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Traditional methods of stock analysis can be complex and difficult to understand, leaving many investors feeling unsure about their investment decisions.

And that's why one of most common question people ask me often is how to select shares for a long term portfolio.

Before I answer this, let's first quickly reflect on what owning a share of company means:

In summary, when you buy a particular share, you are basically buying a share in the profitability/earning of the company.

Let me elaborate it a bit so as to make things clear.

Assume a company named xyz issues 100 shares and you get to buy 10 shares out of it.

So you basically own 10% of xyz shares. This in turn means you are entitled to receive 10% of the profit the company makes till you hold the shares.

Generally speaking, you get your share of profit through:

  1. The dividends the companies pays
  2. The appreciation in share price

Hope you got the essence of what owning a share means and how it generates income.

So let's get back to the original question, which is how to identify nice to have stocks.

If you were paying attention then you must have noticed that the cash flow to your account (points a, b above) is mostly dependent on the earnings of the company. 

The more the earnings, the more the dividends and greater the share price appreciation.

That's the reason they say - stock prices are slaves of earnings in the long run. 

As per Peter Lynch (who is considered one of the most successful stock market investors of all time), if you can follow only one bit of data, follow the earnings to get hold on long-term winners. This is the secret sauce.

Sounds simple, however, simple does not mean easy. Why?

You will come to know in a bit.

For the time being, allow me to take you through the data driven rabbit hole of earnings.

We will look at important P&L items here, including revenue, operating profit, net profit, eps and profit margins. Along the way, I will also provide some DIY options to satiate your creative hunger.

With an innate desire to be a partner in profit of good companies, I will be focusing more on three commonsense parameters to judge the company:

  1. How much company sells i.e. the market share of the company (indicated by revenue)
  2. How much revenue turns to net profit (indicated by net profit margin)
  3. How expensive or cheap the company shares have been historically (indicated by PE ratio)

Let me be clear that these three parameters in no way guarantee return on investment, however they will surely help in:

  1. Creating a worthy list of companies for your long term portfolio
  2. Identifying stocks which you should avoid in your long term portfolio

As the expectations are set now, let's move ahead with the analysis.

We all agree that buying shares is equivalent to getting a part of profit, hence companies with up trending profitability history naturally qualify for the next level of scrutiny.

Now, how to find out stocks having long term profitability history?

To answer this, we will have to start with the fundamental source of profits, which is revenue or sales of a company and then map it with the net profit figures.

Here are two charts that depict the latest yearly revenue and net profit distribution of listed companies - winners on the right and losers on the left.


Oopssss..the data is overwhelming.

But before I tell you how to narrow down your analysis, here is a fun fact.

Just look at the revenue distribution of the companies in the table below.

Roughly speaking 95% of the companies have revenue in the range of 0 to 5000 Crores and approximately 50% have revenue less that 100 Crores. 

Also look at the total revenue figure. It's pretty interesting to note that:

Top few companies (last two row of table) roughly generate more revenue then 95% of the companies combined (top 2 rows of the table).

I will leave it to you to study the net profit data above however, roughly speaking, the inference seems to be the same as that of revenue distribution. It's not surprising as revenue is what trickles down to profit.

What is the implication of this observation?

This clearly indicates that these top 5% companies position in the market is so dominant that “there is a de facto entry barrier for new entrants in their respective sectors".

It is very difficult to compete with companies which have the highest market share for their products or services.

Just spend some time on the data in the table above and let it sink in. Appreciate how shallow or deep Indian Financial Market is in terms of revenue and profit generation in different pockets. 

If you are done then let's zoom in on the Revenue and profit plots above and try to shrink your analysis basket.

You can use the following buttons to plot revenues/net profit of the companies in above ranges. Now is the right time to eyeball top revenue and net profit grosser of different sectors and jot down some names for second level analysis.

Why I am saying so? Hear this:

The only sure shot way a company continues to grow its profit is by increasing its revenues and market share.

We are basically hunting for dominant players both in terms of revenue and profit.

Remember the old saying - Grasses do not grow under big trees. In ruthlessly competitive world, big players will do their every bit to ward off smaller players and new entrants.

Annual Revenue and Net Profit Data of Companies

Having identified the revenue and profit leaders, it's right time to add an additional dimension to our analysis.

Hope you have already guessed it by now that I want to search for industry or sectoral leaders on revenue and profit front.

Revenue or for that matter net profit as a standalone figure does not offer much in terms of decision making.

So we need something to compare it with and for that let's plot sectoral revenue and profit figures of your choice (use the drop down below to choose sector or industry) and check who has the biggest revenue and profit share in that particular sector or industry.

Sector or Industry wise Revenue & Net Profit - Annual

So far so good, as now we have initial list of companies who have the largest market share in their respective industries.

However, we still need to analyse how much of this revenue turns to actual profit as that is what will trickle down to our bank accounts in the form of dividends and share price appreciation.

Net profit is what remains after subtracting companies total expenses from total revenue and to get a hang of how much revenue the company is able to turn to actual profit, we will have to look at the net profit margin of the company.

The net profit margin is net profit divided by total revenue, expressed as a percentage.

Net profit margin is one of the most closely watched numbers as it clearly differentiates the companies who are achieving far more impressive results with the assets and resources they possess.

Analysts and investors look at the net profit margin closely as it directly correlates to the stock price.

Stocks with increasing or consistent net profit margin numbers YoY enjoys premium over their peers. Conversely, if a company is not generating healthy net profits, or if there is a lot of variation in net profit margin, the same will be reflected in decreasing share price over time.

Investors should always look for increasing or consistent net profit margin YoY, while choosing companies for long term investment.

This is pure common sense and following this one rule only will help you avoid most of your stock market losses. 

Anyways, if you are still reading, then you must be hungry for more :-).

So here is the option to plot the revenue, operating profit, net profit and net profit margin figure of the company who you think should be a part of your portfolio. 

Company Revenue, Operating Profit, Net Profit and Net Profit Margin Chart

Time to buy the stock for your portfolio as you found some worthy names?

Hold on for a bit as I don't want you to pay unnecessarily high price for your choice.

Before you hit the buy button, an understanding of how cheap or expensive the particular scrip is would definitely help in building a long term portfolio with same return potential at relatively cheaper cost.

No prizes for guessing that I want you to have a look at PE ratio of the company on standalone basis and relative to its peers.

Just in case you want to learn the secrets of using PE ratio, you can do it here. Do not forget to read the article at the bottom of left menu on the above page. Trust me you wouldn't regret it.

Where to go from here?

Here is a table depicting the current quarter performance of companies as compared to previous quarter.

You can use it to quickly filter stocks whose profitability is in uptrend (add to watch list), downtrend (avoid) or sideways.

You can click on the rows to get the long term trend of P&L items and ratios. Click on the column headers to sort. You can also type in the search box below to pinpoint a particular row of the table.

If you want to do a selective deep dive on a particular stocks profitability matrix, you can do the same below:

I hope by now you understand why I said it's simple but not easy as the number of companies is overwhelming.

Having said that, it in no way means that you can not master the art of stock picking.

If you spend some quality time on this page regularly, simple will start turning to easy.

Don't doubt yourself. Happy Investing!


Note* - The data on this page comes from what we have in our database and is not complete plus there might be inaccuracy in the numbers shown in the tables and charts above. So use this data for analysis purpose only and do not treat it as any recommendation to invest. Also do a second level check for data accuracy from direct sources like company annual and quarterly results before acting on the data.


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