How do you evaluate a human being? We usually tend to do a background check, look at the person’s past records, his current status, and finally come to a conclusion.
Its the same with a company. An investor, before investing, looks into the financial data of the company before coming at a valuation. This method of financial analysis where every basic detail of a company is studied is known as Fundamental Analysis.
Why is fundamental analysis important?
- Evaluation of management
Management is the final decision making body that holds together an entire organization. Fundamental analysis will help you understand the management of an organization, and how efficient they are.
- Company and its competitors
A thorough fundamental analysis will not only tell you if a company is profitable, but also about its market share and how it fares as compared to its competitors. If a company cannot outperform its competitors, it won’t last in the longer run.
- Fair value
Analyzing a company’s past and present is important to understand its fair value. Fundamental analysis can help in arriving at this value by evaluating the company. This will help in understanding if the company is overvalued or undervalued.
This analysis will help you understand the fair value and pick stocks for investment.
- Future pricing
The most important factor an investor is concerned about is the future value of his investment. A company’s business model will help understand if it’s going to make money in the near future.
Fundamental analysis helps in forecasting the future price of a stock. If an analyst finds a favourable future, he will decide to invest his money into the company and vice versa.
How do you conduct fundamental analysis?
- Company website
A company’s website is the first place you need to visit. This will give you an idea about the company, its business’, board meetings, objectives, investor information and much more. This will help in getting an overview about the company and understanding if its worth considering.
- Company’s financial statements
Any company’s financial statements are readily available on the internet. It is important you go through its profit and loss statements, balance sheet, forecasts, etc to understand it’s health and future prospects. If this shows a year on year increase in sales and profits constantly, it should be a good investment.
- Debt ratio
A company’s debt ratio will help you understand if its a good long term investment. A company having a debt ratio of less than 1 is usually seen as a good investment. It means that it is not heavily under debt and can grow quite fast.
It is the duty of an investor to conduct fundamental analysis of a company by looking at various factors that influence its market share, longevity,valuation, and profitability.
Fundamental analysis involves an in depth understanding of a company’s competitors, industry and finances. This is important from an investor’s perspective as it’s his money that will be involved in the business.