Stock market investing is more than just buying and selling individual equities. It requires in-depth knowledge of the economy, businesses, and markets. One method that investors employ to understand the value of a company’s shares is fundamental analysis. To help you better grasp the fundamental analysis of stocks, we will describe what it is, how it is carried out, and give an example in this blog.
Fundamental Analysis: What is it?
The process of evaluating a company’s stock through its financial and economic aspects is known as fundamental analysis. To analyze a company’s financial standing, one must look at its financial statements, including its income statement, balance sheet, and cash flow statement. Fundamental analysis tries to figure out what a company’s stock is worth, which is based on how much its assets, liabilities, and earnings potential are worth.
How Crucial Is Basic Analysis?
Fundamental analysis is important because it tells investors everything they need to know about a company’s finances and its potential in the future. By looking at a company’s financial statements and economic data, investors can find stocks that are cheap or overpriced, as well as possible risks and investment opportunities. With the help of fundamental analysis, investors can lower their risk of losing money and choose investments that are better for them.
Fundamental analysis vs Technical analysis
Fundamental analysis and technical analysis are the two primary approaches used to evaluate stocks. The technical analysis concentrates on a stock’s price movement and trading volume using a chart and some indicators to spot trends, chart patterns, and the direction of the market, whereas fundamental analysis concentrates on a company’s financial and economic factors.
Both fundamental analysis and technical analysis have advantages and disadvantages. Technical analysis offers a short-term perspective on a stock’s price movement and trading activity, while fundamental analysis offers a long-term perspective on a company’s financial health and future. Investors need to do both fundamental and technical research on stock to get a full picture of its value and potential.
Investors frequently use fundamental analysis to identify a stock’s intrinsic value. It focuses on evaluating a company’s financial and economic fundamentals to find out its real value. The fundamental analysis of stocks on the Indian stock market will be covered in this blog with clear examples.
Step 1: Examine the financial statements of the company.
The first step in a fundamental analysis is to look at the company’s financial statements, such as the income statement, balance sheet, and cash flow statement. These records offer a picture of the company’s financial situation and performance.
Take the financial accounts of the multinational Indian IT business Infosys, for example.
Income statement: For a given period, the income statement details the company’s revenues, costs, and profits. In the example of Infosys, we can observe that revenues rose from INR 90,791 crores in FY2020 to INR 1,17,966 crores in FY2021. For reference, you can check this data on MoneyControl.
Information on the company’s assets, liabilities, and equity are included in the balance sheet. According to Infosys’ balance sheet as of March 31, 2021, the company had total assets of INR 1,34,834 crores and total liabilities of INR 44,222 crores.
Cash flow statement: The cash flow statement details the inflows and outflows of the company’s cash. In FY2021, according to Infosys’ cash flow statement, the business generated INR 32,056 crore in cash from operating activities.
Step 2: Evaluate the company’s ratios
The next step in fundamental analysis is to look at the company’s ratios, which give a more in-depth look at how well the company is doing financially.
Key ratios to take into account include:
Price-to-Earnings (P/E) Ratio: This metric compares the share price of a company with its earnings per share (EPS). Investors are more likely to pay more for every rupee of earnings when the P/E ratio is greater. As of March 31, 2021, Infosys’ P/E ratio was 28.3x.
Price-to-Book (P/B) Ratio: This metric compares the share price of a company with its book value per share. Investors are more likely to pay more for each rupee of the company’s net assets when the P/B ratio is higher. As of March 31, 2021, Infosys’ P/B ratio was 8.2x.
Debt-to-Equity Ratio: The D/E ratio measures how much debt and how much equity a company has. A higher D/E ratio means the business is borrowing more money to fund its activities and operations. As of March 31, 2021, Infosys’ D/E ratio was 0.1x.
Step 3: Examine the Company’s Industry and Position in the Market
The last step of the fundamental analysis process is to look at the company’s industry and how it compares to other companies in the same field. This means figuring out the business’s market share, how it will grow in the future, and what advantages it has over its competitors.
Infosys, for example, is in the IT services business, which is a very competitive field. But Infosys has an edge over its competitors because of its good name, brand, and talented employees.
Fundamental analysis is a useful tool for investors who want to know what a stock is worth. Investors can make smart decisions about what to invest in by looking at a company’s financial statements, statistics, and position in its industry. Yet it’s crucial to keep in mind that no one technique can completely anticipate how a stock will perform in the future.
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