Does management have a tremendous track record?
The most important thing for an investor is to find out the management track record of a company or not. It is upon the value, skill and visualization of the management that the future of company rests. A good and competent management can make a company grow. There are numerous success stories, of prosperity that resulted due to the foresight and vision of management. Chairman YC Deveshwar diversified ITC into hotels (the WelcomGroup chain); his successor diversified into agro based industries.

Investor needs to make opinion about a company by analyzing its past record and performance. So it is always a good habit to know about the past performance of a company.

Is the business a superb business?
It is not just about investing in the company, the nature of business is again an important factor; one can avoid high tech companies, which bring new technology rapidly, as they are comparatively unpredictable in long run. Such businesses bring the fab but suddenly fade after sometime. It would be reasonably safer to invest in the “Low-Tech” business that has absence of change like Paints, shaving blades, rugs etc.

If you are good at calculations, search the difference between the value of a business and the price of that business in the market. This is the key to value investing.

And sometimes when market is fearful for a business, become greedy to get that stock and vice versa. Buy when people are selling and sell when people are buying…it works.

As investor should always look at large company rather than in a small cap company of the same sector because theoretically and practically it is observed that the stock of large companies recovers earlier. Market capitalization is also a good indicator to know which one is big and which one is small company. On the contrary small cap companies stock takes time to realize their full value in the market. Moreover, investor must look for under valued stock rather than a overvalued stock, and should be interested in non-asset intensive businesses with high returns on equity, little or no debt, operating in non-commodity type industries without fixed cost structures.

 
The success of a company is of major significance for an investor. Profitability ratios support an investor in shaping how well a particular company is doing in relation to other companies within the similar industry, and with reference to its own performance in earlier years. With the help of profitability ratio, an investor can calculate the company’s efficiency on the basis of the returns generated on sales and investments.

Is the problem temporary or long-term?
The focus here is to enquire that weather the companies stock is trading lower on factors other then related to company’s financial or strength like because of some panic in stock market or else weather the stock is beaten down due to some of the bad development in the company which has short term impact & which is going to change as far fundamentals are concerned in the long term of the company.
Before Investing in any stock, an investor must have to know the overall performance of the company. The choice to make the stock market endeavor succeed lies upon the investor. A wise investor would only investigate into stock market investment upon being apprised with the necessary and crucial information.

Sometime problems come from the result of one-time mistakes on the part of management. If there is long-term problem in the stocks then investor must have to change the direction of his/ her investment as investment is made to earn profit. Build stock market research and decide which stock is profitable one, which company can grow in future and which one is likely to get trap.  Accordingly plan your stock investment. The market is always random in the short-run, but in long-term markets do better than those who inclined to buy stock in rising markets. It is a basic mathematics. Those with the lowest average cost will always win the wealth accumulation game.

Is investor financial capable to wait out the problem?
It purely means being patience and disciplined; investor should able to attach the emotions and think for himself. He must know when to sell or to buy. The big question is that is investor financially able to wait out the company’s difficulty? If you have the patience then you must invest the money in good companies because the market will definitely recognize them. In short term the undervalued stocks may fall for below than buying price. But in the long run patience will definitely bring fruit full return and a smile on face.

To conclude, it is important that at all times investors should ensure that their portfolios are well diversified, taking into account their needs and aspirations.. Whether it is a bull run or a bear hug, the market throws up opportunities for those who look out for them, and for those who invest wisely. Not only a single system has consistently outperformed the market. All systems require thought and some assumptions. However, of all the systems that I have experimented with and tried, the one I am most comfortable with is fundamental analysis as it is the most logical and the most meaningful. There is much feeling attach to money and there is no avoidance of any fact. You can minimize the pressure by using this investment decision strategy. In single sentence it is advised do your homework well. While choosing a stock, discipline is the key. Keep an eye on the changing economy, because the fundamentals of a company are dynamic and change with the overall economy.

The hive-off of the tower business to an independent entity is a new trend like Bharti’s Bharti Infratel is a strategic step to become the largest tower company in the world. Resulting in an asset base of USD 5.3bn – USD 5.6bn for Bharti Infratel. Reliance Communications is unlocking value by going for listing of its tower business. R-Com’s tower plans could also scale up considerably if its GSM plans get going.

