Many people consider picking the best stocks an art. However, while being an art, it also involves logic and science. Fundamental analysis is part of the latter. It includes a basic understanding of a particular stock and its performance to make the right decision. If you’ve been planning to join stock trading classes, this blog that introduces you to fundamental analysis can prove a starting point.
What is Fundamental Analysis?
Fundamental analysis involves understanding the workings of a particular business at the most basic financial level. While performing fundamental analysis, you look at different fundamental indicators and parameters. This method examines the key ratios of a business to help you understand a company’s financial health. Thus, when you complete the analysis, you get a good idea of the value of a particular company’s stock. Simply put, it helps you calculate if the purchase price of a stock was more or less.
How to Select the Best Stocks Through Fundamental Analysis?
Fundamental analysis isn’t complicated. However, it requires you to adopt an organized approach that helps you come to the right conclusion – whether to buy a particular stock or leave it.
Understanding the Business
This involves understanding the overall industry situation, competition, and growth opportunities. Additionally, the step involves understanding the company’s competitive advantages, market position, and how it makes profits. In simple words, we need to understand what does a company sell, who is its customer, how does it get paid and on what factors on which the sales, costs and profits depend on.
Analyzing the Company’s Financial Statements
Examining the company’s financial statements involves assessing the company’s revenue, profit margins and net income. It also requires you to examine the organization’s assets, liabilities, and equity to determine its financial health. You should also check the company’s cash flow statement. It means we should find how much debt the company has, how much assets it has, how long it can survive without borrowing more. What is the trend of profitability, liquidity, etc.
Assessing the Business’s Growth Prospects
Growth prospects refer to the company’s future growth scope. While analyzing it, you should assess the business’s past and future earning growth rates, past revenue growth trends and also examine its market expansion and new product development potential. What is most important is what are the factors which will push the company forward. Real returns are made when a company makes money after you buy the stock.
Key Financial Ratios
Assessing key financial ratios could get a little technical. This step or part of fundamental analysis involves checking the company’s liquidity ratios, debt ratios, profitability ratios, and valuation ratios. You should join stock market courses in Pune to understand what each ratio means and how to calculate it.
Competitive Analysis
With so much competition in every sector, a company cannot survive without a competitive edge. If you look to invest in a particular organization, you should check if it has one. Additionally, you should assess its position against its competitors to understand the company’s chance of enduring competition.
Economic Indicators
Economic indicators involve considering economic factors on a larger scale. These include inflation, interest rates, GDP growth, and market trends. Besides, you should look at industry-specific factors like regulatory changes or technological advancements. All these factors impact a company’s growth prospects to varying extents. Hence, considering and evaluating them is imperative.
Risk Analysis
Risk is a factor no stock player can afford to ignore. Thus, while assessing a company’s financial health and growth prospects, you should also understand risks associated with market volatility, the company’s operations, and the ones concerning the business’s capital structure and financial practices. In this case a SWOT analysis is very useful.
Investment Assessment
Again, this involves deep diving into technicalities like calculating the intrinsic value (the anticipated or calculated value of a company or stock) through Discounted Cash Flow (DCF) analysis or other valuation methods. Furthermore, you should also look for a margin of safety between the stock’s current price and intrinsic value. Along with this looking at other valuation ratios like P/E, PEG ratio etc is also useful
Intangible or Qualitative Factors
These are factors you cannot measure with a unit. They include the company’s brand value (reputation and credibility in the market and among investors), customer base and retention rate, and the business’s abilities to innovate. However, they are crucial as they determine the company’s reliability in the market and indicate whether you should invest or not.
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Final Words
We hope the above helps you get a fair idea of the elements involved in performing fundamental analysis. Remember, your analysis should be useful and effective enough to help you decide whether to buy a share or not. Of course, it takes some to master fundamental analysis. However, you may do so with comprehensive stock trading classes and after spending time in the market.
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