Fundamental analysis is the most important step in investing money in stocks. The world’s most successful investors, Warren Buffett and Carl Icahn, never invest without performing a thorough fundamental analysis. The purpose of today’s lesson is to learn how to check the fundamental analysis of stocks.
Note: Before reading how to check fundamental analysis in the stock, let us tell you that we have over 15 years of experience in the stock market. We hope you have found some value in this article, so please share it with others.
Fundamental Analysis Meaning
A company’s fundamental strength is determined by its fundamental analysis. Several factors determine the fundamental strength of a company, such as its return on equity (ROE) over the last five years.
What Is Fundamental Analysis?
Fundamental analysis is a process in which we examine the past performance of a company. See how the company has performed in the past to get an idea of how it has performed recently. Afterward, estimate how the company will perform in the future. The whole process is called fundamental analysis.
For A Better Understanding of Fundamental Analysis Definition 2
There are two types of people in the stock market:
- Trader : Traders follow the movement of a company’s share price, buying and selling stock in that company.
- Invester : Live stock market behaviour is never used by investors to make stock market investments. Investors always study the company’s past and future before investing in stocks. This process is called fundamental analysis.
Types of Fundamental Analysis
#1 Qualitative analysis
A qualitative analysis examines the company’s goodwill, consumer behavior, demand, and its recognition in broader markets. Other factors checklist
- History and current state
- Business Plan
- Management
- Product/Services
- Competitors
- Financial ratios
- Stock price trend
- Analyst recommendation
- Recent News
- Financial statement figures
#2 Quantitative analysis
The focus of quantitative analysis is on statistics, reports, and data. Based on its financial statements, quarterly performance, balance sheets, debt, and cash flow.
Fundamental analysis can also be divided into two processes. The first approach is top-down, and the second is bottom-up.
Top-down analysis begins with macroeconomic factors, then digs into the specific company. The bottom-up approach analyzes the company first and then examines macroeconomic factors’ impact on it.
How to Check Fundamental Analysis in Stocks
1. Understand the Company in Depth
The most important part of fundamental analysis is the company analysis. Here we discuss three of the most common parameters to consider when analyzing a company.
- CAGR: Over a specific period of time, the compound annual growth rate (CAGR) is how much your investments have grown. This is a measure of how much you have earned from your investments each year.
- Ratio Analysis : Profitability, Liquidity, Solvency, and Valuation are the four ratio analyses you need to perform when analyzing a company. This includes more such as P/E ratio, net profit margin, and Debt-to-Equity (D/E).
- Cash Flow: Cash flow shows how much money has been generated or spent from various investments over time. Stock investments, asset sales, and speculative asset purchases are all types of investing.
2. Study the Financial Reports of the Company
Warren Buffett, the world’s biggest investor, says you shouldn’t choose stocks until you are taught to read and interpret financial statements. When you have understood the company, examine its financial statements, such as balance sheets, profit and loss statements, cash flow statements, operating costs, revenues, Income before taxes, Earnings per share, EBITDA and Expenses.
3. Check the Debt and Red Flags
The most important step in fundamental analysis is to check the debt of the company. In the future, you may incur losses if you ignore this step and buy the stock.
On a company’s balance sheet, you can find its total liabilities and assets. This ratio indicates how much of a company’s assets have been financed with debt. You should not always invest in a company with huge debt. It is always a good idea to invest in stocks of companies whose debt: equity ratio is less than 1.
4. Find the Company’s Competitors
It is important to know who a company’s biggest competitors are before taking stock. The best way to find a company competitor is through Google Finance and Yahoo Finance.
5. Analyse the Future Prospects
While doing fundamental analysis, you have to keep in mind
- What is the future growth potential of the company you are analyzing?
- It is important to ensure that the company is determined to continue developing a new product that will further increase sales.
- You should also check whether the company is inventing and innovating or not. In the future, a new company can proceed with the existing company if it is not doing this.
6. Keep an Eye on All Aspects From Time to Time
Stay up-to-date about the company you have invested in. It is important that you be informed of all its news and financial performance. If there is any problem with the company for any reason in the future, sell the shares and invest in new stocks.
Fundamental Analysis Vs. Technical Analysis
Which one is better: For long-term investments, fundamental analysis is most useful, whereas technical analysis is best for short-term trading and market timing. Whether you should invest your money in good stocks and leave it for long term.
