What is Fundamental Analysis?
In
the past few years, the interest of people towards the stock markets has grown
significantly. After demonetisation, it has been seen that many people are
turning towards the stock markets or mutual funds to invest their savings. The
reason that attributes to people’s interest in stock market is higher returns. The sky is the limit when it comes to making
good returns in the stock market.
Along
with the ability to make good money at the stock markets, there is a good probability
that the investor may end up making losses. Thus, utmost care should be taken
before investing in any particular stock. A wrong investment can prove to be
fatal and take away all the hard earned earnings. Therefore, analysis of the
stock is very important. One such method of analysis is studying the
fundamentals of the company.
Meaning of Fundamental Analysis
Fundamental
analysis is the analysis of a company in which the investor sees the future
profitability and growth of the company based on the environment in which it is
functioning and its financial performance. The man aim of fundamental analysis
of the stock is to find the intrinsic value i.e. the real value of the stock in
comparison to the price of stock traded on the exchange.
The
fundamental analysis of a company can be done in two ways. Let us understand it
in detail.
Methods of Fundamental
Analysis
The
fundamental analysis of a company can be divided
into two parts. They are;
· Qualitative Analysis
· Quantitative Analysis
Qualitative Analysis
Qualitative
analysis involves an understanding of the
financial performance of the company with the numerical data available. By
analysing the data, comparisons can be drawn with various other similar
businesses and performance can be evaluated.
The qualitative analysis comprises of the following.
· Ratio
Analysis:
In
this approach, the comparison and
analysis of basic ratios are done. It
helps in understanding the performance of the company. It gives the idea of how
the company is performing in comparison
to peers. The ratios include liquidity ratio, profitability ratio, solvency
ratio, efficiency ratio, etc.
· Projected
Earning Analysis:
In
this approach, the future projected earnings are evaluated. Based on the
expected future earnings and current trading price, the benefit in appreciation
in the price of the stock is determined.
Also, the amount of dividend that will be distributed among the shareholders holds importance. Overall, the growth in form
of sales and ultimately revenue of the company is analysed to determine the
projected earnings of the company.
· Other
Numerical Data:
Apart
from the above numerical data, there are some figures that also must be looked
into. It involves price to book value, price to sales, dividend yield, book
value, etc.
The
next type of analysis is quantitative analysis
Quantitative Analysis
Quantitative
analysis involves analysis of a company other than in terms of numbers. The
analysis is more subjective. The judgement of in case of quantitative analysis
can vary from one investor to another. The following aspects form part of the quantitative analysis.
· Type
of Business
Understanding
the type of business of a company is very important. It helps to know what can
be expected from its future. It informs the investors about the growth in the
sector and competition among the companies. A business with good growth model
will attract more investors.
· Assets
and Liabilities
Analysis
of the assets held by the company and its liabilities gives an overview of the health
of the company. The overall debt scenario and the ability of the company to
repay it determines whether the company is worth investing or not. Also, its ability to replace and maintain its
asset timely must be considered.
· Earnings
Earnings
of the company forms an important prospect for any value investor. It is
essential that the future earnings of the business comes from its core
operations and not from other sources. The expenses and revenues should be in balanced proportions in terms of the business.
· Corporate
Governance
Corporate
governance is a practice that a company
follows to safeguard the interest of the shareholders and stakeholders. A
proactive management is important to ensure that the corporate governance practice is rightly followed. The company must appoint a board of directors to look into it and conduct
an audit at regular intervals to ensure
that accounts of the business are rightly maintained.
By
doing the above analysis, one can evaluate the fundamentals of the company.
Based on such analysis the investor can take a well-informed
decisions regarding his investments.
Indira
Securities provides various financial services. The services range from equity
investment to currency trading. Our clients can deal in commodities and futures
and options as well. We provide research reports on different stocks based on
fundamentals analysis. The recommendations help
the investors to pick value stocks and make profits. Open a demat account with us to avail our hassle free
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