When you open your TMS and see hundreds of listed companies, how do you decide which stocks are actually worth buying? Many investors in Nepal rely on tips from friends, social media groups, or simply follow the crowd. But there is a more disciplined approach: fundamental analysis.
Fundamental analysis means evaluating a company's financial health and intrinsic value by looking at its financial statements — its earnings, assets, liabilities, and growth potential. Instead of guessing where the price might go tomorrow based on chart patterns, you are asking: "Is this company genuinely worth what the market is charging for it?"

Fundamental vs Technical Analysis

These are two different schools of thought for evaluating stocks:
Fundamental analysis looks at the company itself — its profits, assets, management quality, industry position, and growth prospects. You study balance sheets, income statements, and annual reports. The goal is to determine a stock's intrinsic value and compare it to the current market price.
Technical analysis looks at price charts, trading volumes, and historical patterns to predict future price movements. It does not care about the company's fundamentals — only what the price action is telling you.
On NEPSE, both have their place. But fundamental analysis is particularly important because Nepal's market is prone to speculative bubbles. In bull markets, stocks with poor fundamentals can rally dramatically on hype alone — and when the correction comes, those are the ones that crash hardest. Understanding fundamentals helps you avoid overpaying for weak companies and identify genuinely undervalued opportunities.

EPS: Earnings Per Share

EPS is the most basic profitability metric. It tells you how much profit a company earned for each share outstanding.
Formula: EPS = Net Profit / Total Number of Outstanding Shares
For example, if Nabil Bank earned NPR 6 billion in net profit and has 120 million shares outstanding, its EPS is NPR 50.

What Makes a "Good" EPS on NEPSE?

This varies significantly by sector:
  • Commercial banks: Strong performers have EPS of NPR 25-50+. An EPS below NPR 15 for a commercial bank suggests weak profitability.
  • Development banks and finance companies: NPR 15-30 is typical for healthy ones.
  • Hydropower companies: Varies enormously. Operating projects might show NPR 10-30, while those still under construction show minimal or negative EPS.
  • Insurance companies: Life insurers often show EPS of NPR 20-50+, non-life tends to be lower.
  • Microfinance: Often high EPS relative to share price due to smaller share capital bases.

Annualized vs Quarterly EPS

NEPSE companies report quarterly results (unaudited) and annual results (audited). When you see quarterly EPS, be careful — you need to annualize it properly for comparison.
If a bank reported NPR 12 EPS in Q1 (Shrawan-Ashwin), you might expect annual EPS around NPR 48. But banking profits are not evenly distributed across quarters — provision reversals and year-end adjustments often boost Q4 numbers. So quarterly annualization is a rough estimate, not a guarantee.
Always prefer audited annual figures for serious analysis. Quarterly numbers are useful for tracking trends, not making final judgments.

P/E Ratio: Price to Earnings

The P/E ratio tells you how much the market is willing to pay for each rupee of earnings. It is arguably the most widely discussed valuation metric on NEPSE.
Formula: P/E Ratio = Market Price per Share / Earnings per Share (EPS)
If a stock trades at NPR 800 and its EPS is NPR 40, the P/E ratio is 20. This means investors are paying NPR 20 for every NPR 1 of annual earnings.

Nepal Average P/E Ranges

The overall NEPSE market P/E typically ranges between 15-25, though it has gone much higher during bull runs and lower during corrections.
Sector-wise typical ranges:
  • Commercial banks: 15-25 P/E (lower during bearish phases, higher during bulls)
  • Development banks: 12-20 P/E
  • Hydropower: 25-60+ P/E (the market prices in future earnings potential)
  • Life insurance: 20-40 P/E
  • Microfinance: 10-20 P/E
  • Hotels/Manufacturing: Highly variable

When is a High P/E Justified?

A high P/E is not automatically "expensive." It may be justified when:
  • The company is growing rapidly and future EPS will be much higher
  • The sector has strong tailwinds (hydropower during energy shortage periods)
  • The company has a dominant market position with sustainable competitive advantages
  • Earnings are temporarily depressed due to one-time events
Conversely, a low P/E is not always a bargain. It might indicate the company's earnings are declining, the sector faces structural problems, or there are governance issues the market is pricing in.

