Balance sheet and Annual reports are very important documents which gives information to the investors about the health and investment grade of the company. Sound analytical approach for understanding Balance Sheets of the companies requires following important consideration

• Read all footnotes
• Gaze director's motives and reputation
• Keep in mind that balance sheet can be window dressed
• Ratios are sometimes misleading without absolute figures
• There are three type of analysis

• Fundamental analysis
• Technical analysis
• Statistical analysis

Fundamental analysis
The best place to learn about company earnings is the corporate annual report. The annual report contains information on the company philosophy and its position in the marketplace. It also contains audited financial statements. These tell you all about the company's financial operations. You can obtain reports on the Web by searching the Securities and Exchange Commission's EDGAR database at http://www.sec.gov/ edgarhp.htm. and BSE and NSE sites or physically from companies offices.
The following ratios help in fundamental analysis

• Liquidity ratio
• Current ratio
• Acid test
• Working capital
• structure/leverage ratios
• Debt to equity
• Expense coverage ratio
• Profitability ratios
• Gross profit margin
• Return on equity
• Earning per share (EPS)
• Price to earning ratio (PE)
• Activity ratios
• Turnover ratio like inventory/ debtors etc.

You can look into various accounting books to get the glimpse about these ratios and their utilities in investment decisions.
Based on above analysis there are some investment modules for taking informed decisions, some major investment modules are.

• Dividend yield theory
• Value investing
• Relative priced index (RPI - Momentum theory)

Some factors to be kept in mind while taking decisions based on above module are :

• Small capitalization strategies owe their superior returns to microcap stocks. but these stocks are too small for virtually any investor to buy.
• Buying stocks with low PER (price to earning ratio) is most profitable. 
• Price-to-Sales ratio is the best value ratio to use for buying market-beating stocks.
• Last year's biggest losers may continue to under perform.
• Last year's earnings gains alone are worthless in determining what the stock will do this year.
• Using several factors dramatically improves investment performance.
• You can beat the index if you concentrate on large, well-known stocks with high  dividend yields.
• Relative strength is the only growth variable that consistently beats the market.
• Risk is one of the most important elements to consider in a strategy.
• Combining growth and value strategies is the best way to improve your investment performance.
• Portfolios made up of large capitalization stocks tend to have similar returns to an index fund overall, even if these large capitalization stocks are not formally part of a popular index.
• A superior variation on indexing is to buy the highest yielding large capitalization stocks
• Discipline is the key
• Fund managers do not adopt a well defined strategy and stick to it, they tend to move with flavor of the month stock.
• Rather than random stocks, it is clear that it is the investors who are random
• Simple verses complex
• We are convinced that investment requires sophisticated strategies, the juggling of dozens of variables and complicated portfolio management, but this is not so.
• The one factor that unites all of the great investors is that they have a simple formula that is applied consistently over time
• Various Strategies and statistical conclusion on them
• Large stock vs. small stock

Many past academic studies have ranked groups of stocks by capitalization and found    that the smallest stocks do the best. The great flaw in this idea is that the very stocks that provide this growth are the un-investibles with no liquidity
Price to earning ratio

• PER are probably the most popular measure for a stock
• A high PER means that a share is expensive compared to current earnings
• Buying a large stock with a low PER is a good way to improve on index averages

Price to book value ratio

• This ratio shows you how much you are paying over and above the money you could get by tearing a company apart and selling its components
• Over the long term, buying stocks with the lowest PBR pays off very well.
• Balance sheets of restructuring companies have to be carefully analyzed

Price to sales ratio

• Correlations between a low PSR and high stock gains are unmistakable, with very low volatility in all cases the lower the PSR the better.

Risk verses rewards

• The central tenets of the market are that risk (defined as volatility) and reward are directly and inextricably linked. The assumption is that the market, being efficient, rationally prices stocks to provide a nice, clean tradeoff between volatility and return, it is impossible to get better returns than the market index without massively increasing volatility.

Parameters to reduce risks and increase returns and some myths

• EPS -Investors commonly rush in to shares that had a spectacular growth last year in their earnings. These stocks, which made such impressive earnings gains last year, are now likely to be very overpriced. The conclusion from EPS studies is that investors pay too much for stocks with great EPS gains.
• Profit margin - The theory is that companies with high profit margins are highly efficient, and can survive tough business environments and make better profits. A look at the results by deciles shows that the stocks which did best were the ones in the lower profit margin end of the scale. Companies that overprice their product don't get the volume to compensate, and won't do as well
• Decile analysis for Return on equity
• If you concentrated in the second decile of ROE you would have done well. Concentrate on high ROE stocks, but not the highest 10%. Buy large stocks in the top 30% of ROE, but not the top 10%, to avoid overpriced stocks.

The Best Investment module is case market is moving ahead with speed is Relative price strength (momentum) RPS theory

• It is change in the price of a stock in relation to change in the index
• It shows that stock prices have memories, the idea that buying the stock that did the best may continue to do well is just trend following.
• Selecting large chunk doing empirical data analysis and short listing a range based on various parameters giving each study a weight age and final selection on that basis will give best result

Adding value factors to improve performance of RPS
This is important because good companies as per RPS are overpriced due to increased demand and we have to avoid them.

• Low Price to earning ratio.
• Price to book value ratio below one.
• Price to sales ratio below one.
• Return on equity above 15 %.

Another Important investment strategy is the Value Approach

• This is a blue-chip approach. It uses "leading" stocks. These stocks come from the "large" stocks universe,
• Have more free float shares than the average stock in the database,
• Have cash flows per share exceeding the database mean
• They aren't price regulated stocks
• Low PERs are a good thing with leaders.
• High yield worked very well with leaders. Buying the leading stocks with the highest dividend
• Not only is the strategy fantastic in bear markets, it also shines on bulls. 
• You should buy a portfolio of blue chip stocks with the highest yields the highest dividend

The Ultimate Investment mantra is

• Map the trends- study long term industry trends
• Enter when movement in price is visible
• Don't fight movement
• Keep some investable funds in FD and balance into equity so that you don't have to forcibly exit
• Investigate carefully, decide correctly and follow faithfully.

Email: gopalagarwal@hotmail.com