How to conduct fundamental analysis?

Fundamental analysis is a method of analyzing and evaluating equities, stocks, or other investment avenues. It is prudent to conduct a fundamental analysis before planning for any investments.

Sep 16, 2018 03:09 IST India Infoline News Service

Fundamental analysis is a method of analyzing and evaluating equities, stocks, or other investment avenues. It is prudent to conduct a fundamental analysis before planning for any investments. Publicly available information of a company such as profit and loss accounts, cash flow statements, and balance sheet is used to analyze its financial health.

There are two types of analysis: fundamental and technical. Fundamental analysis researches the financial health of the company, and the technical analysis is used to study trends in order to buy or sell stock. Together, these can be used to make prudent financial decisions.

In this article, we will learn about fundamental analysis:

Factors to consider in fundamental analysis

When conducting fundamental analysis, investors need to answer the following questions:
  1. What is the turnover of the company?
  2. What is the growth rate of the company?
  3. Is the company making a profit?
  4. Is there an increase or decrease in the company’s debt?
  5. What are the income rates of the company?
  6. Is investing in the company’s stock a good investment?
How to conduct a fundamental analysis?

Investors can perform fundamental analysis in the following manner to evaluate whether investing in the company is profitable.

·         Check the company’s website

Checking the company’s website for information is the first way to know about it. The website will host the details about the company, its products, its objectives, as well as its promoters, board members, or directors.  These details can help the investor know whether the company has a strong base.

·         Company’s financials

Read the company's financials including its profit and loss statements, balance sheets, cash flow statements, sales reports, and forecasts, operating costs, expenses, etc. If its CAGR, sales, and profits data for the past five years are on the increasing scale, then it should be a good sign for the investor.

·         Financial ratios

Financial ratios help assess a company's performance. They help with the initial assessment of the company’s growth rate, profitability, revenue generation, or dividend yields.

·         Debt ratio

Checking the debt ratio of the company is one of the determining factors before investing in its stock. As per the rule, a company having a debt ratio less than 1 is a good investment. Companies with a higher debt ratio cannot give long-term dividends to its shareholders, thereby making them a bad investment.

·         What is the catch?

Every company will have competitors in their line of work. One should be able to reason why they are investing in a particular company and not in its competitor. The investor should also determine what sets this company apart from its competitors: whether it has a Unique Selling Point(USP), the features of its products, its prospects, its upcoming products, and other factors.

·         What is in the future?

It is prudent to invest in companies that have bright prospects in the long-term. The longevity of a company’s products is a factor when looking to invest in it.

So, before investing in a company, the investor should be able to answer the above questions. Fundamental analysis is of great value, but it is not the only way to determine the investment. The investor should also take financial experts' opinion into consideration and use other tools before investing.

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