Fundamental analysis enables the rational man to analyze a company to come to a decision prior to making investments. The general financial health of a company can be analyzed through this approach. Various aspects like the management, the current situation of the company in the market and the competition that is faced are all scrutinized through Fundamental Analysis. Let us see how fundamental analysis helps an investor to analyze and understand the status of a company.
The political environment influences the growth of a company. Unstable government leads to insecurity as there is a possibility of the replaced government holding different economical beliefs. While certain factors encourage investment, there are other factors that cause anxiety. It becomes necessary for an investor to watch closely the political and economical developments to use the situation for his advantage.
Determining the cycle of the industry is very important. Initial phase, growth, maturity and decline are the stages that the industry undergoes and buying at the initial stages and selling at the final stage will benefit the investors. A deep study of the industry helps to ascertain the phase to make investment.
Company analysis comprises of the analysis of management, financial performances, annual reports and ratios. The integrity of the company managers and their performance and ratings are important factors to consider. Annual report helps to determine the financial state of the company. The annual report is further categorized as Director’s report, financial statements, Schedules and Auditor’s report.
The director’s opinion on the industry and the details related to the company’s performance are understood from the report of the Director. The plans regarding expansion or modernization of the company are entered in the Director’s report. Changes in accounting principles are known from the report of the auditor and the results state about the effect of the changes.
The balance sheet and the company’s Profit and Loss statement are known from the financial statements. The company’s assets, liabilities, profit and loss and other activities during an accounting period and the effects of these are understood from the details of financial statements.
Market value ratio, profitability ratio, liquidity ratio and asset management ratio are to be analyzed before investing. The regard for a particular share in the market and the time that the share would take to give the investor to recover his funds invested are reflected in the market value ratio. Returns on equity and total assets of a company are known from the profitability ratio and this helps the investor to know about the performance of the company within the industry.
Asset management ratio tells about the management of the assets and the liquidity management enables the investor to determine whether the company will be able to meet the financial obligations.
The intrinsic value of a share gets changed frequently due to various external and internal factors. A good knowledge of this is important in the decision of share purchases or investment.
Though fundamental analysis is a big and complicated task, a thorough understanding of this is inevitable to get a vivid picture of the company and its performance which has direct impact on our investment.