Risk tolerance by stocks categorization using ratio analysis

There are so many investment instruments available in the market today that an investor faces difficulty in choosing the optimal one. This article focuses on considering the risk tolerance of investors using ratio analysis and then allocating stocks into different categories. Stocks categorization is the process wherein stocks are classified into three categories:

  • growth,
  • income, and
  • value stocks.

Stocks categorization is done using different methods like Price-to-Earnings Ratio, Price-to-Book value Ratio, Beta, Price-to-Cash Flow ratio, Dividend yield rate, and dividend payout ratio.

Ratio analysis is an invaluable tool for stocks categorization

Investing in stocks requires careful examination of financial data of the company in order to determine its true worth. Financial ratios are a source of valuable information like profitability, liquidity, debt repayment ability, or operational efficiency clears the doubts of investors and aware them of the financial position of the company. The majority of investors consider ratio analysis as the optimal method for determining the position of the portfolio by having valuation based on historical prices. Herein, in order to classify stocks into growth, income, and value stocks, the ratios considered are:

  • Price-to-Earnings (P/E) ratio: P/E is the ratio representing the company’s current share price to its earnings per share. Depicting the willingness to pay by the market for the company’s earnings, the P/E ratio indicates the valuation of a stock in the market. A high P/E suggests the bullish nature of market participants on stocks wherein it is expected to have higher earnings growth in the future. It is also referred to as the over-valuation of the market.
  • Price-to-Book (P/B) value ratio: P/B compares the capitalization of the market with its book value by dividing the company’s stock price per share to its book value per share. Representing the valuation of stocks, the P/B is mostly used by value investors for identifying undervalued company stocks. A stock with low P/B value shows that there might be some issues that the company is bearing with its fundamentals and thus, the stocks are undervalued. There is a possibility of having a profit in the future.
  • Dividend Yield Ratio: Dividend yield represents the percentage of the market price of a share that the company pays annually to its shareholders as dividends. It is referred to as the ratio of dividend per share to its market price per share. As dividend yield does not show the nature of the company but instead identifies the alignment of stocks, a low yield represents a growing company focusing on re-investment while high yield paying company is a mature company with fewer chances of future growth. Thus, a high yield ratio represents the more possibility of income for the investors.
Categorisation of stocks using ratio analysis
Figure 1: Stocks categorization using ratio analysis

As stated in the previous article, the criteria for the classification of 303 BSE listed stocks is

StocksThreshold value
Income stocksDividend yield between 3-6%
Growth stocksP/E ≥ 20
Value stocksP/E ≤ 15 and P/B ≤ 1.5
Table 1: Stocks categorization criteria

Growth stocks categorization

Growth stocks depict the stocks of the company with high risk and less stability, but more possibility of earning sustainable returns. Herein, for the BSE-500 listed 303 companies, the comparison of the P/E ratio for each stock is done with the stated level i.e. 20. The stocks with the negative values or below the stated level are eliminated from the growth stocks categorization. The analysis of P/E, P/B, and the dividend yield values for the list of growth stocks is shown in the below table.

