Fundamental Analysis

A reference guide to NEPSE's market structure, regulators, fees & taxes, financial statements, valuation, and portfolio strategy.

On this page

What Is the Stock Market?
Regulatory Structure & Key Institutions
Functions of Financial Markets
Primary vs. Secondary Market
IPO, FPO & Right Share
Accounts & Requirements to Start Investing
Fees, Commissions & Taxes
Circuit Breakers in NEPSE
What Is Fundamental Analysis?
Reading Financial Statements
Valuation & Key Ratios
Macro-Economic Analysis
Sectoral Analysis
Stock Selection & Portfolio Strategy
Final Recap

1. What Is the Stock Market?

The stock market (capital market / share market) is a platform where shares of publicly listed companies are bought and sold. It lets companies raise capital and gives investors a chance to earn returns.

Primary market — deals with new share issues (IPO/FPO/Rights).
Secondary market — where already-listed shares are traded among investors (this is what NEPSE operates).
Key participants: investors, companies, brokers, regulators, and stock exchanges.
Instruments traded: shares, bonds, mutual funds, and more.
A stock index like NEPSE shows the overall performance of the market.
Prices move on supply and demand, driven by news and sentiment.
Regulators exist to ensure fairness, transparency, and investor protection.
Risks include price fluctuation, liquidity risk, and broader economic factors.

2. Regulatory Structure & Key Institutions

Nepal's capital market ecosystem is overseen by several institutions, each with a distinct role:

Institution	Role	Key Responsibilities
SEBON Securities Board of Nepal	Primary regulator for listed companies	Approves IPOs/FPOs & rights issues; regulates disclosures & governance; monitors insider trading and investor protection
NEPSE Nepal Stock Exchange	Market operator (supervisory role)	Facilitates secondary trading; enforces listing rules; can suspend/delist non-compliant companies
CDSC Central Depository & Clearing	Securities depository & clearing agency	Maintains demat accounts; handles clearing & settlement; manages IPO/FPO allotment; provides eDIS
NRB Nepal Rastra Bank	Central bank	Monetary policy; regulates banks/BFIs (Class A–D); issues currency; manages forex reserves
Insurance Board Beema Samiti	Insurance regulator	Licenses insurers; monitors solvency & compliance; consumer protection
ERC Electricity Regulation Commission	Regulates hydropower companies	Tariff fixation & PPA approval; generation licensing; dispute settlement & grid connection

3. Functions of Financial Markets

Price determination (through buy/sell activity)
Fund mobilization and capital formation
Liquidity — easy conversion of securities to cash
Risk sharing among participants
Easy access for investors and companies
Reduction in transaction costs
A platform for multiple security types — bonds, derivatives, and money market instruments

4. Primary vs. Secondary Market

Primary Market

New securities are issued here — mainly through IPOs and FPOs. Investors apply, get allotted shares, and those shares then enter secondary trading.

When primary issues are active, secondary market liquidity can fall. Oversubscribed IPOs often create post-listing rallies that lift market sentiment.

Secondary Market

Shares are traded among investors after listing. NEPSE operates entirely as a secondary market — you are buying from other investors, not from the company itself.

Most price movement and technical analysis happen here — driven by trading volume, demand/supply, and market psychology.

5. IPO, FPO & Right Share

IPO — Initial Public Offering: when a company offers shares to the public for the first time to raise capital. Purpose: business expansion, debt repayment, or funding new projects.

FPO — Further Public Offering: when an already-listed company issues additional shares to the public. Purpose: to raise more capital after the IPO for further growth or operations.

Right Share: an offer to existing shareholders to buy additional shares at a discounted price, usually in proportion to their current holdings.

Example: Company A offers a 2:1 right share at Rs. 100. If you hold 200 shares, you can buy 100 new shares.

Feature	IPO	FPO	Right Share
Who can apply?	Public	Public	Existing shareholders only
Listing status	Unlisted company	Already listed	Already listed
Price	Fixed / book-building	Market-based	Discounted price
Objective	Initial fund raising	Further fund raising	Fund from current shareholders

6. Accounts & Requirements to Start Investing

Bank account (with CRN number) — to hold and move money.
TMS account (Trade Management System) — connects investors to brokers and NEPSE for online buy/sell orders.
Demat account (e.g. Mero Share) — holds shares/securities electronically; maintained by CDSC.
Connect IPS account — an interbank payment system for fast, low-cost fund transfers between BFIs.
Broker account (NEPSE code) — required to actually buy and sell stocks, bonds, and mutual funds.
Key regulators involved: SEBON, NEPSE, CDSC, NRB, Ministry of Finance, ERC, and others.

