to 'time the market' by fine tuning their entry or exit.

Those who have spent a long enough time in stock investing - whether using fundamental analysis, or technical analysis, or both - already know that predicting index (or stock price) movements is like tossing a coin. You only have a 50% chance of success at best.

(That may be good enough to make money. However, the 50% success rate comes from averaging multiple tosses/predictions. You may get 7 'heads' in a row and feel that you have mastered the art of coin tossing/predicting. But then you may get 12 'tails' in a row that will wipe out all your investments!)

What should a small investor do? Whether you are an inexperienced or an experienced investor, you need to accept the fact that index movements can not be predicted or controlled.

So, concentrate your time and energy on stuff that can be predicted and controlled. Like, how much you are likely to earn over the next 5-10-15 years. How much you need to save each year to achieve your financial goals. What kind of assets you should invest your savings in to get the required rate of return.

In other words, make an investment plan and then stick to that plan regardless of index movements. The plan may need to be tweaked to optimise returns - but such tweaking should not be done more than once or twice in a year.

It takes a lot of mental strength, faith and discipline to stick to a plan when an index goes through its periodic turmoil. Specially when a 15 months long bear phase decimates your stock portfolio.

But over the long term, a planned investment strategy will generate better returns than an unplanned strategy based on predicting index movements.

That was the long answer. The short answer is: Not really.  

A 7-Step Guide to Value Investing

If you enjoy the thrill of making some quick profit from the stock market by booking trading profits of Rs 2 or Rs 3 per stock then you will save time and effort by reading no further.

But if you are interested in building wealth over the long-term - which requires a well-planned but patient and boring strategy - then going through the 7-Step guide to Value Investing may be beneficial.

So without further ado, here are the 7 steps (according to Andrew Beattie): 

1. Buy Businesses

When you buy a stock, you are not buying a piece of paper or an entry in a demat account. You are actually buying a 'share' in a company. That means, you should spend some time in researching the company's business and assess whether the 'share' you are buying is at a fair price.

2. Love the Businesses you Buy

If you really want to build wealth, you need to hold 'shares' of good businesses over a long period of time. To be able to do that, you have to build a fundamental 'relationship' with the company by regularly analysing its performance. If performance is improving, buy more. If performance is not up to the mark, book part profits. 

3. Simple is Best

You need to understand how a business generates profits and maintains market share. The simpler the business (like Colgate's toothpaste or Marico's edible oil) the easier it is to understand. The more complex the business (like Biocon's medicines or Persistent System's software) the harder it is to fathom how the business is faring.

4. Look for Owners, not Managers

A good manager can successfully run a not-so-good business. A not-so-good manager can run a good business to the ground. Manager integrity and transparency is paramount. Look for managers who act like owners by having a long-term growth focus and delivering on promises. 

5. When you find a good thing, Buy a Lot

A value investor does not need to buy or sell regularly. He waits patiently for the stock of a good business to be available at a fair price. When an opportunity arrives, he buys the stock by the truckload. While this means 'timing the market' - not recommended for novice investors - concentrated portfolios of fewer stocks in large quantities tend to generate better returns.

6. Measure against your Best Investment

Jumping in at every opportunity is not the trait of a value investor. Quality of business is more important than quantity. That means buying a stock only if the company is better - or at least as good - as the ones you already own. It is your money. Why not buy the best companies?

7. Ignore the Market 99% of the time

Markets fluctuate. They neither go up or down in a straight line. Ignore the daily gyrations. When a market is rising, you don't need to buy. Neither should you sell if the market is falling. Rely on your asset allocation plan instead.

Read Beattie's full article here.

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Want to be a successful long-term investor? Act like a professional golfer

For the uninitiated (and the disinterested), here is a brief outline of the career progression of a typical professional golfer:

• an early interest in the game from a father who plays golf and/or proximity to a public golf course
• interest turns into passion - leading to playing regularly come rain or shine
• lessons from a local golf instructor that fine tunes skills
• appearance in local golf tournaments where skills and potential are recognised by experts
• a golf scholarship from a college/University
• competing in inter-college, regional and national amateur tournaments
• becoming a professional golfer after (or even before) completing a college degree
• honing skills in lower level professional tournaments before qualifying for national/international level tournaments
• maintaining status in national/international level tournaments by winning at least once in two years, or by consistently performing every year to be ranked within the top 100/150
• winning one or more Major tournaments - like the Masters, British Open, US Open, PGA Championship - to earn a place in the Hall of Fame

If you are still with me so far, visualise those bullet points as a large funnel. Thousands of kids around the world show an interest in the game that turns into a passion. As they progress along the skills and experience path, the funnel starts to get narrower and narrower.

