If you are an investor, you will know how several factors influence the market expectations and prices of the stocks. An investor’s expectations about the value of a company tend to drive a share price at any given moment in time. Undoubtedly, investors buy and pay for stocks that show future growth and stability. Therefore, it is highly important to conduct fundamental analysis of company and stocks. In this article, we will talk about the basics of fundamental analysis and how you can win over the stock market through fundamental analysis.
Fundamental analysis of company involves analysing the fundamentals of the company before investing in the stocks. This is a component of fundamental analysis strategy.
What is fundamental analysis?
Fundamental analysis is defined as the method of measuring the intrinsic value of a security by scrutinizing various financial and economic factors. So, fundamental analyst studies factors and conditions affecting a company or its security’s value, by analysing macroeconomic factors like industry conditions and the economy’s condition. He also studies microeconomic factors like the efficacy of the company’s management.
It is principal to note that the stocks’ intrinsic values do not change overnight. Therefore, fundamental analysis allows the identification of the chief attributes of the organization and the stock price movement. It also helps you to analyse the company’s actual value or worth, taking into account micro and macroeconomic factors.
Accordingly, fundamental analysis employs data from three sources:
- Historical data tells the investors how the company and the stocks had performed in the past.
- Publicly available information- Company’s health, description, and all the announcements made by the company’s management.
- Information that is not publicly available like how the management handle crisis situations, leadership, etc.
So, before conducting fundamental analysis of company and stocks, you have to consider the following factors:
- Organization’s revenue and structure,
- Firm’s profits in course of years,
- Revenue growth
- Firm’s debts
- Turnover rate, and
- Corporate governance.
Types of Fundamental Analysis
Fundamental analysis is of two types, namely, qualitative and quantitative.
- Qualitative Fundamental Analysis
The qualitative analysis includes the firm’s brand recognition, key executives, propriety technology, and patents. This kind of fundamental analysis is less tangible. Under qualitative fundamental analysis, analysts consider the company’s health, business model whether or not the company is making profits through its strategies. Analysts also consider the firm’s long-term success. It is important for organizations to nourish a competitive advantage and keep it as well.
Qualitative fundamental analysis takes special interest in a company’s management because, in spite of having an amazing business model, businesses fail due to the employer’s incapacity and inability to manage it. This analysis also takes note of corporate governance which describes policies denoting the relationship between the company and the stakeholders. You will surely want to buy stocks of a company that is fair, ethical, and profitable. Therefore, make sure the communication between the stakeholders and the company is transparent, understandable, and clear.
Nonetheless, it is crucial to understand a firm’s industry-wide growth, business cycles, regulation, and customer base. All these factors lead to your profitable stock market trading.
- Quantitative Fundamental Analysis
Other than knowing the company’s reputation, its business model, and corporate governance, it is crucial to look at the number. Basically, quantitative fundamental analysis deals with hardcore numbers. Analysts use financial statements to conduct fundamental analysis of stocks. The important financial statements include balance sheets, income statements, and cash flow statements.
The company’s balance sheets represent its equity, assets, and liabilities at a specific point in time. Assets include inventory, cash, buildings, and machinery. Liabilities represent debts and equity is the amount contributed by the owners of the company.
On the other hand, income statements deal with measures and analyses a company’s performance over a particular time frame. In the income statement, analysts are able to check the company’s expenses, profits, and revenues generated due to business operations of that period.
Cash flow statements focus on the company’s cash outflows and inflows. It focuses on CFI or Cash From Investing i.e. cash spent for investing in equipment, long-term assets, assets, and sale of other companies. The CFF or Cash From Financing is the cash received or paid from borrowing and issuing of funds. The OCF or Operating Cash Flow deals with cash generated from daily business operations.
Both qualitative and quantitative analysis is important for fundamental analysis of company. Neither quantitative nor qualitative is inherently better. Therefore, analysts use both types to conduct a fundamental analysis of stocks and companies.
How can you do fundamental analysis of company?
Below mentioned are the necessary steps for conducting fundamental analysis of company:
- Understand the firm’s operations, business model, etc.
- For initial screening, use financial ratios.
- Minutely study the company’s financial reports.
- Learn and study about the company’s rivals and competitors.
- Examine the firm’s debt and compare it with company’s rivals as well.
- Lastly, scrutinize the company’s prospects.
What are the benefits of fundamental analysis?
When you conduct fundamental analysis of stock, you get the company’s stock’s fair price. The stock price may fluctuate and fundamental analysis tells you when and when not, the stock price is doing well. The stock price can either be underrated or overpriced.
With fundamental analysis, you can lucidly predict the stock market’s long-term trends. Fundamental analysis is chiefly used for long-term investments, enabling you to understand and recognize the price the stocks should reach. Moreover, you can also find out sturdy growth potential companies for investing in stocks.
Equity analysts use fundamental analysis for generating recommendations and price tags for their clients of buying, holding, or selling. Fundamental analysis is also used by corporate managers and accountants to improve a firm’s operating efficiency and profitability and to compare them to its competitors.
Additionally, fundamental analysis helps you with one of the intangible and critical factors i.e. business acumen. The business acumen tells you about the company’s future and how far it is going to sail.
How to win in the stock market?
Fundamental analysis of company will surely make you win in the stock market and earn huge profits. But, for proficient sailing and winning in the market, we have “Secrets of Winning the Stock Market”, a financial fundamental analysis course by Elearnmarkets. This course is highly profitable for traders and investors looking for new stock investment ideas, trying to broaden their knowledge on fundamental analysis, management analysis, portfolio construction, and valuation analysis. Any stock market enthusiast can easily avail this course and learn interesting and valuation information from it.
A chef does not tell his secret recipe. But, if you avail this course, you will know all the secret tips and tricks to win over the stock market. Elearnmarkets is a financial e-learning portal with myriad and varied courses on the stock market starting from basics to technical analysis to fundamental analysis. The courses are specially curated by stock market giants and participants learn and apply the methods learned from this course in the stock market for profitable money-making. Hence, check out their website for phenomenal and erudite stock market courses.
Bottom Line
Fundamental analysis of company is an important aspect while an investor is looking to invest in a company and its stocks. It is crucial to learn about the company’s financial health, assets and liabilities, cash flow, and corporate governance.