7. Fees, Commissions & Taxes

Transaction Charges (buying & selling — both sides)

Brokerage commission: 0.24%–0.36% of the transaction amount
SEBON fee: fixed 0.015% of the transaction amount
DP charge: Rs. 25 per company

Net Profit = Selling Price − Buying Price − Broker Commissions − SEBON Charges

Taxes

Tax Type	Rate	Notes
Capital gain — short-term (<1 year)	7.5%	On gains from shares held under a year
Capital gain — long-term (>365 days)	5%	Lower rate rewards longer holding
Cash dividend	5%	e.g. Rs. 1,000 dividend → Rs. 50 tax
Bonus share (stock dividend)	5% of par value	e.g. 10 bonus shares @ Rs.100 par = Rs.1,000 → Rs.50 tax

These are course-summarized figures, not live regulatory data — verify current rates with your broker or SEBON before relying on them for real decisions. Your Calculator page uses these same figures for its Buy/Sell cost breakdowns.

8. Circuit Breakers in NEPSE

NEPSE uses an index-based circuit breaker system (in effect since April 2019) that halts trading when the NEPSE index moves sharply in either direction, in three stages:

Index Move	Effect
4%	20-minute market halt if it happens before 12:00; no halt if it happens after 12:00
5%	40-minute market halt if it happens before 13:00; no halt if it happens after 13:00
6%	Trading halted for the rest of the day

See your own Circuit Watch page for real, live individual-stock circuit data.

9. What Is Fundamental Analysis?

Fundamental analysis (FA) evaluates a company's financial health, business model, and economic environment to estimate its intrinsic (true) value.

Core belief: stock prices may swing short-term on speculation, but over the long run they follow a company's earnings, cash flow, and value creation.

Why FA matters

Separates hype from reality (e.g., choosing stable BFIs over volatile hype stocks)
Builds conviction to hold during dips when fundamentals are strong
Helps identify undervalued stocks before the market catches on
Supports long-term wealth creation through value-based investing

Type	What It Analyzes	NEPSE Example
Qualitative	Business model, management quality, governance, industry strength	Examining a hydropower promoter's credibility and project quality
Quantitative	Financial statements, ratios, earnings trends, valuation multiples	Studying ROE, NPL, and EPS growth over 5 years

10. Reading Financial Statements

Income Statement (Profit & Loss)

Shows a company's revenue, expenses, and profit over a period (quarterly/annually) — how much was earned, how much was spent, and how much was left. It directly drives EPS, which affects stock prices: strong earnings growth boosts confidence and valuation, while weak or fluctuating profits often trigger price corrections.

Component	Meaning	NEPSE Example
Revenue / Total Income	Earnings from core operations	Bank interest income, hydro power sales
Operating Expenses	Cost of running the business	Branch costs, O&M; cost of hydros
Operating Profit (EBIT)	Profit before interest & taxes	Used to compare business models
Other Income	Non-core earnings	Investment gains, trading income
Finance Cost	Interest paid on debt	Hydro project loans, debenture interest
Net Profit / PAT	Final profit after all costs & taxes	Used for EPS and valuation

Example (Nabil Bank, from the course deck): Q3 2081/82 net interest income was about Rs. 12.05 billion, total operating income about Rs. 15.30 billion, and profit for the period about Rs. 5.05 billion.

Example (SHPC, hydropower): Operating income of roughly Rs. 545 million and net profit of about Rs. 277 million in the same latest quarter, smaller and more volatile than recent prior years.

Balance Sheet

A snapshot of a company's financial position at one point in time — what it owns (assets), what it owes (liabilities), and what's left for shareholders (equity).

