Fundamental Analysis – A tool for a long term investor to find the right company

When you are planning to buy a phone, car, property, gold, you analyse various factors including prices before buying an item. If you find the item price is at lowest with the desirable quality, you grab a deal and buy it in a single thought. Same applies to Stocks.

While buying stocks, you follow a multistep approach and buy the stock when it is available at the cheapest of its price with the highest of its quality. This multistep approach is known as fundamental analysis.

Fundamental analysis can give you the tools that may signal to differentiate a company with a high quality of earnings and business which is about to implode.

Fundamental analysis focuses on visible growth and revenue in future.


There are key elements that can obtain with the help of fundamental analysis:-

1. Company Position – A fundamental analysis can determine the company’s position by comparing Sales, client base, etc of one company with other company which can help an investor to find the market leader. It is not compulsory that a market leader can always outperform but hen you consider the margin of safety then the market leader is the one who can survive well in a bad time of economy.

2. Financial PerformanceStock price is directly proportional to the company’s revenue and earnings. If company earnings improving year by year you will seel the rise in stock price, I falling, you will see a decrease in prices. It can easily find an income statement issued by the company which states the in-depth information about the company ‘s financial position.
(For more information about income statement, visit https://www.stocknwin.com/2020/02/9-major-categories-of-income-statement.html).

3. Financial Resources – Fundamental analysis can find debt loads and a pile of cash by determining the financial resources of a company which helps a company to survive especially in bad times. Financial resources comprise of assets, liabilities, cash and cash equivalents of the company. It can examine with the multiple tools available under this category such as current ratio, interest coverage ratio, debt to equity ratio.
4. Management team – If a company is like a car and the economy is like road then management is like a driver. If a driver is knowledgable and experienced then he can save the car from the bumps and accidents on a bad road and drive fast on a smooth road. Similarly, if management is experienced and knowledgeable then they can save a company during a weak economy and take it to rapid growth during a strong economy. It is easy to find the management is properly equipped to best manage the company t deliver the outstanding results by observing the return on equity and return on capital

5. Valuation – Sometimes due to bad news in the market cause the sudden drop in the price of a company but fundamental analysis help to fund the company’ current stock price to its real value by using the different tools such a P-E ratio, earning yields, P-B ratio etc.

Although the fundamental analysis can find a good company, there are uncontrollable and unpredictable factors that affect the company’s growth which leads even the best company can be tripped us. These are:-

1. Macro Trends – Some events are unpredictable such as Trade war, climatic conditions which
impacts the economy and lead to slow growth of the economy.

2. Competitor actions – If a competitor comes with the new product which
comes in high demand or drops their prices for existing products
then it will impact the company’s growth.

To profit from fundamental analysis, you have to be comfortable in going against the crowd. When other investors are overly enthusiastic about the stock and bidding high price then be a contrarian and don’t buy the stock at that time.

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