S.NoGrowth stocksP/EP/BDividend yield (%)
1AU Small Finance Bank50.0006.6100.100
2Bandhan Bank41.6675.7700.413
3Deepak Fertilizer20.7831.0253.689
4Deepak Nitrite23.3332.6380.992
5Eris Lifesciences33.33310.1250.000
6Future Lifestyle61.1115.1400.425
7Galaxy Surfactants37.5006.4150.546
8Godrej Agrovet50.0008.2600.779
9ICICI Lombard47.5137.6100.000
11Intellect Design Area27.1432.8380.000
12L&T Technologies22.2226.1231.344
13Mahanagar Gas23.7204.6700.000
14Mahindra Logistics50.0007.8600.332
15Manpasand Bev32.8603.5970.000
16Navkar Corp25.0002.0400.000
17New India Assurance37.5001.8750.900
18RBL Bank38.8893.7070.458
19Reliance Nippon Life AM29.1675.76556.146
20SBI Life Insurance62.24710.3200.000
21Sharda Cropchem22.5003.7640.999
22Tejas Network22.2222.1050.196
23Tube Investment33.3334.2450.763
24Varun Beverages45.8334.8180.470
253M India100.00014.3950.000
26ABB India107.2136.9380.000
27Abbott India37.6866.5560.000
29Adani ports27.3335.0290.491
30Aditya Birla Fashion42.7759.4600.000
31Aegis Logistics47.1395.2261.679
32AIA Engineering27.5954.7210.978
33AllCargo Logistics32.6072.3321.242
34Amara Raja Batteries36.7834.9520.913
35Ambuja Cements29.8332.7711.768
36APL Apollo Tubes25.4442.5691.850
37Apollo Hospital41.6674.2730.640
38Asahi Glass India32.4077.5350.174
39Ashok Leyland41.8574.2951.437
40Asian Paints49.16714.6991.025
41Astral Poly Tech52.5516.4570.378
42Avenue Supermarts100.00014.8730.000
43Axis Bank20.3132.3190.827
44Bajaj Consumer24.9119.6392.761
45Bajaj Finserv91.66713.1990.173
46Bajaj Holdings22.7542.3902.953
47Bata India35.8477.1360.882
48Bayer Crop Science36.2045.4050.000
50Berger Paints42.3338.5811.048
51Bharat Financial Inclusion24.5744.0630.000
52Bharat Forge34.5004.8310.974
53Bharti Infratel30.2383.2673.154
55Blue Dart Express72.22219.2160.988
56Bombay Dyeing26.0106.7420.940
59Carborundum Universal32.8334.3880.900
60Centrum Capital29.3333.6590.239
61Century Plyboard26.3386.4301.249
62Century Textile and Industries49.2064.1800.683
63Cera Sanitary ware37.5006.5450.461
64Cholamandalam Finance22.6232.6561.021
66Coal India20.22911.8325.477
67Colgate Palmolive (India)31.71628.4110.000
70Dabur India46.66715.9661.136
72Dr Lal Path Lab50.00012.1130.436
73Dr Reddys Lab33.3334.2160.917
74Edelweiss Financial Services64.1673.5141.539
75Eicher Motors49.07415.4320.961
76EID Parry India25.8642.6211.403
78Elgi equipments39.5004.3371.056
80Equitas Holding1219.8972.9230.000
82Eveready Ind23.0082.3780.526
83Exide Industries22.0003.6281.225
84Future Retail621.7536.6000.000
85Gateway Distri32.8331.8063.684
86GE T&D India55.2877.4580.000
87Gillette India100.86418.2730.000
88Glaxosmith Con40.5939.8150.000
89Glaxosmithkline Pharma55.55611.2090.597
90Glenmark Pharma25.4133.4850.317
91GMR Infra24.3811.4880.096
92Godrej Consumer53.33310.9171.003
93Godrej industries45.0007.5420.600
94Godrej Properties48.5194.2380.401
95Grindwell Norto25.4404.1542.101
96Gujarat Fluoro Chem36.9202.1810.000
97Hatsun Agro56.95015.5360.000
98Havells India33.1676.4931.148
100HDFC Bank24.2594.1600.724
101Heildelberg Cem25.9321.8200.000
103Hindalco Industries23.6110.8690.855
104Honeywell Automation55.4875.8930.000
106IFB Industries50.0006.9230.000
107India Cements33.1110.8221.209
