|
Greattips www.GreatTipsIndia.com
|
|
Will it Work ? Are You Sure ? Why not confirm it….. |
|
By continuing to read or referring to material contained in any of our services, you have read and agreed to the disclosure & disclaimers mentioned & published at our site: www.GreatTipsIndia.com |
What is
Fundamental Analysis ?
Fundamentals are associated with the economic health of a
company, measured in terms of revenues, earnings, assets, liabilities, Return
on Equity (ROE), Return on Assets (ROA), Return on Investments (ROI), growth
prospects and cash flows, etc. The fundamentals tell you about a company. You
can say a company is having robust fundamentals if it is growing at a nice
pace, generating a profit, has limited debts and abundant cash.
The analysis
of a company's fundamentals
involves getting deep into its financials, rather than day-to-day movement in
its share price. Equity researchers normally do fundamental analysis in order
to calculate the intrinsic value of a company's stock. If a company's stock is
trading above the intrinsic value or fair value, then the stock is overvalued.
If a company's stock is trading below the intrinsic value, then the stock is
undervalued. However, if you watch the stock markets very closely, the share
price of most companies never matches the fair value. Often, day traders and
investors who would prefer short term investment options invest in those
stocks, regardless of the companies' long term growth prospects. However, long
term investors generally prefer to invest in companies with robust fundamentals
and ignore near-term share price movements.
The following are various components that constitute a company's fundamentals:
Revenues: Revenues (sales) are the total amount of money received by
a company through the sales of its goods and services during a specific period
of time. Revenues are one of the most important barometers of the growth of a
company as it indicates whether there is demand for their products and
services.
Cash flows: Cash flows are calculated by deducting a company's
cash payments from cash receipts over a particular period of time. Cash flows
indicate the liquidity position of a company. However, one must pay particular
attention to the operating cash flows, since the health of the business can be
most clearly seen there.
Net income: Net income, which is also called the 'bottom line',
is calculated by subtracting from revenue, all of the company's costs, such as operating
costs, interest expenses, depreciation, taxes and other expenses associated
with running the business.
Balance Sheet: Balance sheet is the company's financial statement,
which reflects its assets and liabilities. A company's fundamentals are said to
be robust if its assets are significantly higher than the liabilities. However,
one must carefully analyze companies who are reporting large intangible assets
as they may have questionable liquidation value to offset any real liabilities.
Return on Assets (ROA): ROA is an Indicator of a company's
profitability, which is calculated by dividing the net income for the past 12
months by total average assets of the company. This is one of the important
indicators, which long-term investors consider before investing into a
particular stock.
Although long-term investors and institutional investors consider a company's fundamentals before investing,
the share price of a company often does not correspond to the fundamentals -
which can present enormous investment opportunities. A company's long-term
growth is driven primarily by fundamentals, while a company's share price can
be driven by short-term news and investor sentiment, which can be extremely
volatile. Every investor must consider a company's fundamentals before
investing into its stock if you want to gain stable returns over the long term.
by Joel Arberman
|
Happy Investing & Trading… |