Before you can begin reading a financial analysis, you need to understand what things are typically analysed. An investor would conduct three main areas of analysis on a company before buying its stock: company fundamentals, technical, and sentiment.
Introduction to fundamental analysis:
Fundamental analysis has been one of the most gratifying analyses in the history of stock markets. The fundamental analysis concerns a security’s intrinsic value by analysing economic, financial, qualitative, and quantitative criteria to determine its worth. Macroeconomic and microeconomic factors, it is thought, can influence a security’s price.
These elements include economic conditions, industry circumstances, financial circumstances, and management abilities. The primary goal of fundamental analysis is to assess the intrinsic value of a security and compare it to the current stock price; this lets you know whether the security is undervalued or overvalued.
Many different ratios can be calculated to get a better understanding of the health of the company. Typically these will look at how much debt there is compared to assets or equity, how long it will take for them to pay off their debt on assets they have already purchased, etc.
However, some specific examples of valuable metrics include Current Ratio (which determines if the company has enough income/assets/cash on hand to meet its short-term obligations), Receivables Turnover (which determines how quickly the company can collect on outstanding invoices), Inventory Turnover(which determines how long the company holds stock of unsold product)
Many different ratios can be calculated to better understand the stock price compared to its actual value. Some examples of valuable metrics include:
- Price-to-Book Value Ratio (which helps identify whether or not buying this company’s stock is cheaper than getting all of their assets on paper)
- Earnings Per Share
- Price-to-Earnings ratio (which determines if you’re paying too much for every dollar in earnings).
Technical analysis typically looks at trends that may affect supply and demand or other patterns that may affect the stock’s price. Some examples of technical analysis metrics include:
- Moving Averages (Average Price over a certain amount of time, typically 10-days),
- Exponential Moving Averages (like moving averages but more sensitive to small changes in price and less sensitive to old data)
- Bollinger Bands (this process takes a list of historical prices and then determines an upper and lower bound for “normal” prices).
Whether or not investors currently feel confident about buying this company’s stock. This can be measured by looking at recent articles about the company(positive articles drive up share price while negative ones drive it down) or short interest.
How to do Fundamental Analysis of Stocks:
1. Understand the company
You must understand the firm you’re thinking of investing in. It’ll provide you with further information on how the firm is progressing, whether it’s making good decisions towards its long-term objectives, and whether or not you should hold or sell the stock.
2. Study the financial reports of the company
You should begin by researching the firm’s financials after you’ve done your research. You should start by looking at its balance sheet, profit-loss statements, cash flow statements, and operating expenses to get an overview of the company. Its compounded annual growth rate (CAGR), sales, and net profit; if they have been growing for the past five years, it can be considered a good sign for the business.
3. Check the debt
Debt is a serious concern that can harm a company’s performance. Security can’t perform well and pay you if it has considerable debt. It’s best to avoid firms with significant debt. Always seek an investment opportunity that has less than a 1:1 debt: equity ratio.
4. Find the company’s competitors
You must pick a firm that is one of the best among its competitors. Look for a firm that is outperforming the competition. It should have brighter future possibilities, as well as planned projects, new facilities, and more.
5. Analyse the prospects
When trying to maintain a long-term investment strategy, fundamental analysis is most valuable. Invest in firms that have products that consumers will use for a long time.