Many don't make it to college. Those who do, fail to make a mark in inter-college tournaments. Only a handful perform outstandingly at the amateur level to get a direct entry into a few professional tournaments. The rest grind their way through lower level professional tournaments, and may never get to play in any of the Major tournaments.

So, what does all this have to do with successful long-term investing? I'm coming to that.

Making big money as a professional golfer is extremely difficult, if not impossible. How difficult? Only 5 golfers in the entire history of the game have managed to win all the four Major tournaments in their careers. Many well-known golfers have never won a Major. A few have won one Major tournament only to fade into oblivion after that.

In the recently concluded Masters tournament, last year's winner Jordan Spieth had a 5 shot lead with 9 holes left to play. Everyone expected him to win again. Inexplicably, Jordan dumped two shots into the creek in front of the 12th hole to lose his lead and finished second. 

The game itself requires a lot of skill and dedication. On top of it, one requires an extraordinary amount of patience and equanimity. Unlike in most professional sports, golfers don't make any money just by playing in a tournament. They have to qualify for prize money by being among the top 60 or 70 after the first 2 days of a typical 4 day tournament that has 140+ entrants. Several past winners failed to qualify for the last 2 days of the 2016 Masters.

Tournament organisers rarely help in arranging travel and hotel bookings. So, a golfer has to take care of all logistics and pay upfront from his own pocket for travel and lodging. If he fails to qualify after the first 2 days, he has to pack his bags and go home without earning anything, or head for the next tournament early to put in some practice to iron out mistakes.

Anyone who has been investing in the stock market for any length of time should be able to draw an analogy from the golfer's career funnel. 

Most investors show a lot interest and passion initially. But they become euphoric when a stock's price moves up and get out quickly; or, fail to remain calm under adverse circumstances, averaging as a stock's price continues to move down.

As losses increase, many investors sell and give up. Others soldier on in the hope of recovering their losses, but often fail to do so. Only a very few develop the skills, patience and equanimity to make money consistently and build wealth over the long-term. 

Moral of the story? Learning about fundamental and technical analysis is necessary but not sufficient. Having the correct mental make-up - of being dispassionate at a gain or a loss and taking the appropriate buy/sell decisions - will separate the long-term wealth-builders from the short-term thrill seekers.

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Top-down Analysis: Finding the Right Sectors and Stocks

The stock market seems to be recovering from a year-long correction. Experts and analysts are suggesting that the next leg of a long-term bull market is about to unfold.

This is a good time for new investors to start building an investment portfolio. Note that I haven't mentioned anything about buying stocks just yet. 

Building an investment portfolio that will generate inflation-beating returns for many years requires careful planning and analysis. So, how should you begin the process?

Ideally, you should get in touch with a financial planner who will hand-hold you through the process of preparing a financial plan based on your current and future earnings and financial commitments.

Another option is to spend some time on research about how to prepare a financial plan, and do it yourself. It is not rocket science. Basic math skills and accounting knowledge is good enough.

Next, properly assess your risk tolerance. There are tools available to do such an assessment.

Based on your financial plan and risk tolerance, an asset allocation plan should be prepared. What is the necessity of an asset allocation plan? 

It diversifies your investments among different asset classes - like equity, mutual funds, fixed income instruments, gold - to enable better returns under different market conditions.

Now you are ready to build your investment portfolio according to your financial plan, risk tolerance and asset allocation plan.

To beat inflation, you have to invest in equity shares. It is not just about opening trading and demat accounts. You need to know which stocks to buy. 

For that, you need to go through another process, called Top-down Analysis - where you figure out how the economy is doing and which sectors are likely to perform better during the next leg of the bull market.

It helps to have some knowledge of the business processes in the identified sectors. 

If you have identified FMCG sector as a potential money-spinner due to the thrust on rural income by the government, you need to know that companies in the sector typically have huge advertisement costs, strong cash flows, low capex, well-known brands, high P/E, low growth, good dividend payouts.