In Europe, Vodafone and Hutch share their infrastructure largely because of the small size and density of population covered. This is the case in Asia, with China as an exception. Experts opine that India too could go the China way, due to the geographical spread and population density. In America, independent tower companies have become what they are by acquiring towers of operators gradually. The area and the population covered make it unviable for an operator to run a tower company with itself as a sole tenant. Sharing thus becomes a natural outcome of the need to cover the Indian landscape at a cost that doesn’t cost the earth.

The high capex in towers is one scary part of the business. (A few US companies have a debt-equity ratio as high as 8:1.) Typically, a ground-based tower costs Rs 25-30 lakh. A roof-based tower can be built for Rs 13-14 lakh. On having a look at the additional 1,10,000 towers that are expected to come up by March 2008—at a conservative cost of Rs 15 lakh per tower—some Rs 16,500 crore would have been sunk into them as capex. Industry insiders say a debt-equity ratio of 1.5-2 would be comfortable, and is not impossible. Also tower companies are valued at a multiple of earnings before interest, depreciation, taxes & amortisation. Companies operating in mature markets such as American Towers are valued at 16-17 times the EBITDA. We expect Indian tower companies to trade at a much higher multiple as compared to global peers in view of strong growth in the subscriber numbers.

 
Currently the Indian Telecommunication market is valued at around $100 billion i.e around Rupees 400,000 crore. Two telecom players dominate this market – Bharti Airtel with 27% market share and Reliance Communication with 20% along with other players like BSNL and AT&T.

The Outlook:

Indian telecommunication Industry is one of the fastest growing telecom market in the world. The mobile sector has grown from around 10 million subscribers in 2002 to reach around 180 million by 2007 registering an average growth of over 90% yoy. It is estimated that India needs 300,000 towers right now. So, what these operators now want is to get other operators to place their equipment on the existing towers for a fee. That gives it a clear revenue stream from a business where there was none till quite recently. Also if more than two operators are co-located on a single tower, it reduces everyone’s capex. India has 120,000 tower sites, having 136,000 Base Transmitting Station of different telecom companies. Bharti Airtel has the largest tower portfolio with 40000 tower sites and around 1.26 occupants per tower. Reliance Communications has 14000 towers. All other operators’ towers have lower occupancy ratios and face challenges in facing competition from larger players.
It is estimated that by 2010, India would have have 42.5 crore mobile subscribers thus creating demand for 4.5 lakh Business Telecom Systems (BTS), with major demand coming from rural areas. Estimates say that Bharti would have 33% market share followed by R-Com with 18.3% market share. Thus, the tower business of telecom companies will put them follow a rapid growth path leading to higher valuations.

Established in 1983, Sun Pharmaceutical Industries Ltd. is an international, integrated, specialty pharmaceutical company. It manufactures and markets a large basket of pharmaceutical formulations as branded generics as well as generics in India, US and several other markets across the world. The company has strong skills in product development, process chemistry, and manufacturing of complex API, as well as dosage forms. The company operates in select therapeutic segments like psychiatric, neurology, cardiology, diabetology, orthopedics and gastro-enterology. It markets specialty ranges of high-value branded formulations in several countries across Asia, Africa and west Asia. In India, Sun Pharma currently has a 3.3 per cent share in a highly fragmented market and enjoys a position of strength in brands catering to therapy areas of psychiatry (Repace), neurology (Oxetol), cardiology (Aztor) and gastroenterology (Pantocid) amongst others.

The company has demerged its innovative research and development (R&D) into a separate company. Sun Pharma will spend $60?75 million (more than Rs 300 crore) over the next three years through its innovative research entity for initiating and completing clinical studies to support products in its pipeline.

INVESTMENT RATIONALE

§ Sun Pharma’s wholly owned US subsidiary, Sun Pharmaceutical Industries has acquired 100% ownership of Chattem Chemicals,Inc, a narcotic raw material importer from Elcat, Inc.

§ Bulk drugs revenue improved by 44% to Rs 134.92 crore for the quarter under review. Domestic bulk drugs revenues went up by 62% to Rs 34.11 crore and International bulk drugs revenues improved by 39% to Rs 100.81 crore.

