Basics of stock investing

As the first book, I would highly recommend The Thoughful Investor by Basant Maheshwari. He discusses all the various mistakes a beginner makes , what to look for in a company before buying, when to sell etc.

However, in short, the basics of fundamental analysis are as follows - when shortlisting a stock to buy, you need to look at two things: 1) how good is the business model and 2) at what valuations is it available in the market right now. Both these factors are very important if you wish to make money through long term investing. It's not possible to describe all the ratios in detail, but I'll mention which ones are super important and you can read about them online (can get these ratios on screener)

Business Model: Here we analyze how good the business model is, which is completely independent of the price at which the stock is trading at:

RoE: The most important ratio is RoE (Return On Equity). This basically means what is the net profit received per rupee invested by the shareholder. Usually, for good companies it should be above 20%
Profit margins: A company with high margins indicate pricing power and monopoly in the segment - look at Gross Profit Margin (GPM > 40% is good), Operating Profit Margin (OPM) and Net Profit Margin (NPM).
Sales growth: Revenue growth (> 20% is good) is one of the basic metrics you might have heard on shark tank as well. (It reflects whether there is demand for the company's product or not. Without sales growth, there will be no profit growth (PAT = Profit After Tax), and without profit growth, there will be no EPS (Earnings Per Share = PAT/number of shares) growth, which means you as a shareholder and not earning more per share and the company doesn't have much profit remaining to reinvest into the business.
Negative working capital: The best business is one that buys raw materials on credit and sells the final product in cash. This way, it has no issues in scaling big. Look at Debtor days (lower is better and 0 is ideal) and days payable (higher is better). Overall, business is good if debtor days << days payable which indicates -ve working capital.
Asset light and debt free: an ideal scalable profit machine should not require much assets for its product, as assets like factories, machinery etc require maintenance and replacement every few years just to maintain the same revenue and other metrics, which leads to unnecessary Capex. Asset light companies will have high RoA (Return on Assets > 15% or so - barring Banks and NBFCs) and since RoE = RoA x Leverage, you can get to know how much debt the company has taken to generate a good RoE from the base RoA. If RoE is high and RoA is close to RoE, it means very less leverage, which means low debt, which is good as it implies that company is has profits remaining from its natural business operations which it is using to scale up the business and doesn't need much debt (All thanks to good RoE). Can also see Debt to Equity ratio (sibling of leverage) to analyze debt levels.

Valuations: buying good businesses at good valuations is a must as otherwise even if the business is good and you buy at the peak valuations, your return will be less.

PE Ratio: the most fundamental and basic ratio which tells the perception of the market for the stock compared to its peers in the sector. Since Price = PE Ratio x EPS, so the growth in price is fundamentally dependent on the growth of two factors: PE and EPS growth. Lets say we hold a good business having EPS growth of 20%. Then in the long run(10-20 years types) price will also have CAGR of 20% as the effect of PE is neutralized. However in shorter durations (< 3-4 years), effect of PE is critical and in bull markets, PE ratios expand and in bear markets they contract, so even if EPS growth is 20%, and you bought the stock at PE of 100, it is possible that the price stays the same for 3 years as the stock is undergoing PE contraction and returning to normalized valuations after a bull market hype. There is no absolute cut off for a good PE as it is highly dependent on sectors, but on average, PE above 40 starts getting expensive.
PEG ratio (PE ratio / EPS growth rate): PE is a relative metric used to compare peers in the same sector, but PEG ratio is used to compare a stock with its own historic valuations, and you get some absolute sense as to whether the stock is cheap or not. Let's say PE is 20 and EPS growth rate is 25%, then PEG ratio is 20/25 = 0.8 which is cheap. PEG < 1 is cheap and above 1 indicates it is expensive.
PB ratio: price to book ratio is market cap / (assets - liabilities). Has features similar to PE in that it is sector to sector and need to compare against peers. In general lower the better, but the kind of business we have selected through the business fundamentals section above, they are highly scalable, asset light and debt free, which means the denominator is small which naturally indicates high PB ratios ( > 10) and thats fine if your business model is like that. However for asset heavy models like hotels, airlines, steel plants, cement etc, PB ratio is quite valuable to compare peers and the stock's own history of PB to judge current valuations.

Other general tips: When looking for such good metrics, you may stumble upon some small cap companies but you need to be careful before investing and do your own due diligence and make sure the numbers reported by the company make sense and there is no fraud happening. Some basic due deligence to ensure before investing:

Make sure there are some FII and DII in the stock with some good percentage of holdings as they would have done stringent testing of accounts reported. You don't wanna be the lone warrior and supporter of the company.
Make sure corporate tax paid is near 25% as less tax percentage indicates some fraud. It is possible they are getting some writeoffs due to losses in previous years, but please check carefully why corporate tax rate paid by the company is not near 25%.
Make sure inventory days or trades receivable is not rising continuously. These are indicators of sales not being made and inventory piling up, or, the sales are made but money not received (easiest place to scam the investors is trades receivable).
A company scamming revenue and profits doesnt pay dividend as it doesnt have the money to do so. So if your company has some little dividend also, it acts as a safety net in that the possibility of scamming is low.

I think I have covered all the major points and after some practice, you should be able to reject 90% of the companies within 2 minutes based on above metrics using screener. Then pay attention to finer details on balance sheet, P&L statement and cashflow statement to reject 5-8% more companies in 1 hour or so. Remaining 2% companies are genuinely investible as they have good fundamentals along with good valuations. Currently the market has seen some corrections and some stocks are available at good valuations. Good luck!

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