Fundamental analysis is the first step before you invest in the stock market. It will be your research just to make sure that where you are investing and securities. It can be useful in every aspect where you want to buy or sell, where to invest, for how long you will invest and your plans will work accordingly.
Fundamental analysis talks about the company analysis, industry analysis, industry evaluation, economic condition, future profit outlook.
It is public data. It uses revenue, reading, future growth, profit margin, & you can find all this data on companies’ financial statements.
It is a researched base thing. You need to search about what is the actual price, what price is showing you now if it is less than expected price, buy that stock if is more than expected price, sell it & get profit. This whole process comes under the short position.
To start with fundamental analysis some basics you need to follow:
Check company’s income, growth, profit, debt, turnover, their approach towards customers & employees.
Company Prospectus plays a very important role to gather this information. It is a tool to create awareness about company details & attract more & more general public.
It comes in handy when a company launches its IPO ( Initial Public Offer). They Share applications to fill in the prospectus.
Fundamental analysis is the basic & relevant approach before you invest. So follow some steps before you choose a company in which you wanna invest or decide which company shares you are going to buy.
Step 1: Economic Research: Many industries & sectors together creates an economy. The growth of the economy directly affects a company’s growth & company shares. So detail economy research is the first mandatory step anyone should follow.
Step 2: Industry Research: Few industries impact the economy. So, selection of the industry that affects more, which industries are profitable for the economy, see is has a potential to get more profit or not. Then check how many companies are involved in that specific industry, which technology they use, employee status, growth rate.
Step 3: Company Research: It is the last step after economic & industrial research. From selected economy & industry narrow down some names of companies depends on brand value, market share, marketing standards, do they use new technology and innovation for their profit/progress.
After completing the above research you should understand about company’s business plan, Management status, financial details, whether they have any scope for investment, intrinsic value, a company can boost their stocks in future or not. Intrinsic value is the hypothetical value calculated by the initial assumption & the last assumption’s only difference is the initial price i.e. the current price of the market does not fully reflect an assumption value is very near to a true value.
There is no specific accepted to find the intrinsic value of stock
Types of Fundamental Analysis:
Qualitative Analysis: In the qualitative analysis we talk about a little bit of how is your management, what are their business objectives, etc.
First, we need to understand what the company does? Who are the competitors, what is the success rate of the company? Where are we compare to our competitors? What is their share cycle? Who are investing in the company? For how much period they are investing? Is their communication clear & transparent? How is the company’s behavior with consumers? loyal to the company?
It is also important to know, that are you able to find the answers to all the above questions.
Quantitative Analysis: In quantitative analysis, we look into the company’s balance sheet analysis, P&L analysis, cash flow analysis.
It is a measurable business characteristic. It includes of numbers. Conclude facts from the company’s financial statement, study the changes, growth, ups, downs, profit, loss.
All company’s assets, equity, liability according to time recorded in the Balance sheet.
Balance Sheet: Two things are essential i.e. asset how much resources we have in a current situation & liability is how we used those resources which is the total cost you need to pay back.
P&L Analysis (Income Statement): Liabilities represent debt (which of course must be paid back), while equity represents the total value of money that the owners have contribute to the business – including retained earnings, which is the profit that was generated as a result of the business operations for that period.
There are other types of analysis also Top-down Approach & Bottom-up Approach.
- Helps to predict the future value of stocks.
- Helps to decide whether you should invest long-term in a company or not.
- Helps to find companies with a good reputation, trustworthy brand, profit & potential to increase the value of their stocks in future.
- This analysis can provide you lots of benefits.
- It takes a lot of time to study every aspect.
- Every report & current situation may be slightly different.
- Different approaches for companies & industries could make your decision-making difficult.
- Valuation about any company is provided by the company itself so, prices of shares could be changed according to companies provided information.
Top Tools used for Fundamental Analysis:
It carries everything that is currently there & obtains from things we research about i.e. financial statements, business plan, management, etc. Depends on how you study, how you think the use of tools differs from person to person.
There are many tools used to calculate fundamental analysis But very few tools use on regular basis.
Top Five Tools Used For Fundamental Analysis:
Earning Per Share:
Combining two values i.e. earning of company & total no of the shares of the company you will get a commonly used ratio to know as earning per share.
It is also known as EPS.
It helps you to realize the net worth over time of that specific company.
Earnings Per Share= Profit – Preferred dividends / Weighted Average Common Shares
Price to Earnings Ratio:
Basically, it is the comparison between current sale price of company stock to EPS.
It helps you to realize growth of share price against the price generated in that particular year.
P/E= Share Price / Earning Per Share
Dividend Payout Ratio:
It is a comparison between dividends paid out to the company’s total net income.
1)DP Ratio= Dividends Paid / Net Income
2) DP Ratio= 1 – Retention Ratio
(Retention Ratio= EPS – DPS/EPS)
DPS= Dividends / Total Number of Shares
It is also the ratio of yearly dividends & share price. Value indicated in percentage.
Dividend Yield= Annual Dividend Per Share / Current Share Price
Return On Equity:
By dividing the net income of a company with shareholder’s equity one can find return on equity. It is also known as the company’s return on net worth.
ROE= Net Income / Shareholder’s Equity
Projected Earnings Growth:
It is a one year earnings growth rate of the stock.
PEG= Price/ EPS / EPS Growth
Price To Sales Ratio:
It is a comparison between a company’s stock value to its revenue.
This helps you to recognize generated revenue in that specific year against growth of share price.
PS Ratio= Market Capitalization / Revenue
PS Ratio= Per-Share Stock Price / Per-Share Revenue
Price To Book Value Ratio:
It is a value of an asset, the same as it appears in a company’s books, that company book values compare with market value.
Also known as price to equity ratio.
PB Ratio= Market Price Per Share / Book Value Per Share
OR Market Capitalization / Book Value
I prefer using EPS, Price to earning ratio, Projected earning growth, Dividend payout ratio for my Fundamental Analysis.