Before investing money in the stock market, you should know what your goal is. If your goal is long-term investing then fundamental analysis is the best way for you.
And
If your goal is to invest in the short term, then technical analysis is the best way for you.
| Fundamental Analysis | Technical Analysis |
|---|---|
| Understand patterns in company’s financial performance | Understand patterns in the company’s share price |
| Long term investments | Short term investments |
| Useful for trading and Investing | Useful for trading |
| Use Both past and Present data | Use past data only |
| Analyzes financial statements to predict future performance | Assume that historical patterns in share prices will repeat themselves in the future |
| Long term position traders | swing and short term traders |
| Identify undervalued and overvalued stocks | Determine the right time to buy or sell stock |
| Often holding for days, weeks, and even months | Most are short-term, lasting only a few minutes, seconds, or days |
| Bonds and derivatives can also be analyzed using fundamental analysis | Can be applied to all the assets |
| 1928: First proposed | 18th Century: First proposed |
Fundamental Analysis Checklist
| S.N | Point | Description | Check |
|---|---|---|---|
| 1 | PE Ratio | PE ratios below 20 are considered very well, but they should be lower than industrial PE ratios | |
| 2 | Earnings per share (EPS) | This should be in increasing order from last 04-05 years | |
| 3 | Net Income | It should be in increasing order | |
| 4 | Revenue | It should be in increasing order | |
| 5 | Dividend Yield | Day of >5% is very attractive. Fast-growing companies, however, don’t spend much time on DY. | |
| 6 | Book Value | if book value is decreasing means either assets are decreasing or liabilities are increasing. It should be in increasing order or should not decrease | |
| 7 | Liabilities | As a rule, it should be arranged in decreasing order, or if it is arranged in increasing order, check why | |
| 8 | Return on Equity (ROE) | ROE shall be greater than 20% for at least the last 3 years or must be in increasing order | |
| 9 | Return on Capital Employed (ROCE) | ROCE it should be in increasing order | |
| 10 | Volumes | When volume increases with price, it is a bullish sign | |
| 11 | Derivables | It should be more than 50%.Higher the %age more the delivered qty than traded qty.Good Sign of investment | |
| 12 | Reserves | Reserves should be in increasing order | |
| 13 | Networth | The order should be increasing | |
| 14 | Netblock | It should not decrease with a high rate | |
| 15 | Debit | It should be in decreasing order | |
| 16 | Debit Equity Ratio | It should be less than one | |
| 17 | Net Income | It should be in increasing order | |
| 18 | Net Sales | It should be in increasing order | |
| 19 | Price To Book Ration(P/B Ratio) | It should be lower w.r.t. peer companies | |
| 20 | Price To Sales Ratio(P/S Ratio) | It should be less than 1. The smaller the ratio better the stock. | |
| 21 | Current Ratio | It should be greater than one | |
| 22 | Promoters Holding | In increasing order or constant | |
| 23 | Pledged Share | There should not be any pledged share | |
| 24 | Share Capital | It should be minimum or in decreasing order | |
| 25 | Put Call ratio | It should be in increasing order | |
| 26 | Future plans | Check business growth | |
| 27 | Scope of product | Are you taking stock that the product has future scope | |
| 28 | Popularity of service | Are the service popular in market | |
| 29 | Quality | Are the Peoples satisfied with the quality of the products | |
| 30 | Does everyone like that company | Would you recommend the product of the company if you owned it or liked it |
FAQ
- Why is Fundamental Analysis Important?
Using fundamental analysis, we can determine why the market is going up or down. FA helps you predict future price movements and gauge its undervaluation or overvaluation. That’s why fundamental analysis is important.
2. What Are the Tools for Fundamental Analysis?
- Earnings per share or EPS
- Price-to-earnings ratio (P/E)
- Return on equity
- Price-to-book (P/B) ratio
- Beta
- Price-to-book ratio (P/B)
- Dividend payout ratio
- Dividend yield ratio
- Projected earnings growth (PEG)
Watch This Video For a Better understanding: 7 Fundamental Tools for Fundamental Analysis
The Bottom Line
Investing in the stock market for long-term investment requires fundamental analysis and technical analysis. After investing in stocks, you should see articles, news, and media about that company on a daily basis.
Reading fundamental analysis books is essential if you want to succeed in the stock market. Further, you can learn a lot about stock market fundamental analysis on platforms like Google and YouTube.
