Important Elements of Fundamental Analysis

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Fundamental Analysis is the foundation of investing. There are endless investment strategies, and almost each of them has Fundamental Analysis at its base. Coming up with a fair value for a stock is the basic objective of using it. It is used to predict future movements of price of stocks on the basis of underlying factors which contribute to the demand and supply for that specific stock.

Fundamental Analysis broadly relies on specific sources of information i.e.:

· Balance sheet of the company

· Profit and Loss statement

· Annual Report

· Announcements by the company &

· Industry news

These sources of information, together, become key factors to some valuation measures which are actually most Important Elements of Fundamental Analysis of Stocks.

The main elements of fundamental analysis are:

1. Earnings:

Analyzing a stock’s earnings over a specific period is a crucial method in assessing a stock’s profitability. It is very important to know how much the company is making in profits, before investing in it. Earnings per share are the simplified interpretation of earnings. Generally, companies issue quarterly earnings reports which state how much earnings per share that company made in that quarter.

2. Profit Margins:

The profit margin of a company indicates the control of the company over the cost. If the costs to a company grow at a higher rate than its sales, even if it is making good earnings, its profit margin will be lesser. It will results in less returns to its investors. A higher profit margin means the company is more profitable than its competitors.

Profit Margin is calculated on the basis of a simple formula that is:

Profit margin= Net income/Revenue

3. Valuation Multiples:

Valuation multiples are those factors on which ‘comparable company analysis’ is carried out. This is the quickest method to evaluate a company.

Broadly used valuation multiples are price earnings ratio (P/E) – It is a value driver for earning per share, & multiples based on enterprise value (EV/EBITDA, EV/EBIT, EV/NOPAT) – These values shows the rating of a business of its capital independently.

Calculations based on these multiples are easy to carry out and are user friendly in assessing value of an asset, which eventually, helps you to avoid misleading precision of others.

4. Return on Equity:

Return on equity or ROE is that ratio which is considered as the parent ratio. This ratio measures the efficiency of a company in making its profits.

The formula, on which ROE is calculated, is:

Return on Equity = Net Income/Shareholder’s Equity

5. Price per Book:

P/B ratio is that ratio which is used to compare a company’s market value to its book value. You can find out P/B ratio by dividing current share price by book value per share as stated by previous financial statement.

For every investor, it is important to carry out Stock Analysis before investing in them. These elements are vital in analyzing a stock fundamentally and to measure the actual worth of potential stocks.

About the Author: AKDSEO

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