Debt is important in fundamental analysis?

General
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I am complete beginner in fundamental analysis , Can some one explain things to look in a stock.

I was looking at total debt and quarterly profits , Lots of big blue chip companies like reliance , hdfc bank etc have their debt 10 times greater than gross profit.

Example HDFC average quarterly profit is around 60 billion and debt is around 2700 billion , still they are trading at very high price.

Whereas ITC is debt free and quarterly profit is around 70 billion , still price is falling.

So what is happening and what to see in fundamental analysis.

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hi @vishnux ,everyone value businesses differently and look for different parameters

I usually look at four ratios before i dive deep into the financials of the company

  1. P/E Ratio, while there is no ideal P/E ratio, but just for a start i would ignore looking at businesses that are having P/E ratio higher than 25-30 range

  2. ROCE, for a minimum ROCE of the company should be higher than 10

  3. Ev/Ebit, it should be lower than 20 for me

  4. Debt/Equity, ideally it should be around 2:1
    after shortlisting, i read their financials, mainly looking for future growth, free cash-flow and good profitability.

prices in the market doesn’t always move with the fundamentals, sometimes FOMO factor drives people to go for a company ahead of their fundamentals, a majority of popular shares are overpriced, trading above their fair value, because investors are pumping money on hope because companies have performed well in past, i would not suggest you to buy any company for long-term having PE ratio above 25

ITC has sound fundamentals, but ciggs is a declining business, i might be biased, you can study and invest if you feel that the company can grow at an efficient pace.

what’s happening? as a value investor i can tell you that leaders of the market are highly over-priced, people are in a FOMO stage, where they are hoping that after the economy will recover, these leaders will pick up growth again, so prices are ahead of fundamentals, what to see? good businesses with sound fundamentals, trading below their fair value
Happy Investing :slight_smile:

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I was looking at total debt and quarterly profits, Lots of big blue chip companies like reliance , hdfc bank etc have their debt 10 times greater than gross profit.

There are various ways to interpret fundamental data and they are not rule-based interpretation.
When looking at debt, there could be multiple questions that need to be answered. Few could be:

  1. what’s the quantum of the debt. is it too high or too low? - This needs to compared with net worth/equity of the company by looking at Debt/equity ratio. It is not the right thing to compare the value of debt with different companies but it’s the ratio that can be used to compare. Check out section 6.2 in this link to get a high-level understanding of debt for reliance. https://simplywall.st/stocks/in/energy/nse-reliance/reliance-industries-shares#future
  2. Can the company repay its debt and cost of debt? - For repaying the debt, a company can use its assets or earnings. The profit of the company is after deducting interest expense. So, if it’s a loss-making company it might find it difficult to pay even interest expense and that could be a red flag. In the balance sheet, debt get’s classified into short-term (needs to be paid within a year) and long-term (repayable beyond a year). For the short-term debt - does the company have cash reserves to pay them?

There could be multiple other questions that can pop up and I am stopping here.