Core Selection Criteria for Undervalued Stocks
Definition: Total market value of company's outstanding shares
Why it matters: Companies with larger market cap are generally more stable, have better liquidity, and are less prone to manipulation.
Example: A company with 10 crore shares trading at ₹150 each has market cap of ₹1,500 crore (10 cr × ₹150)
Definition: Price-to-Earnings ratio comparing share price to earnings per share
Why it matters: Lower P/E may indicate undervaluation, but compare with industry averages.
P/E Ratio = Current Market Price ÷ Earnings Per Share
Definition: Percentage of shares held by company promoters
Why it matters: High promoter holding shows confidence in business. No pledging reduces risk.
Excellent: 75%+ promoter holding with zero pledging
Warning Sign: High promoter pledging (>25%) indicates financial stress
Metrics to track: Gross Sales, PAT, EPS
Why it matters: Growing fundamentals indicate healthy business operations.
- Gross Sales: Total revenue before deductions
- PAT: Profit After Tax - actual bottom line profit
- EPS: Earnings Per Share - profit allocated to each share
Definition: Compares company's total debt to shareholders' equity
Why it matters: Lower debt means less financial risk and interest burden.
Debt to Equity = Total Debt ÷ Shareholders' Equity
Definition: Price/Earnings to Growth ratio
Why it matters: PEG < 1 suggests stock may be undervalued considering its growth rate.
PEG Ratio = P/E Ratio ÷ Earnings Growth Rate
Understanding Key Financial Terminology
Gross Sales vs PAT vs EPS
Gross Sales (Revenue)
Definition: Total amount of money generated from business activities before any deductions.
Example: A company sells 10,000 units at ₹500 each → Gross Sales = ₹50,00,000
PAT (Profit After Tax)
Definition: The actual profit earned by company after deducting all expenses, interest, and taxes.
Example: Gross Sales ₹50 lakhs - Expenses ₹35 lakhs - Tax ₹3 lakhs = PAT ₹12 lakhs
EPS (Earnings Per Share)
Definition: Portion of company's profit allocated to each outstanding share.
EPS = (Net Profit - Preferred Dividends) ÷ Outstanding Shares
Example: PAT ₹12 lakhs ÷ 1 lakh shares = EPS ₹12
Additional Screening Factors
Look for increasing DII (Domestic Institutional Investors) and FII (Foreign Institutional Investors) holding over the last year. This indicates smart money confidence.
Positive guidance in recent conference calls and annual reports. Management should be transparent about challenges and growth plans.
Consistent quarter-on-quarter reduction in total debt shows financial discipline and improving health.
Changes in government policies (tax benefits, subsidies, regulations) that benefit the company's sector.
Sectors receiving government attention and budget allocation (infrastructure, renewable energy, manufacturing).
Other Important Factors to Consider
Measures how efficiently company uses shareholders' money to generate profits.
Cash generated after capital expenditures. Essential for dividends and growth.
Shows pricing power and cost control. Compare with industry peers.
Stock Screening Example
| Parameter | Excellent | Good | Avoid |
|---|---|---|---|
| Market Cap | > ₹1,000 Cr | ₹500-1,000 Cr | < ₹500 Cr |
| P/E Ratio | < 12 | 12-18 | > 25 |
| Promoter Holding | > 60% (No pledge) | 50-60% | < 40% or High pledge |
| Debt/Equity | < 0.3 | 0.3-0.6 | > 1.0 |
| Sales Growth | > 15% YoY | 5-15% YoY | Declining |
| PAT Growth | > 20% YoY | 10-20% YoY | Declining |
⚠️ Important Warnings
Don't rely on single parameters: A stock with low P/E but declining profits is not undervalued.
Industry context matters: Different industries have different typical ratios (IT vs Manufacturing).
Quality over quantity: One excellent company is better than ten average companies.
Patience is key: Undervalued stocks may take time to realize their true value.