What is fundamental analysis?

 

What is fundamental analysis?

 

Fundamental analysis is the foundation of any investment made in any financial instrument in the world. Pick the top investors in the world. They all created extraordinary wealth because their fundamental analysis behind their investments was very strong. Fundamental analysis involves many parameters and, based on them, a decision is made to invest or not to invest in any asset.

 

Before investing your hard-earned money in the stock market, you should conduct extensive research on the fundamentals of the companies or stocks in which you wish to invest. So now the question arises: how to study fundamentals for any stock and where to find them?

So, the fundamentals of any stock simply mean the balance sheet (profit and loss statement) of the company. Every company listed in the stock market has to provide their balance sheet at the end of every quarter to the shareholders of the respective company. You will find all companies' balance sheets on your country's stock exchange portal, or there are many other websites which provide them. One of the top platforms to study balance sheets is Moneycontrol. Any company is considered to be fundamentally strong when its balance sheet is strong, and you should only invest in fundamentally strong companies. Fundamentals will also tell you if the stock price is overvalued or undervalued and what should be the fair price to buy.

 

Let's discuss now how to study the fundamentals of any stock or company before investing in it.

For example, you are buying a new house, so what are the parameters you will check before buying the house? The most common parameters will be the location, the total area of the house, if it's a building, then on which floor you want to be, the amenities you need, your house should have easy access to transportation, and many more. You will leave no stone unturned to get your perfect new house. The same goes in the stock market. You have to see all the parameters of any stock and then decide if that stock is perfect to buy or not.

 

Below are some of the most important fundamental parameters to check for any stock:

 

• Price to earnings ratio (P/E)- this shows if a stock is undervalued or overvalued.

 

• Earnings per share (EPS)- higher the number is better

 

• Quick ratio- should be > 1

 

•  Working capital ratio- higher the number is better

 

• Debt to equity ratio- should be < 1

 

• Return on equity ratio (ROE)- shows the company's overall profitability.

 

• Profit margin- higher the percentage is better

 

• Shareholding- shows how much shareholding FII/DII and promoters hold in the company

 

After studying these parameters, your work doesn't end here. Now you just know that the company is fundamentally strong or not, but is the current trading price of the stock available at a fair value? To know the answer to this question, you have to look at the price to earnings ratio(P/E) of the stock. The P/E tells you if the stock is overvalued or undervalued. So you have to compare the stock P/E ratio with the respective industry/sector P/E ratio and also compare it with the competitors' P/E.

If you find that the P/E of your stock is comparatively lower than the industry's and competitors', that means your stock price is undervalued and you are getting an opportunity to buy it at a low level. If the P/E ratio of your stock is higher compared to others, then your stock price is overvalued and you should wait for the stock price to settle down with a good P/E ratio. Always choose stocks with a P/E ratio that is lower or equal to the industry and competitors.

 

Now, after your research is complete and all the set parameters are meeting your expectations, you can invest confidently. So fundamental analysis is a simple but critical task to perform before investing in any financial securities.It is not rocket science; any individual can study them irrespective of the background they come from. You can learn, study and become a good fundamental analyst. We are investors and not gamblers. Investors study, research, and then invest their hard-earned money and succeed, whereas gamblers take a blind shot and fail miserably. So be a proud investor and not a gambler.

 

So this was a basic tour of how fundamental analysis helps you make better decisions before investing in the financial markets. I hope this article helps you in your investing journey and you grow more and more.

 

Happy Investing!!

 

 

 

 

 

 

 

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