How Scary the term Fundamental Analysis is to You?
Most people think that only professionals can do a fundamental analysis of any company.
Actually, it is much easier than you think it is.
What do you do when you have to buy a laptop?
You will probably go the google and search for the best laptop brands. Next, you will search for the best laptop under your budget, let’s say Under 50K.
Then you will research all its specifications. You will read its customer review.
Sometimes you will go to the specific brand store just to have a look at the laptop you are planning to Buy.
Finally, after lots of research, you decide which laptop to buy.
This Whole process comes in analysis. Here you do an analysis of the Laptop you have to Buy.
Similar to that while investing in companies you have to do Fundamental Analysis. Here you have to analyze the company.
The process is exactly the same while fundamentally analyzing the company. The difference is in the question we ask?
For fundamental analysis, questions will be?
What does the company do?
How much profit does the company make?
Which type of Product company make?
What is the Return on Investment the company gives?
How the company will perform in the Future?
Will the company make enough profit in the future?
Who are the Promotors?
How is the management improving the company?
Is this will be a good investment for me?
And many more related questions?
While analyzing any company gathers as much information about the company as you can.
After all, you are going to invest in this company. Your money is at stake.
One thing that can trouble you while understanding the company is its Financials.
If you are not from a finance background. Then it can be a little difficult to understand the financials of the company.
Financials of any company consists of three components
- Income Statement
- Balance sheet
- Cash flow statement
These are not hard.
Anyone can learn this thing? Buy just learning some accounting basics. You can read some books on how to interpret the financial statement of the company.
There is one book I can recommend you to read to understand the financial statement of a company.
Some of the popular and Important Financial Terms You should look in the companies while Investing.
While Looking at the Financial statement of any company Keep these things in mind
The company should have Low debt.
The company Must have a strong and consistent Return on Equity.
The company should have a reasonable Price to Earning ratio. In between 10 to 30.
Also, compare the P/E ratio of the company with its peer company and respective industries.
The price to Book value Of the company should be less than 1.5.
They should have a strong profit margin.
The company should have Good management.
Look to the consistent growth in sales, Net Profit.
The Reserve of the company should also increase over the years.
Take a look at the balance sheet of the company.
It will tell you how much asset and Liabilities a company have. Its current asset and Current Liabilities.
The ratio of current assets and current liabilities gives the value of the current ratio. which is also an important factor. The current ratio value should be Greater than 1.