when we talk about investing in stocks for the long term then we should do first some research and analysis about the company which is called fundamental analysis like, what the company do, what is the companies business model, how is the management of the company, and many things we have to consider while analysis, How to do a fundamental analysis of a company in India
In this article, you will learn about the different aspects of the Fundamental analysis of a company / Stocks. We will cover the basics as well as the deeper secrets of this tool which is the most efficient tool for investing in stocks, especially for the long term.
what is fundamental analysis?
If we say in simple words that the fundamental analysis evaluates individual companies by looking at the firm’s financial statements and examining various ratios and other metrics. This is used to estimate a company’s intrinsic value based on its revenues, profit, ratio, costs, capital structure, cash flows, and so forth.
This process is not only limited to the company’s financial structure but it goes beyond that.
It includes the general economic scenario, the industry’s growth, and fall, along with the company’s organizational structure, management, and financials.
So, it is a complete study of a business venture to analyze its actual worth and then measure its share’s intrinsic value.
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What are the main points of Fundamental Analysis?
For Fundamental Analysis Strategies, there are some Fundamental Analysis Basics that you need to be considered. These are primary factors that affect the analysis of the stock and they are –
- Company’s revenue and its structure
- Growth of the revenue over the past years
- Is the company making consistently Profit from the past years
- how much debt company have or not
- Rate of Turnover
- How is the management of the company
- company’s cash flow structure
- how many assets does the company have
These are Eight basic factors that are kept in mind while doing a fundamental analysis of any company’s stocks
This is required to determine the intrinsic value of the stock and check whether it is rightly priced at the market or not.
Which are the Best Fundamental Analysis Tools?
Tools for Fundamental Analysis can include everything that is present and can be derived from the financial statements, management discussions, and business plan as you read above.
Here are some points that you should check out while doing a fundamental analysis of a company :
Earnings Per Share Or EPS:
Two of the basic financial information – one is the earnings of the company and the other is the total number of shares of the company but none of these two can individually tell you about the company’s performance.
But when you combine these two, it becomes one of the powerful tools for financial analysis. It is one of the most popular ratios.
which tells you about the company’s profit share for each of the stocks.
EPS is calculated by dividing the net income or income after deducting dividends on preferred shares by the total number of outstanding shares of the company.
It is crucial for the investors as it helps them understand the wealth accumulation capabilities of the share of the company. fundamental analysis of a company
Price to Sales Ratio
It is used to recognize the price of the stock as compared to the revenue. It helps you understand the growth of the share price against the revenue generated in that year.
Price to Earnings Ratio
It is derived by dividing the price of the shares in the market (current sale price) by the earnings per share.
Price to Book Ratio or P/B Ratio
It is another important ratio that gives you an idea about the company’s stock price compared to its asset.
It is also known as the Price to Equity Ratio. P/B Ratio is derived by dividing the latest closing price of the share by the book value of each share.
Return on Equity
It is derived by dividing the net income of the company by shareholder’s equity. It gives you the return generated on the equity of the company.
Read Also: What is dividend?
Dividend Payout Ratio
It gives you two important pieces of information – one is how much dividend is paid to the shareholders out of the profit of the company. The second is retained earnings of the company.
Apart from these few, there are many financial ratios and other tools which are used in fundamental analysis research.
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