Fundamental Analysis for PSX

Fundamental analysis is the art of determining a stock's true worth by examining the company behind it. Instead of looking at price charts and patterns (that's technical analysis), you dive into financial statements, calculate ratios, and compare companies to find undervalued opportunities on PSX.

The Core Financial Ratios

1. Price-to-Earnings (P/E) Ratio

The P/E ratio tells you how much investors are willing to pay for each rupee of earnings.

Formula: P/E = Share Price ÷ Earnings Per Share (EPS)

How to interpret for PSX:

• KSE-100 average P/E: typically 5-8x (much lower than global markets)
• P/E below 5: Potentially undervalued (or the market sees risk)
• P/E above 10: Growing company or overvalued
• Negative P/E: Company is making losses — proceed with extreme caution

2. Price-to-Book (P/B) Ratio

Compares a company's market value to its book value (net assets).

Formula: P/B = Share Price ÷ Book Value Per Share

• P/B below 1: Stock trades below its net asset value — potential bargain
• P/B above 2: Market values the company significantly above its assets
• Most useful for banks and financial companies on PSX

3. Dividend Yield

The annual dividend as a percentage of the share price.

Formula: Dividend Yield = (Annual Dividend Per Share ÷ Share Price) × 100

Pakistani companies are generally generous dividend payers:

• Banking sector: 5-10% yields common
• Fertilizer sector: 6-12% yields
• Oil & gas: 4-8% yields
• Cement: 3-6% yields

4. Return on Equity (ROE)

Measures how efficiently a company uses shareholders' money to generate profits.

Formula: ROE = Net Income ÷ Shareholders' Equity × 100

• ROE above 20%: Excellent — the company generates strong returns
• ROE 10-20%: Good
• ROE below 10%: Mediocre — your money might work harder elsewhere
• Compare ROE within the same sector for meaningful analysis

5. Debt-to-Equity Ratio

Shows how much debt a company uses relative to shareholders' equity.

Formula: D/E = Total Debt ÷ Shareholders' Equity

• D/E below 0.5: Conservative, low debt
• D/E 0.5-1.5: Moderate leverage
• D/E above 2: Highly leveraged — risky if interest rates rise (very relevant in Pakistan's high-rate environment)

Reading Pakistani Financial Statements

All PSX-listed companies publish quarterly and annual financial statements. You can find them on:

1. PSX website: Financial results section
2. Company websites: Investor relations page
3. SECP EDGAR-like system: Annual reports filed with SECP

Key Statements to Read

DCF Basics: What is a Company Worth?

Discounted Cash Flow (DCF) analysis estimates a company's value based on its expected future cash flows, discounted back to today's value.

Simplified steps:

1. Estimate future free cash flows for the next 5-10 years
2. Choose a discount rate (in Pakistan, use 15-20% given the risk-free rate is ~12%)
3. Calculate a terminal value for cash flows beyond year 10
4. Sum all discounted cash flows = intrinsic value of the company
5. Divide by total shares outstanding = intrinsic value per share
6. Compare to current market price — if intrinsic > market price, the stock may be undervalued

Sector-Specific Considerations for PSX

Different sectors on PSX require different analytical focus:

• Banks: Focus on NIM (Net Interest Margin), NPLs (Non-Performing Loans), and CASA ratio
• Cement: Capacity utilization, retention prices, and demand from CPEC/construction
• Fertilizer: Urea prices, gas allocation, and subsidy policies
• Oil & Gas: Crude oil prices, exploration success, and circular debt
• Technology: Revenue growth, client diversification, and PKR depreciation benefit

Key Takeaways

• P/E, P/B, dividend yield, ROE, and D/E are the five essential ratios for PSX analysis
• Pakistani stocks trade at very low multiples (P/E 5-8x) compared to global markets
• Always read the cash flow statement — profits on paper don't always mean cash in hand
• DCF analysis requires a higher discount rate (15-20%) for Pakistani companies
• Different sectors require different analytical focus — there's no one-size-fits-all

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