Fundamental analysis is the foundation of investing. You can predict the movement of stock prices by using a stock valuation method that uses financial and economic analysis. So, before you invest, check fundamentals and be wise while picking stocks.
Fundamental information is analyzed through the company’s financial reports and non-financial information. You can collect information through the study of demand for the products sold by the company.
Moreover, you can gather data related to government policies, comparing industries and much more. By doing the fundamental analysis you can understand the financial statements and the profit pattern that leads you to find the gem.
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You need to understand the intrinsic value of the company which means the real worth of a company. If the intrinsic value of a company is higher than the market value then you can buy it.
As over a certain time period, the share price will move towards the intrinsic value. On the other hand, if the intrinsic value is lower than the market value you can sell the stocks right away.
Picking Stocks Based on Fundamental Analysis In 5 Wise Ways
Growth Of Sales Revenue
Try to learn the revenue streams of a company you want to invest in. Understand the growth pattern of the revenue, whether it is growing or coming down in any financial year. If you found any downtrend then try to assess the reason for the same.
There are some avoidable reasons which bring down the revenue but some which you cannot be avoided. For instance, the availability of a better alternative for the product in the market.
There are certain products where one can foresee huge demand in the near future that can heavily affect the prices of the stock.
Revenue is one of the main indicators of a company’s earnings. Growing revenue of a company indicates a green signal considering expenses are in check.
Financial Reserves
Financial reserves are basically an appropriation out of profits. Larger the reserves mean a larger amount of undistributed profits with the company. Certain cash reserves are utilized by the company to invest in profitable areas.
It also indicates growth, acquisition & takes over prospects. A good amount of reserves can lead to the growth of the value of the company.
Market Share
You will find numerous companies holding their respective brand in a particular industry. For instance, Colgate holds around 55% of the toothpaste market in India.
Market share indicates how strong the company’s demand in the market and how it manages to meet such huge demand. So you must focus on market share while picking stocks.
Competitive Advantage
Every company has their own speciality. Competitive advantage basically adds value and is unique to that particular company.
Asian Paints has a wide distribution network and also provides good quality products. Moreover, it has a very strong brand name. So, it’s better to invest in the market leader to gain significantly.
Quality Of Management
Every company’s primary goal is to maximize the wealth of shareholders and add value to the company. Fluctuating management is not a good sign for a company’s progress.
A company with a strong mission statement indicates that the company has set proper goals for the management. Evaluating a company’s management is not an easy task. You can analyze the past performance of the management to derive a suitable conclusion.
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The areas discussed above are not an end to the fundamental analysis of any company. Areas that can logically indicate future prospect or strength of any company contributes to such analysis.
Relying only on the market trend of the stocks can fool you at any time. The sentiments of the market can lead you to profit in a short term but not in the long run. Proper fundamental analysis of the stocks provides the real solution.
Where the market is ruled by charts, bars, graphs big investors have made their fortunes based on the proper fundamental analysis of the stocks they want to hold.
Peter Lynch a famous American investor said: “Charts are great for predicting the past”. The same chart doesn’t always predict the future”.
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Published on: Sep 28, 2017