108India Tourism Development Corp32.1436.6330.448
109Indiabulls Real Estate51.3890.6560.817
110IndusInd Bank25.5563.6810.581
111Infibeam Avenue100.0003.5200.012
112Info Edge India56.6676.8430.340
113INOX Leisure40.9522.8030.000
114Ipca Labs33.1903.7430.509
115IRB infra42.4173.5561.911
116ISGEC Heavy Eng.21.4022.7006.874
118J K Cement20.7121.9901.927
119J K Lekshmi Cement26.9902.0731.502
120Jain Irrigation35.7541.9410.741
121JM Financial50.0002.1172.687
122Johnson Control87.3516.7360.000
123Jubiliant Foodworks75.00015.4730.108
124Jubiliant Life Science33.6162.9471.142
125Just Dial51.1118.8470.054
126Kansai Nerolac39.2866.6710.541
128Kotak Mahindra Bank44.4445.5010.079
129L&T Finance72.9173.5950.855
130Lakshmi Machine Works21.1792.9891.173
131Lemon Tree Hotels100.0006.1608.432
132Linde India75.0003.0280.073
134Mahindra CIE41.4581.7800.000
135Mahindra Holiday31.5003.8101.133
136Mahindra Life22.3731.3021.511
138Maruti Suzuki23.1673.7820.820
139MCX India28.9653.6070.000
141Minda Corp28.8143.7110.995
143Monsanto India29.9086.6410.000
144Motherson Sumi50.83310.2331.010
145Motilal Oswal50.0005.4421.299
146Narayana Hrudayalaya100.0005.2380.108
148Nestle India65.21625.7110.000
149Oberoi Realty35.1853.2680.674
151Oracle Financial Service25.6676.2173.148
153Page Industries69.20724.5040.000
155Phoenix Mills45.8332.3660.753
156PI Industries21.6115.4640.660
157Pidlite Industries38.6679.8070.924
158Prestige Estate24.5501.9930.747
160Quess Corp.66.6677.1670.000
161Radico Khaitan25.0002.7430.582
162Rain Industries55.6884.6142.035
163Rajesh Exports29.3533.4930.450
164Rallis India24.3334.1641.382
165Ramco Cements29.1673.3830.543
167Relaxo Footwear28.0566.7560.000
168Reliance Capital24.0211.1401.790
169Reliance Power56.5301.2450.000
170S H Kelkar50.0005.6630.475
171Sadbhav Engineering27.2623.0460.373
172Sanofi India33.5205.1630.000
173Schaeffler India33.2254.0090.000
174Shankara building products75.0007.7150.189
175Shoppers Stop50.9264.5270.221
176Shree Cements54.7626.3130.310
179SKF India28.4283.8230.000
180Solar India41.5007.8871.043
181Somany Ceramics22.4213.2061.125
182SREI Infra28.0310.8480.768
183Sterlite Tech24.1793.7570.926
184Strides Pharma39.6102.6428.786
185Sun TV Network24.5005.9712.476
186Sundaram Clayton42.1626.4262.256
187Sunteck Reality23.3534.7510.365
188Suprajit Eng.21.3784.1961.477
189Supreme Industries25.0286.5202.144
190Suven Life Science21.8573.8360.629
191Swan Energy50.0004.4040.152
193Take Solutions58.4922.5691.796
194Tata Communications22.2621.4000.990
195Tata Global Bev27.5953.1771.536
197Thomas Cook41.5484.7860.427
198TI Financial91.2775.4030.000
200Titan Company51.66712.4350.786
201Torrent Pharma25.9725.1731.698
203TTK Prestige43.7507.7230.521
204TV 18 Broadcast35.0002.6400.000
205TV Today Network21.3022.2260.856
206TVS Motor25.4485.2171.539
207Ujjivan Financial Service62.5002.5370.250
208Ultratech Cement31.0833.7060.454
209United Brewerie45.13710.8240.159
212Vinati Organics24.8034.0860.000
213VIP Industries28.4296.5471.767
214V-Mart Retail30.0874.8580.000
216WABCO India49.6497.7280.000
217Whirlpool of India42.9738.2300.317
219Zee Entertainment32.3338.4061.189
220Zydus Wellness35.0007.5340.783
Table 2: BSE-500 listed growth stocks categorization