§ Sun Pharma has filed 7 ANDAs and Caraco filed 3 ANDA in the quarter, taking the total number pending approval to 96 filings.

§ Consolidated R & D expenses for the quarter stood at 88.39 crore, or 7.5% of net sales.

§ USFDA has granted approval for the Abbreviated New Drug Application (ANDA) to market generic Sinemet, Carbidopa and Levodopa tablets. In the Quarter ended Sept’2008, 3 products have been approved by the USFDA.

§ Company had strong performance across all its business segments. The generic business in the US, the branded prescription businesses in India and international markets continue to post steady growth. This performance validates belief in the potential for these markets and the investments co. have made in setting up, nurturing and expanding these businesses.

§ Co. generates 41% of its annual revenues from the US market, a record of sorts among Indian drug firms. The company is bullish on its US prospects and expects 25% growth in the country this year, higher than the 18-20% growth projection it has given for other markets including India.

Now Lets Have a Look on What all is covered in the annual report

Management’s Discussion and Analysis -

The name by it self explains that it contains the management’s statements about the financial numbers. The management hereby, describes the reasons behind the changes in numbers, be it the revenues or margins. A thorough study of this section shows the potential threats and the uncertainties the management expects to encounter in future.

Balance Sheet –

It is the summation of assets and liabilities at a particular point of time. The data from the balance sheet of the current year is compared with the data from previous year. The first section of the balance sheet includes fixed assets (good will, any land, building or plant) and the current assets (cash, short-term investment, prepaid expenses & taxes, outstanding bills, inventories etc). The second section comprises of the liabilities namely, loans payable, taxes payable, outstanding debts etc. This section also includes the value of all the stock owned by the shareholders. Some other heads included in this section are preference share, minority Interest and also the project in which the company is planning to re-invested or has already re-invested.

Statement of income and retained earnings –

The income statement together with balance sheet shows the company’s financial performance over a period of time, which is usually one year. This section gives a clear picture that how much money is left to reinvest in the company. Following parameters can be looked upon in the income statements:
· Sales Growth – One must watch the sales growth of the company. Analaysing YoY gives a good picture about the company like at which pace of the company is going. Some people also check the growth with that of other companies which the same area and of comparable.
· Earnings Growth – Earnings growth is a must watched out item in the annual report. One needs to look for whether the company has a record of beating the market estimation or not.
· Sales Costs – This is what costs the company to generate the sales shown in Total Sales Revenue. Comparing the total costs to the total revenue makes it necessary to also look at the cost of each line of product or service versus its revenue. Sales Costs is also known as Cost of Goods Sold (CGS). Analysing this gives a good picture like unlike cost components can swing up or their trends & how the company is dealing with such cost.
· Profit Margin – Is the company’s profit margin stable or increasing? This margin varies from industry to industry, but on the same hand is a good measure to compare similar companies, from either an investment or a benchmarking perspective. The basic idea is to check the company if it has good margin with that of other in the peer group. It is proved the company, which enjoys good margins, stand still comparatively in conditions like inflationary environment, competition etc.
· Company’s research & development expenditure either increases or decreases as percentage of sales. But one needs to analyse whether this increase or decrease is favourable for the company or not. Like in the case of Pharma, a decrease in research & development expense can turn out to be harmful for the growth of that company.
· Non-recurring Items – These numbers are shown separately in the income statement so that the investor doesn’t get confused with the “continuing operations” figures. This is one-time expense, or a non-reimbursed casualty loss.
· Statement of changes in financial position – This portion states the usage of working capital for daily operations. It also throws light on the working capital available over a period of time (which could mean several years), and also how it is put to use.

Auditor Report –

A very important part of the annual report is the auditor’s report in which the auditor claims that all the facts mentioned in the annual report are the true picture of the company’s finances. It also states that the report was prepared in the context to the auditing standards and the accounting principals.
What to look for
What generally means when we say what is the worth of a particular stock? This question, however, has different answers from different perspectives, but what everyone will commonly agree to is that a stock’s value is related to its future earnings. Research and analysis what we see, is designed to calculate the value of a stock. Every investor has his or her own perspective to look at the facts in annual reports; here are some more elements of an annual report, which are worth consideration.