Book Value Per Share

Book value represents the net asset value of a company — what shareholders would theoretically receive if the company liquidated all its assets and paid off all liabilities.
Formula: Book Value per Share = (Total Assets - Total Liabilities) / Total Shares Outstanding
Or equivalently: Shareholders' Equity / Total Shares Outstanding

P/B Ratio (Price to Book)

The P/B ratio compares market price to book value:
P/B Ratio = Market Price / Book Value per Share
NEPSE sector benchmarks:
  • Commercial banks: P/B of 1.5-3.0 is typical. A bank trading below 1.0 P/B deserves investigation — either it is genuinely undervalued or there are hidden problems (bad loans, regulatory issues).
  • Insurance: P/B of 3-8+ is common because insurance companies often have embedded value not fully reflected in book value.
  • Hydropower: P/B varies wildly depending on project stage and expected cash flows.
  • Manufacturing/Hotels: P/B of 1-3 is typical.
For banking stocks especially, book value is a critical floor indicator. Banks that consistently trade below book value are either deeply out of favor or have asset quality concerns.

ROE: Return on Equity

ROE measures how efficiently a company uses shareholder capital to generate profits. It directly answers: "For every rupee shareholders have invested, how much profit is being generated?"
Formula: ROE = Net Profit / Shareholders' Equity x 100%

Interpreting ROE for NEPSE Stocks

  • Commercial banks in Nepal: A healthy ROE is 15-20%. Below 10% suggests inefficiency. Above 20% is excellent but check if it is sustainable.
  • Development banks/Finance: 12-18% is decent.
  • Insurance: 15-25% is common for well-run insurers.
  • Hydropower: Once operational, strong projects achieve 15-25% ROE.
ROE should be considered alongside leverage. A company can artificially boost ROE by taking on more debt (because equity stays small relative to assets). For banks, this is inherent to the business model, but for non-financial companies, unusually high ROE combined with high debt is a red flag.

Dividend Yield

Dividend yield tells you what return you receive in cash (or bonus shares) relative to the price you paid.
Formula: Dividend Yield = Annual Dividend per Share / Market Price per Share x 100%
In Nepal, dividends are declared as a percentage of par value (NPR 100). So "20% cash dividend" means NPR 20 per share. If the stock trades at NPR 500, the cash dividend yield is 20/500 = 4%.
For bonus shares, you need to calculate the value: "15% bonus share" when the stock price is NPR 500 means you receive 0.15 shares x NPR 500 = NPR 75 value per share held. The effective yield in that case is 75/500 = 15%.
Total dividend yield combines both. NEPSE's better dividend payers (commercial banks, some insurance companies) typically offer 3-6% cash yield plus bonus shares.

Debt to Equity Ratio

This ratio measures how much debt a company uses relative to shareholder equity.
Formula: Debt to Equity = Total Debt / Shareholders' Equity

Why It Matters for NEPSE Stocks

For hydropower companies, this is critical. Most hydro projects are financed with 70-30 or 60-40 debt-to-equity ratios during construction. A company with D/E of 3-4x during construction is normal, but you need to assess whether projected cash flows after completion can service the debt.
For banks, the concept is different — banks are inherently leveraged, so D/E is not the right metric. Instead, look at Capital Adequacy Ratio (CAR).
For manufacturing and hotels, D/E above 2x warrants caution. Companies heavily reliant on loans are vulnerable to interest rate increases by Nepal Rastra Bank.

NPL/NPA Ratio: Critical for Banking Stocks

Since banking and financial institutions make up the majority of NEPSE's market capitalization, understanding asset quality is essential.
NPL (Non-Performing Loan) ratio = Non-Performing Loans / Total Loans x 100%
A loan is classified as non-performing when principal or interest is overdue beyond 90 days. Nepal Rastra Bank mandates strict classification:
  • Pass/Good: Less than 3 months overdue (1% provisioning)
  • Substandard: 3-6 months overdue (25% provisioning)
  • Doubtful: 6-12 months overdue (50% provisioning)
  • Loss/Bad: Over 12 months overdue (100% provisioning)
What to look for:
  • Commercial banks should ideally have NPL below 3%. Above 5% is a warning sign.
  • Sudden increases in NPL quarter-over-quarter suggest deteriorating loan quality.
  • Compare with industry average — if one bank's NPL is rising while peers remain stable, that bank-specific problem is concerning.
  • High provisioning reduces reported profit, so a bank with rising NPL will see EPS drop even if gross interest income is growing.

