Fundamental Analysis Part
One
Article About Investor
Analysis Tools
The investor has many tools at hand when making decisions about
which stocks to buy. One of the most useful of these is fundamental
analysis, examining key ratios which show the worth of a stock and
how a company is performing.
The goal of fundamental analysis is to determine how much money a
company is making and what kind of earnings can be expected in the
future. 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.
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 stock's price.
There are many tools available to help determine a company's
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.
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 auditor's report, a statement of cash flow, a
description of the business activities and the expected revenue for
the coming year.
Auditor's Report
The auditor's report is one of the most important sections of the
financial statement. The auditor is an independent Certified Public
Accountant firm which examines the company's financial activities
to determine if the financial statement is an accurate description
of the earnings. The auditor's report contains the opinion of the
auditor concerning the accuracy of the financial statement. A
financial statement without an independent auditor's report is
essentially worthless because it could contain misleading or
inaccurate information. An auditor's report, although not a
guarantee of accuracy, at least provides credibility to the
financial statement.
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).
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 which the costs incurred in doing business are
deducted. The bottom line show the net income (or loss) and the
income per share.
Cash Flow
The statement of cash flow is similar to the income statement – it
provides a picture of a company's performance over time. 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. It is a good
indicator about how the company is run on a day-to-day basis, how
it handles creditors and from where it receives growth capital.
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