Fundamental Analysis Learner

Basics of Investing

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What is Fundamental Analysis

Fundamental Analysis is a very old and successful approach for investing in any shares. It is a method of calculating intrinsic value of security. It can be defined as an analysis of a business’s financial statements considering macroeconomic factors such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices etc. along with microeconomic factors such as total sales, price levels, the effects of competing products, foreign competition etc.

For all those investors who want to invest for long term, Fundamental analysis of the stock is must, because over the long term, the stock prices of a fundamentally strong company tend to appreciate, thereby creating wealth for its investors.

There are many companies which have delivered on an average over 20% compounded annual growth return (CAGR) year on year for over 10 years with good financials.

How to do Financial Analysis?

There are some basic steps of financial analysis are as follows:

1.      Annual report of the company – Go through the complete annual report of the company, and important ratios such as P/E ratio, debt to equity ratio, further dividend declared by the company, cash flows of the company etc.

2.      Macroeconomic factors such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices etc. which can be accessed through news or through different websites.

Yes with these two simple tools you can do a very effective fundamental study but these two are not as simple as it seems.

So this was a small introduction to fundamental analysis tool, further we will be discussing in details each tools.






Annual Report study - First Step of Fundamental analysis

Financial analysis of any stock starts with the study of its annual report, yes annual report and hence it is very important to understand it and go through it.

What is Annual report?

This report highlights the annual performance of the company. An annual report serves to present the company in best light possible and since it is governed by regulatory acts so its misrepresentation can lead to judicial actions against the company and hence there are less chances of its misrepresentations. It is a yearly publication by the company and is sent to the shareholders and other interested parties. It is usually published within 45 days from the end of the financial year.

Listed companies come out with their reports highlighting annual performance to its shareholders. These reports are primary source of information for an investor to understand the company, sector, management views and analyse the financials.

Where it is found?

Now days there are many websites which publish the annual report of various companies but the best source is to get it from company’s official websites in the Investor’s section.

What to look into an annual report?

It’s a very long list and it is completely one’s own way of interpreting and studying the annual report, something’s are important for some analyst while some looks in it in another way, also what to study an annual report of a company depends on the kind of industry company belongs, but still we have sort down some important areas which are essential to look into.

a)     Vision and mission of the company

This information is usually contained in the starting page which gives us the overall object of the company.

b)     Financial Highlights

Financial highlights are usually the comparative figures giving comparatives of some important data of different periods. Special focus should be given to the growth made by the company over the year and comparison should be made with its industry growth.

c)     Management statement and Management Discussion & Analysis

Usually this gives the future prospect of the company and the reasons of company downfall and it future course of action. Tone of the Management in the speech is very important whether the reasons given are strong enough or future prospect is practical under given circumstances. In analysis they discuss the overall economic activity of the country and the business sentiment across the corporate world. If the company has high exposure to exports, they even talk about global economic and business sentiment.

d)     Auditor’s Report

Auditor’s Report gives the opinion of the auditor on the financial statement prepared by the company. One must go through the Auditor’s report completely and see that weather is there any observation made by the auditor which can impact the company. Auditor’s usually writes their opinion in such a way that it doesn’t comes into notice specially the negative comments are written in generalised way, so one needs to be more diligent while reading this report.

e)     Financial Statements

Usually financial statements consist of information on profit and loss accounts (income statement), balance sheet as on year end, cash flow statement and schedules of the financials for two years. Analysing numbers from this section help us to check financial health of the company.

f)       Notes on accounts

This section is usually left out by most of the investors but it contains very important information. This section should be analysed in depth to read the hidden information.

Apart from above points some more points can be checked like Corporate Information, Director’s Report, and Report on Corporate governance, etc.