You can choose the top two or three companies based on their rural distribution reach. Repeat the exercise for three or four more sectors to get adequate diversification. 

Now you have 10-12 stocks from three-four sectors for the equity part of your portfolio.

Read more about Top-down Analysis here.

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How to Pick Stocks for Investment - Part II

Why small investors should relentlessly pursue Saraswati and wait patiently for the blessings of Lakshmi - instead of the other way around

In Hindu mythology, the Holy Trinity of Lord Brahma, Lord Vishnu and Lord Maheshwara represent the cycle of life - Creation, Preservation and Destruction.

They are also symbols of the three ‘gunas’ (or attributes) of the soul – sattva, rajas, tamas – that have to be understood and then transcended for the soul’s liberation and eventual union (yoga) with the Universal Consciousness.

The Divine Consorts of the three Lords are Saraswati, Lakshmi and Parvati. Saraswati is the Goddess of learning, speech and music. Lakshmi is the Goddess of wealth, prosperity and generosity. Parvati is the Goddess of fertility, love and devotion.

Here, we will concern ourselves with Saraswati and Lakshmi – who appear to be mutually exclusive. Where one is present, the other is absent.

There is a Bengali proverb that says: “Those who concentrate on their education eventually get to ride in nice cars.” In other words, pursue Saraswati, and Lakshmi will eventually give you her blessings.

Times have changed. Saraswati has taken a back seat. Lakshmi has become the Goddess to be pursued – by hook or by crook. The concept of ‘capitation fees’ paid by wealthy parents to private medical and engineering colleges to admit their academically inferior sons and daughters is a glaring example.

Those with knowledge and learning have very little money. Those who have lots of money are often crude and semi-literate. Many of our rowdy Parliamentarians have amassed vast amounts of money through dubious means.

Many small investors perhaps get influenced by what is going on around us. The video of a farmer who has not paid the last three instalments of a Rs 1 Lakh loan getting beaten up by uniformed cops no longer shock us.

The King of Good Times, a willful defaulter of over Rs 9000 Crores of loans from several banks, thumbs his nose at authorities and flies off to a foreign land and there is a murmur of protest in social media, which will soon die down.

As someone put it succinctly: “If you owe 1 Crore to a bank, it is your problem. But if you owe Rs 1000 Crores, it becomes the bank’s problem."

So, why am I suggesting that small investors should pursue Saraswati and wait patiently for Lakshmi? First, I belong to the old school of the Bengali proverb mentioned above.

Second, most small investors may not have the resources of our wily politicians to launder their wealth into real estate projects or foreign bank accounts through ‘hawala’.

Making money from the stock market is the easier part. Retaining that money and growing it into long-term wealth requires skill and learning.

If you are suddenly blessed by Lakshmi and make a 10-bagger return on a penny stock, will you know how to turn that 10-bagger return into 100-bagger wealth? Or, in your urgency to chase Lakshmi, will you reinvest in another penny stock and lose it all?

Not only do you need to learn about the economy, money market, bond yields, put/call ratios, fundamental and technical analysis to survive in the stock market, you need to follow proper financial and asset allocation plans.

Without the blessings of Saraswati – which requires life-long commitment to learning – the blessings of Lakshmi may be short-lived. Unless – according to a Marathi proverb – she breaks her leg and has to stay put at your home for some time. 

Fundamental Analysis: Solvency ratios and Liquidity ratios

Selecting a company for investing is not a trivial task. Many small investors get into trouble because they buy a stock without doing adequate homework. 

A stock may be in the news as a potential multibagger, or may be approaching its 25th or 50th year of existence or has a reputation of distributing large dividends.

Those may be good reasons for someone to buy the stock in the hope of making some quick gains. But for building wealth for the long-term, more detailed analysis is necessary to determine a company's staying power.

Ratio analysis is a good way to differentiate a company from its peers and competitors. But there are so many ratios to analyse - where should you start?

The state of financial health of a company is one of the first things you should evaluate. If the financial foundation is strong, many other shortcomings can be overridden.

Solvency ratios - like debt/equity and interest coverage - indicate the ability of a company to meet its long-term financial commitments.

Liquidity ratios - like current ratio and quick ratio - indicate how well a company can meet its short-term financial obligations.

To learn more about solvency and liquidity ratios - how to calculate and evaluate them - visit the following links at investopedia.com:

Link 1

Link 2