Many traders still rely on fundamental analysis in order to select their stocks to trade.  While I do believe that fundamental analysis can be useful, it is not needed for short term trading. Technical analysis will tell you all you need to know about when to buy or sell a stock.  However, if you are planning to hold a position longer than a few months, then an understanding of the companyís health may be useful.

Most fundamental analysis revolves around ratios.  Most traders and investors focus on the Price to Earnings Ratio or P/E Ratio.  The P/E ratio divides the price of the stock by the earnings that company had for the last year.  The resulting number tells us what multiple of earnings the stock is trading at.  This can be useful to determine whether the stock is trading at a high or low multiple compared to other companies in the same industry.  If the P/E ratio is higher than the competitorsí P/E ratios, then the stock is overpriced and is less likely to see prices rise.  If the P/E ratio is low compared to other ìlikeî companies, then the stock is cheap and may be a bargain buy.

There are a couple of problems with using the P/E ratio for analysis.  First, you cannot compare unlike companies, such as an auto manufacturer with a bank.  Secondly, a company may have a high P/E ratio and still be a great investment if the growth rate of the earnings is high.  For instance, if the companyís earnings are growing year over year faster than the competition, that may justify paying a little more for the stock.

So how do we analyze companies in this manner?  We can take the P/E ratio and divide it by the growth rate of the earnings for the past three years.  The resulting ratio is called the Price to Earning to Growth or PEG ratio.  Typically, the lower the PEG ratio, the better the price is for buying the stock when considering the growth prospects.  In fact, a bargain growth investor or trader should look for a PEG ratio under 1.0.

Unfortunately, I do not know of any website that shows the PEG ratio for Indian companies.  You will have to calculate it manually.  It is easy to do though.  To find the PEG ratio, I use the Reuters website at http://in.reuters.com.  I go to the Markets section and then India Markets.  Once there I get a quote for the stock I am looking for.

Once the quote is up, I can then click on the ìFinancials Tab,î to get the desired information.

The P/E ratio is located halfway down the page and the growth rate is on the right.  Divide the three year growth rate into the P/E ratio to yield the PEG.

You can compare unlike companies by using the PEG ratio to see which investment has the most growth potential for the lowest price.  If there is a negative number for the growth rate or if there is no P/E ratio, then the company isnít making earnings and is fundamentally weak.  This may be a shorting candidate as would be a stock with a high PEG ratio.