Cash flow statement

In general increasing cash flows shows a positive sign for the health of a company. It is considered that a company with excess cash flow can raise dividends and survive recession periods without being forced to borrow money or sell assets. To arrive at the cash flow of a company, depreciation expenses and accounts payable are added back to the net income income. Then the capital expenditures, inventories and account receivables are subtracted from the above derived amount.

After analysing the financial statements above, we need to look out for certain ratios relating to the balance sheet, income statement and some efficiency ratios to get a clear picture of the company’s operations:

Balance Sheet Ratios:

Current Ratio – This ratio judges the company’s liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities.
Quick Ratio – This is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. It excludes inventory and other current assets, which are difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.
Debt/Equity Ratio – The debt-equity ratio is a leverage ratio that compares a company’s total liabilities to its total shareholders’ equity. This is a measurement of how much the suppliers, lenders and creditors have committed to the company versus what the shareholders have committed. A lower the percentage means that a company is using less leverage and has a stronger equity position.

Income Statement Ratios:

Gross Margin – The gross profit margin is used to analyze how efficiently a company is using its raw materials, labor and manufacturing-related fixed assets to generate profits. A higher margin percentage is a favorable profit indicator.
Net Margin - Often referred as a company’s profit margin, the so-called bottom line is the most often mentioned when a company’s profitability is discussed. While undeniably an important number, investors can easily see from a complete profit margin analysis that there are several income and expense operating elements in an income statement that determine a net profit margin.

Other Efficiency Ratios:

Return on Assets - This ratio indicates how profitable a company is relative to its total assets. The Return On Assets (ROA) ratio illustrates how well management is employing the company’s total assets to make a profit.
Return on Capital Employed – The comparison of net income to the sum of a company’s debt and equity capital, gives investors a clear picture of how the use of leverage impacts a company’s profitability. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management’s ability to generate earnings from a company’s total pool of capital.

Other Key factors

Also look for the investments made by the corporate insiders. An increase in the same is a positive sign. Also check whether the company is making sufficient earnings or revenues from its products in past few years. The annual report is the best source for this study.

Moreover, being an investor you should not hesitate to consult the company’s investor relations department in case there is any misconception regarding any explanation to any subject.

Conclusion:

This article has thrown light on some basic points to build up a decision regarding investment in a particular stock. Also one can research on the company’s competitors. May be after reading company’s competitors annual report one decides to buy the stock of a competitor company.

Sales/Revenue Growth
Sales growth is the foundation for the overall investment case. At the most fundamental level, revenues measure the economic acceptance of the company’s products and services and the competitiveness of the offerings relative to its peers. It is also easy to identify and measure. Components to consider in looking at sales/revenue growth include:
-Historical growth rates: A company that learns how to generate consistent year-over-year growth is a winner in anyone’s eyes. Stable sales growth provides powerful insight into data regarding the acceptance and growth of a company’s products.
-Industry growth rate, influences, and trends: The real measure of a company’s revenue growth is its ability to continue growing even as a market begins to mature, when pricing, promotion and positioning come into greater and greater play than product quality alone. Investors should not only examine absolute year over- year growth, but also comparative growth within industry and product groups.
-Declining, stable, or improving competitive position: Companies are expected to use all means available to generate long-term sales growth, and their results are based upon where they are in the marketplace. It’s important for investors to know that a company is doing the things which it needs to in order to improve its competitive position, such as making alliances with channel partners, improving the product range, strengthening the brand/franchise and so on. When measuring competitive positioning, look at a company’s market share data and sales growth in comparison to its competitors. It is also important to qualitatively evaluate how fast the company is innovating and adding new products, as well as if the company is entering new markets.