Component	Meaning	NEPSE Example
Assets	Resources owned: cash, property, investments	Hydro plant & land; loans given by banks
Liabilities	Obligations: loans, payable interest, unpaid expenses	Long-term project loans in hydros
Shareholders' Equity	Share capital + retained earnings	Paid-up capital, reserves, bonus/rights impact

Example (Nabil Bank): total assets grew from about Rs. 277 billion five years ago to about Rs. 612 billion in the latest quarter, funded mostly by customer deposits, with total equity around Rs. 61 billion.

Cash Flow Statement — Real Money Movement

Metric	Meaning	Signal
Operating Cash Flow (OCF)	Cash generated from day-to-day business	Should be consistently positive in mature companies
Free Cash Flow (FCF)	OCF minus CapEx	Real cash left for shareholders, debt repayment, dividends
Cash Flow vs. Net Profit	Compare OCF with net profit	High profit but low cash flow may signal manipulated or unsustainable earnings

11. Valuation & Key Ratios

Valuation estimates the fair, intrinsic value of a company or its share price — answering whether the current price is justified by performance and future potential.

Example: if NABIL's market price is Rs. 320 but its intrinsic value is Rs. 400, it looks undervalued (a buy signal). If a hydro stock trades at Rs. 700 against a Rs. 400 intrinsic value, it looks overvalued (correction risk).

Method	Basis	Used When
Ratio-based (EPS, PE, PBV, ROE)	Current profits & book value	Quick comparison & screening
Discounted Cash Flow (DCF)	Future free cash flow	In-depth, long-term valuation
Dividend Discount Model (DDM)	Future dividends	Stable dividend-paying stocks
Asset-Based Valuation	Net asset value	Investment firms, liquidation cases
Relative Valuation	Sector PE, PBV, etc.	Comparing against NEPSE or peer companies

EPS — Earnings Per Share

EPS = Net Profit ÷ Outstanding Shares. Shows profit earned per share. Track EPS growth over years for consistency; after rights/bonus issues, use adjusted EPS. Higher EPS generally means stronger dividend payout capacity.

Example: a company earning Rs. 2.4 billion with 120 million shares has an EPS of Rs. 20 — stronger than a peer with the same price but only Rs. 8 EPS.

PE Ratio — Price to Earnings

PE = Market Price ÷ EPS. High PE (>30) suggests the market expects strong future growth; low PE (<10) can signal undervaluation — or risk. Compare against sector average and the stock's own historical PE; a "PE band" strategy buys near the lower range and sells near the higher one.

Example: price Rs. 300, EPS Rs. 10 → PE = 30. If the sector average PE is 15, this stock looks overpriced unless rapid growth is expected.

Book Value (BV) & Price-to-Book (PBV)

BV = (Total Assets − Liabilities) ÷ Shares — the accounting value per share if the company liquidated today. PBV = Price ÷ Book Value. PBV below 1 suggests a value pick; above 2 suggests a premium, justified only by high ROE. For banks, PBV under 1.5 often signals undervaluation.

Example: book value Rs. 220, market price Rs. 330 → PBV = 1.5 (reasonable for a premium bank). A PBV of 3.5 with low ROE, by contrast, may be overpriced.

ROE — Return on Equity

ROE = Net Profit ÷ Shareholders' Equity — how effectively a company turns shareholder funds into profit. In Nepal, ROE above 15% is generally considered healthy. High ROE with low PBV suggests a value pick; high ROE with high PE suggests a growth stock.

Example: equity Rs. 20B, net profit Rs. 3.6B → ROE = 18% (strong), versus a peer bank at only 9% (less efficient).

Combining the Tools — Strategic Matrix

Metric Combination	Signal	Action
EPS rising YoY + low PE	Undervalued stock	Buy & hold
EPS falling + high PE	Risky overvaluation	Avoid or exit
PBV < 1 + ROE > 15%	Deep value	Long-term buy
High PE + consistent EPS	Growth story	Buy on dips
ROE > PE	Profitability beating valuation	Strong performer

EPS, PE, Book Value, PBV, and Dividend Yield for any real company are already shown live on your homepage search.

