Investors often argue about which approach is better: studying a company’s financial health or studying its price chart. The truth is that each method answers a different question. Fundamentals tell you what a business is worth, and charts show you what the market is willing to pay right now. Anyone hunting for the best stocks to buy today will find the process far more reliable when both lenses are used together. Even someone casually browsing stocks to buy today will benefit from knowing what a handful of key signals really mean. This article explains them in simple terms.

Fundamental Signals: Measuring Business Strength

Look at the growth within the company. Have they shown sustained growth in revenues and net profits over 5 + years, preferably in an economic downturn? If they have shown consistent growth regardless of the economy, then they are likely to have sustainable competitive advantages. Also look at their operating profit margin – how much profit (before interest and tax) they are making per rupee of sales.

Look at Return on Equity and Return on Capital Employed to see how well management is deploying capital. If they have shown sustained high returns well above the cost of debt, then this shows a quality business. Look at how they compare against their competitors – average margins in different industries can be very different. A capital-intensive manufacturing company will not have the same ratios as a software service company.

Balance Sheet and Cash Flow

A strong balance sheet is good to see. Look at the debt/equity ratio and interest cover. Whilst high levels of debt aren’t always bad (especially in sectors such as infrastructure and financial services) they should still be making comfortable amounts more than they are paying in interest.

Cash flow is equally important to look at. Profits can be impacted due to the discretion of the accountant; however, cash is much harder to hide. Look at the relationship between operating cash flow and net profit over several years. If they correlate, then it suggests that earnings are real. However, if there is growing profits but not cash flow, then this may be a sign of issues with receivables, inventory and/or aggressive revenue recognition.

Valuation

PE ratios are one of the most popular indicators when looking at valuations. They work best for companies with steady and profitable operations. Banks often use price-to-book ratios. If the company has fluctuating profits, then looking at EV/Operating Profit or Price/Sales ratios may give a better indication.

Always look at the history of the company and how they compare to similar companies. A low multiple stock may be cheap for a reason. Maybe demand is falling or governance is poor. A high multiple may be justified due to strong and consistent growth. A valuation should just be seen as a guide.

Technical Indicators

Charts show how the market has reacted as a whole. Some basic principles to look at are support and resistance. Support is an area of the chart where buying has consistently come in. Resistance is where selling has tended to prevent the price from moving any higher. If the price breaks out above resistance with strong volume this can be seen as a sign of renewed demand. If the price falls below support with high volume this can be seen as a sign of weakness.

Moving averages are used to smooth out daily volatility. Many investors look at the 50 and 200 day moving averages to get an indication of the medium and long term trends. Generally it is seen as positive if the price is above rising moving averages.

Momentum Indicators

Relative Strength Index shows how fast the price has been moving. It can be useful to look at overbought or oversold conditions. However these should be seen as warnings rather than instructions. If the stock is in a strong uptrend it can be overbought for a long time.

Volume shows confidence. If volume is increasing whilst the price is rising it can be seen as a sign that many people are involved. If the price rises but on low volume it may not last. Delivery percentages on the exchanges can also be seen as a sign of how many traders are actually taking ownership.

Putting it All Together

A practical way to use this would be to look at fundamentals to create a list of quality companies. Technical indicators can then be used to help decide when to enter. This can help ensure you are not buying after a parabolic run and will prefer to buy during consolidation or when the price is pulling back to support. Long term investors may only look at charts to space out their investments. Traders may place more emphasis on charts.

It is important to be consistent. Choose one method and use this for all stocks. If you change your method every time you lose, then you won’t learn what works.

Limitations

No indicator can predict the future. Unexpected events such as policy changes, earnings surprises, and global events can cause any pattern to break down. Risk management, position sizing, and diversification remain important.