Operating Margins
Operating margins are a simple but fairly accurate measure of profitability. Stabilizing or improving margins, particularly for value stocks, indicate well for upward valuation adjustments as the firm’s competitive position is seen to stabilize and hopefully strengthen over time. For value managers who are typically accumulating stocks in periods of depressed margins, stabilization is an important sign that fundamentals are improving. In evaluating operating margins, consider the following issues:
-A firm’s operating margins relative to industry margins: Just as with sales growth, comparing a company to its competitors suggests a lot. Investors should look for the best companies within any given industry sector, because stock value is likeliest to rebound among the companies that have the best operating conditions- good operating margins give the management flexibility to use pricing to gain market share in difficult periods.
-A firm’s operating margins, assuming a normal operating environment: Sometimes the operating margins of either a firm or its industry sector will decline from a long-term trend line. If this is the case, look at the current operating margins and business environment to assess whether the company’s operation is temporarily being impacted, or if the industry is in a secular decline. It is not unusual for us to buy a stock that is experiencing a temporary decline in operating margins.
-The level of revenue and assets necessary to sustain operating margins: These are the ratios of sales-to-margin and assets-to-margin. A firm may be maintaining its operating margins, or even improving them, and still be in declining health if it takes an increasing amount of revenue to produce each incremental gain in margin. The same thing is true for assets. A company may be spending more and more on its next generation of plant and equipment for smaller and smaller incremental gains in operating margin, as the company’s leverage begins to disappear in the face of market saturation, and increased competition.

Relative P/E
The price-earnings ratio is the most frequently used and misused valuation ratio. Prudent valuation of a company’s earnings potential includes market and peer group comparisons, factoring in past cycle valuations and growth rate assumptions. In evaluating the price-earnings ratio, consider the following issues:
-Trailing, current, and forward P/E relative to the market and the peer group: Market has long had varying opinions about the value of earnings from company to company, and industry to industry. The value of earnings in an industry such as automobiles, which is capital intensive, versus the value of earnings in an innovative technology company with low to no levels of debt are different, and they should be. Therefore, when looking at earnings, it is important for investors to differentiate between individual company and industry dynamics.
-Trough earnings and peak earnings multiple for the company: Many companies have earnings ranges that rise and fall with various factors, such as economic or industry cycles. The relative P/E of the company is of primary interest. Investors should look at historical P/Es over a long period and compare them to the market and the company’s own history to identify peaks and relative valuation ranges.
-Projected earnings in a “normal” operating environment: Most companies examined are in a state of depressed earnings due to various factors including economic downturns. At these times it is important to look at what the earnings multiple would be in “normal” times, in order to estimate what the company might be worth under better business conditions (based on its own valuation history and industry benchmarks). This figure can then be compared to the current valuation to determine the relative attractiveness of the valuation.
-Improving or deteriorating normalised earnings relative to the last cycle: This is an extension of the point previously made. Once investors come up with normalised earnings, they can plot normalized earnings over time as a set of moving averages, and then calculate the percentage increase or decrease from normalized earnings. This shows the company’s long-term ability to generate earnings in good times or bad, which provides some clues about its future value. Investors should look for companies that have a consistent ability to improve their earnings at a faster rate than the industry as a whole in good times, and that do not deteriorate as rapidly as the industry as a whole in bad times. Investors will pay more for the next rupee of earnings than the last, if they believe that a company can sustain its growth better than the competition.

Positive Free Cash Flow
The greater the cash flow, the greater the opportunity for management to increase shareholder value by either redeploying the proceeds into strategic growth areas or by simply returning the cash to shareholders via share repurchases or dividends. Improving working capital turnover and operating cash flow yield both signal financial flexibility. Issues to examine regarding positive free cash flow include:
-The free cash flow trend: Cash is almost always king in the market. The more cash a company has, the more it can do to improve its competitive position. Investors should look at cash flow on a five-year basis, and look for companies that are increasing their ability to generate cash flow year-over-year.
–Trend in operating cash flow per share relative to EPS: In the best companies, cash flow will rise at least as fast as earnings per share. Investors can calculate the percentage rise year-over-year for both and compare them.Again, the faster that cash flow rises, the more money that is available both for expansion and raising the dividend.
–Working capital turnover trend analysis relative to historic trends and the industry: Working capital turnover is an indication of a company’s operating efficiency and ability to internally fund new growth initiatives. Investors should compare a company’s working capital turnover rate both with the company’s own long-term averages, and with the industry’s long-term average. The best companies will usually be turning capital over at a faster rate.

Conclusion: These are some of the fundamental factors to search good stocks and where we can invest but there are also lots of techniques to identify good stocks in this market so work on your own decision.