An Introduction to Fundamental Analysis

Stocks have been around since almost the beginning of trading. They allow you to invest in companies and own little pieces of those companies without actually being a part of the company itself. (at least, until your stocks grow to the point where you can start buying board seats, but that’s a different story).

If you want to be able to understand what’s going on with your investments, it’s important to know about fundamental analysis. Which helps you determine what value a stock should be at based on information about the company.

How to Do Stock Fundamental Analysis? How do you know when it’s time to buy or sell stocks?. Don’t worry if you have no idea what I’m talking about. I didn’t either before I started doing some research and reading about fundamental analysis. Read this article to learn what it is and how to do it. Then you can start investing in the stock market successfully today!

The Fundamentals

There’s a lot of information out there when it comes to picking stocks, and it can be easy to get confuse. That’s why you need a consistent system for filtering through all that information and making good decisions.

The fundamentals refer to key data that all publicly traded companies are required by law to provide, including things like their annual financial statements and stock price history. In order for investors or analysts to make sense of these numbers, they rely on some main fundamentals.

Here we handpicked some aspects for your understanding like,

1. Balance sheet
2. Income statement
3. Cash flow statement
4. P/E ratios
5. Dividend growth rate history

• Balance sheet

A company’s balance sheet is a snapshot of what it owns and owes at a given point in time. On one side of the balance sheet, companies list their assets, or what they own. On another side, they list their liabilities and equity. A company’s stockholders’ equity is made up of two parts, preferred stock (or preferred shares) and common stock.

You can find out which types of securities make up a company’s stockholder equity by checking its balance sheet or in some cases it’s most recent annual report to shareholders. Investors refer to common stock as common because it represents an equal ownership share in each company that issues it.

• Income statement

A company’s income statement provides a summary of its revenues, expenses, and profits (or losses) over a set period of time, usually one year. It’s typically prepared quarterly or annually. And consider as one of three important financial statements along with balance sheets and cash flow statements.

An income statement begins with revenue, subtracts all costs associates with generating that revenue. (cost of goods sold, administrative expenses), and then shows what’s left over as profit. If there are no costs in generating revenue. (think: sales where you pay people commissions) you’ll find that number in your income statement as well, it’s gross profit.

Note: Some companies use different terms like profit & loss statements instead of income statements or they mention them as P&L statements.

• Cash Flow statement

A cash flow statement is used to track how a company’s cash inflows and outflows change over time. It is one of three financial statements used in what is known as a statement of cash flows. Which explains how an organization generates, uses, maintains and disposes of its cash.

This allows investors and creditors to assess a firm’s overall liquidity that is, its ability to pay off debt obligations when they come due. The data found on a company’s cash flow statement can be helpful in deciding whether or not an investment in that company would be profitable.

In addition, it can also provide insight into other aspects of business operations. For example information regarding investments in capital equipment may indicate future growth potential.

• P/E Ratio

The price-to-earnings ratio is one of many valuation metrics and can be use to determine whether a stock overvalued or undervalued. The P/E ratio is calculates by dividing a company’s share price by its earnings per share (EPS).

For example, if a company has $4 in EPS for every share which is trading at $40, its P/E ratio would be 10. A low P/E value means that investors are valuing a stock at a discount, while a high P/E ratio indicates that investors are willing to pay more for a given level of earnings or cash flow.

Analysts often compare prices relative to earnings when making fundamental analysis. However, fundamental analysis also takes into account other factors such as cash flow and free cash flow.

( If you wish to Watch a cool video explaining this topic – CLICK HERE )

• Dividend Growth Rate history

A company’s dividend growth analyzed by looking  its dividend G/R history. Which provides an overview of how consistent management has been in raising or lowering its annual payout. A fast growing dividend may more enticing than one that grows by a few percentage points each year. The current yield of a stock can also provide insight. Whether it’s paying out more or less than other companies in its industry. But it should be keep in mind that a higher yield could give lower future returns if management chooses to cut dividends. This is because some companies may choose to increase their distributions when they are having trouble increasing profits, even though reducing these payouts might be better for long-term shareholders.