Not many of us know how to analyse a chemical sector stock. Through this blog, I will try to help you understand the industry in the simplest possible way. Also, we will end the discussion with a comparison of Alkyl Amines with Balaji Amines and other chemical companies like Deepak Nitrite. Table Of Contents 1. Alkyl Amines Business Alkyl Amines Chemicals Ltd. was started in 1979 by Mr Yogesh Kothari . It operates in a very small segment of the chemical industry - the amines and is currently one of the largest manufacturer in India (around 50%), along with Balaji Amines. Amines play a major role in the pharmaceutical industry and agrochemicals. These are primarily used as a solvent. Alkyl Amines' Business comprises of 3 major segments:- • Aliphatic Amines Methyl amines and Ethyl amines are the aliphatic amines used to make different types of derivatives. These can also be sold directly and are used by Alkyl Amines t o produce vario...
Nowadays, everyone has realised the importance of investing in the stock market. As the number of investors grows, so do the questions.
This blog will explain the basic evaluation criteria while picking a stock for long term investment, i.e., for a horizon of 5 to 10 years.
How to Choose Stocks for Long Term Investment
1. Fundamental analysis
Growing Profit and sales, High OPM (Operating Profit Margin), High ROE (Return on Equity) and ROCE (Return on Capital Employed) - These can act as a first level of filter to pick the best long-term stocks.
But, do remember that some of these parameters may be very high or low depending on the industry, and thus are industry specific. For example, banking stocks will not have a high ROE value, be it HDFC Bank or Yes Bank. Insurance industry stocks will have a low OPM.
2. Business analysis
Whether the stock has a monopoly in its sector and what is the business outlook of the promotors - This is where one needs to invest most amount of time while analysing stocks for long term investment. Never invest in a business that you don't understand - in terms of how it will make money and how it will grow in future. As an example, you can check out our 6 pointer analysis of Laurus Labs.
3. Debt
The lower, the better. Prefer stocks with 0 debt. Stay away from stocks with consistently increasing debt and declining profits (Most of the PSUs, as an example). Again, having or not having debt depends on the industry. Example :- Banking stocks always have a considerable amount of debt. Capital intensive industries (power/infra) can also have high debt, which is acceptable. On the other hand, high debt for an IT stock, is a negative indicator.
4. Promotors holding
Should be high. (Majority of the stocks should be held by the promotors). Keep a check that it is not decreasing consistently with every quarter, as it could be an alarming sign. Majority of the penny stocks (stocks woth a price less than Rs. 10), can be viewed as an example, where the promotors sold off their shares slowly and steadily and the retail investors have more than 50% holding.
5. Stock P/E
For a market leader, high PE ratio is acceptable. But, undervalued stocks which satisfy point 1, 2, 3 and 4, might be available at a low PE. Such a stock can be certainly added to the watchlist. Also, always compare P/E of a stock with its peers belonging to the same industry, to decide whether it's overvalued, undervalued or fairly valued.
6. Dividends
Check if the company believes in rewarding its shareholders with dividends. This is not a "must have" and generally the companies in a growth phase prefer not to give dividends or pay out lesser amount of dividend. So, try to keep some big giants in your portfolio that would generate dividend income for you.
So, now you know how to pick long-terms stocks to buy and hold for long term. Some additional pointers for industry level analysis :-
- For banking stocks, always check the PB ratio. Along with that, do check out the CASA ratio. Both should be high and growing. NPAs should be less.
- For IT sector, consider the number of clients. (Should be growing. Also, there should not be a very huge dependency on the top 2 to 3 clients in terms of revenues). Read this post on Happiest Minds Analysis for a better understanding.
- Some stocks have 0 promotor holding (L&T, ITC), which does not mean that the stock is of low quality
Topics that might interest you
Frequently Asked Questions (FAQs)
1. What is the use of P/E ratio ?
The P/E or "price-to-earnings" ratio is the ratio of the company's current share price to its earnings per share (EPS). It is used to determine the valuation of a company.
2. What is a dividend ?
Dividend is a part of the company's Free Cash Flow which it decides to distribute among its shareholders. It is not mandatory, but can act as another passive source of income. For best dividend stocks, you can visit Best dividend stocks You will need a demat account and a trading account to start
3. How to start investing ?
You will need a demat account and a trading account to start investing in the stock market.
Happy Investing!✌
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