An investor should know how to decide if a Company is a good investment based on the Company’s underlying fundamentals that are reflected in the valuation and investor sentiment.

Most of us would agree that Nazara Technologies can be considered as a high quality company, firm backed by big bull Rakesh Jhunjhunwala.Its IPO attracted 175.5 times bids on the final day of the bidding process.It is a leading Indian based diversified gaming and sports media firm.
Nazara has diversified assets, strong relationships, in-house content, and technology stack that can help the company create the network effect and economies of scale for it to continue its global expansion and increase monetization.However whether Nazara’s stock is a compelling investment boils down to how much of those positive fundamentals are reflected in the stock price.

If investors are bearish on the outlook of a company, the valuation multiple typically trades lower, but if investors are bullish on the outlook, the valuation multiple trades higher.

We can consider few scenarios to make a judgement on the attractiveness of the investment.

Scenario 1 – Nazara Fundamentals strong and stock trading at 10x P/E –
Very attractive investment since an investor can buy a company with strong underlying fundamentals at a cheap valuation.
Scenario 2-Nazara Fundamentals strong and stock trading at 20x P/E-
Depending on the expected growth rates, this could also be an attractive investment, but the investment is clearly not as attractive as it was when the P/E multiple was at 10x.
Scenario 3– Nazara Fundamentals strong and stock trading at 100x P/E-
Unless there is an expectation for a massive acceleration in Nazara’s business ,many investors would find it unattractive to purchase the stock at such a high valuation multiple.
Scenario 4-Nazara fundamentals weak and 30x P/E –
If Nazara’s underlying fundamentals are weakening ,most investors would find it unattractive to pay a premium for a company with fundamentals going in the wrong direction.
Scenario 5 –Nazara fundamentals weak and 10x P/E
This could be a potential investment since the P/E ratio is cheap and it could be compensated for taking risk when the fundamentals are wrong,if the investor believes that the fundamentals will improve.

What should an investor analyse in judging the quality of a company?

1. Quality of the management team
2. Brand Loyalty and Perception
3.  Competitive Moat such as product differentiation strategy ,low cost strategy or brand image

What are the features of a good investment?

1.  High quality Company
2. Attractive Valuation

We can say that the attractiveness of an investment is dominated not just by the qualities of the company and strength of the fundamentals but by the valuation at which the investor purchases the stock.