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.
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 Performance – Stock 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).
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.