| Author: Adam Masterson |
Your average joe investor doesn't have a lot of tools or knowledge when making decisions on the stock market. For this reason, you will want to at least conduct a fundamental investment analysis before you invest your money into just any old company. This will clearly identify the ratios that determine the worth of a stock and the performance of the company.
1. Goals
A good fundamental analysis will include many factors. Although future earnings are always subject to interpretation, a good earning history creates confidence among investors. Stock prices increase and dividends may also be paid out.
2. Earning Reports
Companies are required to report earnings on a regular basis and stock market analysts examine these figures to determine if a company is meeting its expected growth. If not, there is usually a downturn in the stocks price.
There are many tools available to help determine a companys earnings and its value on the stock market. Most of them rely on the financial statements provided by the company. Further fundamental analysis can be done to reveal details about the value of a company including its competitive advantages and the ratio of ownership between management and outside investors.
3. Financial Statements
Every publicly traded company must publish regular financial statements. These statements are available in printed form or on the Internet. All statements must include an income statement, a balance sheet, an auditors report, a statement of cash flow, a description of the business activities and the expected revenue for the coming year.
4. Auditors Report
The auditors report is one of the most important sections of the financial statement. The auditor is an independent Certified Public Accountant firm that examines the companys financial activities to determine if the financial statement is an accurate description of the earnings. The auditors report contains the opinion of the auditor concerning the accuracy of the financial statement. A financial statement without an independent auditors report is essentially worthless because it could contain misleading or inaccurate information. An auditors report, although not a guarantee of accuracy, at least provides credibility to the financial statement.
5. Balance Sheet
Another important section of the financial statement is the balance sheet. This is a snapshot as it were, of the financial condition of the company at a single point in time. The balance sheet shows the relationship between assets (cash, property and equipment), liabilities (debt) and equity (retained earnings and stock).
6. Income Statement
The income statement shows information about the revenue, net income, and earnings per share over a period of time. The top line of the income statement shows the amount of income generated by sales, underneath that the costs incurred in doing business are deducted. The bottom line show the net income (or loss) and the income per share.
7. Cash Flow
A sucessful cash flow is the most important part of any business. The cash flow statement, however, does not use accounting procedures such as depreciation it is simply an indicator of how a company handles income and expenses. A statement of cash flow shows incoming and outgoing cash from sales, investments, and financing. If you invest in a company with a rock solid cashflow, chances are you will at least see your money back. |
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