Fundas Of Fundamental Analysis

There are many ways in which investors and traders decide on which stock to buy. One of them is fundamental analysis, which relies on what you may call the `intrinsic’ worth of a company or stock, rather than just price movements.

In this method of analysis, an analyst may study the products offered by a company, its management, its economic environment and even its competitors. These help determine the value of a particular stock. Additionally, fundamental analysis may also consider the revenue of the company, assets and operating costs, cash flow and projected earnings etc. Analysts also take into account price/earnings (P/E) ratio, dividends paid out and return on equity while conducting fundamental analysis.

Let’s look at how fundamental analysis helps determine the worth of individual stocks in the market.

Fundamental analysis and performance of individual stocks

An analysis is done based on several fundamental business factors. These include:

The company and the products it offers: Fundamental analysis helps investors understand the company they are investing in. It helps them determine the performance of the company and whether it is taking the right steps towards its future goals. It also enables investors to understand whether it is the right time to purchase, hold on to, or sell off a stock. They may look at the products offered by the company -- whether they are good ones, niche products not offered by other brands, or if they are market leaders in their category.

The company management: Fundamental analysis of stocks is also done on the basis of how the company is managed. Fundamental analysts look at the company’s leadership and whether the management team is efficient. Analysts believe that companies that have good management teams are solid investments and the same would be reflected in the prices of stocks. If a company goes through any change in management, there will be scepticism about the company’s future performance, and this could be reflected in the company’s share price. 

The financial health of the company: Analysts also look at financial reports of the company. They look at the debt accumulated by a company and how much of it is paid off. Companies that have huge debts cannot possibly perform well or reward their shareholders. However, investing in a company that hasn’t got any debt may also not be ideal since it may not be considered aggressive enough or worthy of investment. As a thumb rule, experts suggest investing in companies that have a debt/ equity ratio of less than 1.

The performance of the company over the years: This is another key factor that comes into play in the fundamental analysis of stocks. An analyst will determine if a company has been performing well and consistently over the years and if it has been growing year on year. An investment-worthy company is defined as one which has shown consistent and incremental growth each year.

Investors can visit the company’s website and take a look at the profit/loss statements, balance sheets and cash flow statements to find out how it’s been doing. They can also find out operating costs, expenses and revenue, to help them make an investment decision