Value stock categorization

Value stocks are the undervalued stocks which though currently traded at price below average market price but have the possibility of yielding high returns in the future. The stocks are mostly traded in the situation of distress thus there are very fewer investors who prefer these stocks. Herein, the listed BSE-500 companies are categorized on the basis of two ratios i.e. P/E and P/B. Stocks with P/E value less than 15 and P/B less than 1.5 are regarded as the value stocks. Herein, the stocks with negative average values and the value with either P/E less than 15 and P/B greater than 1.5 or P/E greater than 15 and P/B less than 1.5 are eliminated. A list of identified value stocks is shown below.

S.NoValue StocksP/EP/BDividend Yield (%)
1Canara Bank9.8760.7701.571
2Dewan Housing7.7591.4311.154
3Federal Bank13.7391.3591.536
5GIC Housing Finance10.1631.4830.000
8Gujarat Alkalies7.7050.8701.706
11IDFC First Bank14.7621.2700.008
14Jaiprakash Associates12.4591.0980.257
15JB Chemicals11.9711.3986.566
16Jindal Saw9.8710.7631.209
17Jindal Stainless7.3360.5950.000
18JK Bank6.7550.8691.822
19JK Tyre & Industry14.1631.2322.275
20Lakshmi Vilas Bank7.1671.1011.844
22Nava Bharat Ventures11.2400.8701.930
25Oil India9.4181.1984.089
26Phillips Carbon Black9.4041.0811.889
28Power Finance Corp7.8541.1292.958
30Reliance Communication8.1200.4730.136
31Reliance Infrastructure8.4460.7351.319
33Shipping Corporation8.5320.3920.000
35South Indian Bank9.1150.9832.097
36Tamil Nadu Newsprint1.8470.9550.000
37Tata Steel8.5400.8582.458
40Union Bank of India5.7440.7281.614
41Vardhman Textiles7.6291.1051.985
42Vijaya Bank7.4300.7282.469
43First Source Solution13.5441.1390.708
44Indiabulls Integrated4.7030.4831.287
45Magma Fincorp12.9421.3040.703
Table 3: Value stocks categorization from BSE-500 list

Income stocks categorization

Income stocks are the kind of secured investment for investors wherein the portfolio is balanced against the volatility of the market by having a source of steady income. A larger portion of the profit is paid as a dividend the company issuing these stocks is more of matured companies with slower future growth possibility. Mostly the dividend yield for these stocks is between 3-6% however, herein, the computation is done by comparing the rate with the average dividend yield of the market. The computed average market yield is 1.302%. Thus, the stocks having a value greater than the average market yield are referred to as income stocks. However, the growth and value stocks with a dividend yield greater than 1.302%, and the negative value are eliminated from the income stock. List of the identified income stocks along with their P/E, P/B, and dividend yield are shown below:

S.NoIncome StocksP/EP/BDividend yield (%)
1Cochin Shipyard13.8891.8302.657
2General Insurance Corp20.0001.7001.685
4L&T Infotech17.5005.5032.147
5Apar Industries15.0121.9542.359
6GE Power India14.1125.2821.577
7Hero Moto corp.19.0486.6572.739
8Indiabulls Ventures19.3603.1739.509
9Jagran Prakashan17.9893.8941.732
10Meghmani Organics16.1901.0621.556
12Piramal Enterprises16.2211.8982.752
14Sundram Fastners17.9493.6442.015
15Torrent Power17.6421.6621.643
16Vodafone Idea16.7691.9092.922
Table 4: BSE-500 listed income stocks categorization

BSE-500 listed categorized stocks

The examination of the 303 BSE-500 listed stocks with the ratio analysis i.e. P/E, P/B, and dividend yield has shown that as most of the investors opt for investing in companies yielding sustainable returns and have more possibility of growth, thus, there are about 220 growth stocks in the market. With the availability of undervalued stocks, about 45 stocks were value stocks. Lastly, with less opportunity for growth and more stable earning, only a few investors consider stocks as a medium to earn income. Therefore, 16 stocks are income stocks. Further, 22 stocks do not meet the threshold limit for stock categorization, thus are eliminated from further analysis.

Riya Jain
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