Basics of Fundamental Analysis

Fundamental Analysis refers to analysis that tends to be more long term. These generally involve the comparison of income statements, cash flow and balance sheets of companies over time.

These statements are released at every earnings call of a company and are available in yahoo finance or the company's website.

Income Statement

Net profit is the main indicator that needs to be looked at. Even if revenue increases, net profit can remain the same or even decrease( as net profit = revenue - all expenses).

COGS - Money u spent on making the product you sold.

An increasing net profit is always a good indicator and vice versa.

Balance sheet

Assets is the value of everything the company owns (including cash, inventory, property, investments etc)

Liabilities is the value of everything that the company owes to other companies.

Current assets are assets that are expected to be converted to cash within a year. Noncurrent assets are those that are considered long-term, where their full value won't be recognized until at least a year.

Assets = Liabilities + shareholders equity

Cash Flow

Shows the outflow and inflow of the cash to the company, in terms of operations, investments and financing.

A positive change in cashflow is always favourable.

Ratios - Ratios of different values that can be found through these statements serve as good long term indicators for the company.

Net profit ratio - This is the ratio between net profit and net sales. It is an indicator of how efficient a company is while converting their revenue to their profit.

Current ratio - This is the ratio between current assets and current liabilities. This indicates whether a company can cover its short term debt and not fall into bankruptcy.(This ratio can be done for non current assets and liabilities too, for indicating long term debt).

Price to earnings ratio - This is the ratio of stock price to annual earnings per share(diluted). A high P/E ratio indicates that the stock is overvalued(sell) and a low P/E ratio indicates that the stock is undervalued(buy).

Note: When it comes to low market cap companies that are lesser known and traded less, minimal fluctuations and steady growth is always favourable(in terms of income/cash flow statements as well as the price of the stock). However, for higher market cap companies, this may not be necessarily true. Highly volatile stocks(in the short term) may perform very well in the long term(for higher market cap companies).

Keep investing.