Where to Find These Numbers

Gathering fundamental data for NEPSE stocks requires checking multiple sources:
  1. NEPSE website (nepalstock.com.np): Basic financial data, floorsheet, company profiles
  2. Company annual reports: The most reliable source. Published after AGM. Available on company websites or SEBON filings.
  3. MeroShare (meroshare.cdsc.com.np): Portfolio holdings, IPO applications
  4. SEBON website (sebon.gov.np): Regulatory filings, prospectuses, quarterly reports
  5. Financial portals: Sites like ShareSansar, NepseAlpha, and Merolagani aggregate financial data and calculate ratios for you
  6. Nepal Rastra Bank publications: Quarterly banking statistics for industry-wide metrics
For most retail investors, financial aggregator sites are the practical choice. They calculate EPS, P/E, book value, and other ratios automatically from company filings.

Practical Example: Analyzing a Banking Stock

Let us walk through analyzing a hypothetical commercial bank on NEPSE using fundamental metrics:
Company: Example Commercial Bank (ECB)
  • Market Price: NPR 450
  • EPS (latest audited): NPR 32
  • Book Value per Share: NPR 220
  • Paid-up Capital: NPR 12 billion
  • Net Profit: NPR 3.84 billion
  • Shareholders' Equity: NPR 26.4 billion
  • NPL Ratio: 2.1%
  • Dividend History: 18% cash + 10% bonus (last year)
Step 1: P/E Ratio 450 / 32 = 14.06
This is below the sector average of 15-25, suggesting the stock is not overpriced on an earnings basis.
Step 2: P/B Ratio 450 / 220 = 2.04
Reasonable for a commercial bank. Not cheap, but not stretched either.
Step 3: ROE 3.84 billion / 26.4 billion = 14.5%
Slightly below the ideal 15-20% range but acceptable. Investigate whether recent provisioning charges depressed profits.
Step 4: Dividend Yield Cash: NPR 18 / 450 = 4% Bonus value: 0.10 x 450 = NPR 45 per share = 10% Total effective yield: ~14%
This is attractive for an income-oriented investor.
Step 5: Asset Quality NPL at 2.1% is healthy — below the industry average and well within NRB comfort zones.
Overall Assessment: The stock appears reasonably valued with decent dividends and healthy asset quality. The slightly low ROE is worth monitoring. If the broader market or banking sector corrects, the below-average P/E provides some downside cushion.

Limitations of Fundamental Analysis on NEPSE

While fundamental analysis is valuable, it has real limitations in Nepal's market:
  1. Small market, limited liquidity: Some stocks trade so infrequently that "market price" barely reflects real supply-demand dynamics.
  2. Limited public data: Not all companies publish timely quarterly reports. Audited annual reports may be delayed.
  3. Accounting quality varies: Nepal's accounting standards are improving but vary in application. Smaller companies may have less rigorous audits.
  4. Related-party transactions: In a small economy, interconnected ownership structures can obscure true financial health.
  5. Regulatory changes: NRB directives can dramatically alter banking profitability overnight (merge mandates, provisioning changes, interest rate corridors).
  6. Sentiment-driven market: NEPSE often moves on news flow and crowd psychology more than fundamentals, especially in the short term.
  7. Sector concentration: Banking dominates NEPSE. If you only analyze banking metrics, you cover most of the market — but diversification options are limited.

Putting It All Together

Fundamental analysis on NEPSE is not about finding a single magic number. It is about building a complete picture:
  • Start with EPS and P/E to understand valuation relative to earnings
  • Check book value and P/B for asset-based valuation
  • Evaluate ROE to assess management efficiency
  • Look at dividend yield for income potential
  • Examine NPL for banks or D/E for non-financial companies
  • Compare ratios with sector averages, not just in isolation
No single metric tells the full story. A stock with a low P/E might have declining earnings. A stock with high ROE might be overleveraged. A stock with great dividends might have deteriorating asset quality that will force dividend cuts.
Use fundamental analysis as your starting framework, combine it with awareness of market conditions and sector trends, and you will make significantly better investment decisions than following tips blindly. The numbers will not guarantee profits — but they will help you avoid the worst mistakes.