Before investing or trading in stock, we need to analyze the stock to derive some expectation on the future performance of the stock
The analysis of stocks falls in two main categories: Fundamental Analysis and Technical Analysis In this article we will try to understand the Fundamental Analysis
Fundamental Analysis analyses a stock from its financial statement, bank statements, and the cash flows. It interprets the future performance of a stock based on the cash flow statement, balance sheet, and income statements and the brand and management. So Fundamental Analysis considers both the qualitative Analysis (Management and Company Brand) and quantitative Analysis (P/E ratio, fair price, intrinsic value and other information extracted from the financial statements)
If you are an investor, based on fundamentals, you can ask yourself following few questions before making an investment in the stock.
- What is the fair Price of the Stock - What Based on the analysis, Investors try to identify the fair value of a stock. Fair Value of the stock can be defined as the potential value of a stock or the expected value of the stock based on the financial statements of the company. Based on the comparison of fair value with current market value, we can take a call on whether to invest in the stock or not. A stock with fair value > Market Price is a good candidate to invest in (an Undervalued stock), whereas fair value < Market Price (an Overvalued Stock) is a good candidate for sell. But it is one of indicator of Fundamental Analysis, and investment can depend on multiple other factors before investing.
- What is the debt to equity ratio of the stock – When we look at the liability section of a company financial statement, it has mainly two components, Debts and equities. Company with low debt to equity ratio is a better candidate to invest into. If we compare the debt to equity ratio of two different companies, we should compare the ratio of companies in the same sector. Comparing the debt to equity ratio of IT Company with Capital good company will not give the current indicator.
- What are the profit margins of the company and the pattern of profit margin of a company over a larger period of time is an indicator of company management of business
- How long the stock is in market. Larger the span of a stock help to analyze how the stock has performed during different cycle. E.g. a stock in market before 2007 Recession, we can get an estimate of company fundamentals during lean period.
- What is the revenue growth for the company?
- How the company is better placed compared to its competitors. What is the brand value, how has management handled the company assets and what is the general outlook for the sector in which the company is a player. What is the business model of the company?
- What is the market Share of the Organisation,How much customers does the company serves to.