12. Macro-Economic Analysis — How Nepal's Economy Affects NEPSE

Inflation & Currency Risk

High inflation reduces purchasing power and real returns from stocks
Import-heavy companies (manufacturing, energy) suffer from NPR depreciation
Investors shift to safer sectors (banks/insurance) during macro instability

Monetary Policy (NRB's Role)

NRB controls liquidity via CRR, SLR, interest rates, and refinance policies
Tight policy → less liquidity → lower demand for stocks
Loose policy → more liquidity → bullish sentiment on NEPSE

Interest Rate Trends

High interest rates draw money to fixed deposits → equity market outflows
Low interest rates make equities more attractive → more market inflow

NEPSE often corrects when fixed-deposit rates cross about 11%, and rallies when they drop below about 8%.

Fiscal Policy, Budget & Alternative Assets

Sectoral budget allocation (hydro, infrastructure, agriculture) shapes stock trends
Capital spending or tax changes affect listed-company profitability
Higher remittance inflows → more household savings → more investment in IPOs/secondary market
A real estate boom tends to pull money out of the stock market
Crypto and gold/bullion trends compete with stocks for retail investment capital

Live NRB forex rates are already on your Economy page.

13. Sectoral Analysis

NEPSE is sector-dominated — banks (BFIs), hydropower, and insurance together make up over 75% of market capitalization. Capital flows shift between sectors, and tracking this gives entry/exit signals, since company earnings are often sector- and policy-linked.

Sector	Key Drivers	Investor Focus
Commercial Banks	NRB policy, interest spread, NPLs, dividend history	Consistent EPS, low PBV, ROE > 15%
Development Banks & Finance	Interest income, capital adequacy, merger news	Momentum, growth-oriented
Hydropower	Generation license, COD, PPA rates, construction delays	Project pipeline, CGR model
Insurance (Life/Non-Life)	Investment returns, reserve surplus, premium growth	High EPS, ROE, bonus patterns
MFIs (Microfinance)	Credit cap, NRB directives, credit penetration	Volatile but fast growers
Manufacturing/Hotels/Others	Tourism, production cost, import duty	Watchful, cyclical investing

See your Sector Heatmap for a real, live view of which sectors are up or down right now.

14. Stock Selection & Portfolio Strategy

Stock Selection Framework

Criteria	Target Value	Why It Matters
Consistent EPS growth	≥10% YoY (5 yrs.)	Signals sustainable profitability
ROE	≥15%	Shows capital efficiency
PE Ratio	Below sector average (or justified by growth)	Valuation check
Debt-to-Equity	<1 (except hydros)	Financial health
Dividend history	5+ years consistent	Sign of maturity & stability
Cash flow	Positive OCF	Confirms real earnings

Case Study — Comparing 3 Commercial Banks (from the course deck)

Metric	NABIL	SBL	PCBL
EPS	Rs. 28	Rs. 17	Rs. 13
ROE	18%	12%	11%
PE	11	14	15
PBV	1.5	1.1	1.0
Dividend (5Y avg.)	35%	25%	20%

In this course example, NABIL stands out with the higher EPS, ROE, and reliable dividend history. Figures are from the course deck, not live data — use your homepage search for real current numbers.

Define Investment Goals

Short-term (<1 year): IPO listing gains, technical/momentum stocks
Mid-term (1–3 years): growing sectors with improving EPS (hydropower, MFIs)
Long-term (>3 years): stable companies with consistent ROE & dividends (banks, insurers)

Capital Allocation Strategy

Category	Allocation	Purpose
Core Holdings	50–60%	Fundamentally strong companies held long-term
Growth Stocks	20–30%	Emerging sectors with strong future EPS growth
Speculative	10–15%	IPO flipping, construction-stage hydro plays
Cash Reserve	5–10%	Dry powder for corrections or new IPOs

15. Final Recap — Key Takeaways

Guiding principle: "Buy strong, hold wisely, exit smart."

Core Concept	Key Takeaway
NEPSE Structure	Know the roles of SEBON, NEPSE, CDSC, and NRB
Financial Statements	Income = performance; Balance Sheet = strength; Cash = reality
Valuation	Use EPS, PE, PBV, and ROE to judge if a stock is under- or over-valued
Macro & Sector	Match stock picks to economic and sector cycles

This page is educational reference material, summarized from a fundamental analysis course — it's not personalized advice. Real, live numbers for any company (EPS, PE, PBV, dividend yield, and more) are available by searching on your homepage. See the full Disclaimer for terms of use.