Basic Fundamental of stock Market
A Step-By-Step Guide to Fundamental Analysis, we specialize in providing a comprehensive understanding of fundamental analysis for investors. Our aim is to help individuals make informed decisions when investing in companies for the long term.
What is fundamental analysis?
Looking to enhance your investment strategy? Consider incorporating fundamental analysis into your decision-making process when trading our stocks. Understanding the fundamental factors that drive a company's performance can give you a competitive edge in the market. By evaluating key metrics such as earnings, revenue, and cash flow, you can make smarter investment choices and achieve long-term success in the stock market.Importance of Fundamental Analysis:-
Fundamental analysis helps in determining the fair value of any stock. It also evaluates the health and performance of an organization with the help of its financial and major economic indicators. Fundamental analysis of stock also helps in understanding the business model of a company, the working ways of the management, and its strengths and weaknesses. You can predict future price movements and determine if the stock is undervalued or overvalued.Types of fundamental analysis:-
Fundamental analysis is divided into two categories: -1. Qualitative analysis
As the name suggests, qualitative analysis considers the qualitative factors of a company, such as goodwill, demand, consumer behavior, company recognition in the broader market, competitive analysis, and brand value. It also aims to determine how the management is, the impact of their decisions on the market, and depicts their socio-economic position. Qualitative analysis is usually considered subjective.
2.Quantitative analysis
Quantitative analysis is related to the measurable characteristics of a business. Hence, the biggest source of quantitative analysis is financial statements. Quantitative analysis is about statistics, reports, and data. It considers statements, balance sheets, cash flows, debt, quarterly performance, and many financial ratios to understand the company’s overall financial health and determine the share’s price.
Financial statements: -
These statements offer vital data to make informed decisions on capital allocation for business growth. The three primary financial statements are balance sheet, income statement and cash flow statement. Together, they present a comprehensive overview of a company's financial status.
1)Balance sheet.
What is a balance sheet?
A balance sheet is a financial statement that contains details of a company's assets or liabilities at a specific point in time. It is one of the three core financial statements (income statement and cash flow statement being the other two) used for evaluating the performance of a business.
Why is it called a balance sheet?
The name "balance sheet" is based on the fact that assets will equal liabilities and shareholders' equity every time.
What are the 2 basic forms of the balance sheet?
Standard accounting conventions present the balance sheet in one of two formats: the account form (horizontal presentation) and the report form (vertical presentation).
Assets:-
1)Current Assets
- Cash and Equivalents:-
The most liquid of all assets, cash, appears on the first line of the balance sheet. Cash Equivalents are also lumped under this line item and include assets that have short-term maturities under three months or assets that the company can liquidate on short notice, such as marketable securities. Companies will generally disclose what equivalents it includes in the footnotes to the balance sheet.- Accounts Receivable:-
This account includes the balance of all sales revenue still on credit, net of any allowances for doubtful accounts (which generates a bad debt expense). As companies recover accounts receivables, this account decreases, and cash increases by the same amount.account - Inventory:-
Inventory includes amounts for raw materials, work-in-progress goods, and finished goods. The company uses this account when it reports sales of goods, generally under cost of goods sold in the income statement.2)Non-Current Assets
- Plant, Property, and Equipment (PP&E):-
Property, Plant, and Equipment (also known as PP&E) capture the company’s tangible fixed assets. The line item is noted net of accumulated depreciation. Some companies will class out their PP&E by the different types of assets, such as Land, Building, and various types of Equipment. All PP&E is depreciable except for Land. - Intangible Assets:-
This line item includes all of the company’s intangible fixed assets, which may or may not be identifiable. Identifiable intangible assets include patents, licenses, and secret formulas. Unidentifiable intangible assets include brand and goodwill. Liabilities:-
1)Current Liabilities:-
- Accounts Payable:-
Accounts Payables, or AP, is the amount a company owes suppliers for items or services purchased on credit. As the company pays off its AP, it decreases along with an equal amount decrease to the cash account- Current Debt/Notes Payable:-
Includes non-AP obligations that are due within one year’s time or within one operating cycle for the company (whichever is longest). Notes payable may also have a long-term version, which includes notes with a maturity of more than one year.- Current Portion of Long-Term Debt:-
This account may or may not be lumped together with the above account, Current Debt. While they may seem similar, the current portion of long-term debt is specifically the portion due within this year of a piece of debt that has a maturity of more than one year. For example, if a company takes on a bank loan to be paid off in 5-years, this account will include the portion of that loan due in the next year.2)Non-Current Liabilities:-
- Bonds Payable:-
This account includes the amortized amount of any bonds the company has issued.- Long-Term Debt:-
This account includes the total amount of long-term debt (excluding the current portion, if that account is present under current liabilities). This account is derived from the debt schedule, which outlines all of the company’s outstanding debt, the interest expense, and the principal repayment for every period.2)Income statement: -
What is in an income statement?
The income statement focuses on the revenue, expenses, gains, and losses of a company during a particular period. An income statement provides valuable insights into a company's operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.
Income statement is also known as statement of profit and loss, statement of Revenues and expenses, Statement of operations , statement of Earnings.
2 Ways of Making Income statements:-
There are two different types of income statements that a company can prepare such as the single-step format statement and the multi-step format statement.
- single-step income statement: -
Example- The single-step income statement lists all income on a single line and all expenses on a single line, with the net income total below: ABC Ltd. Company
Income Statement Tax Year 2023
Profit Before Tax (PBT) = Total revenue- Total expenses
Net Profit/ Net Income = Profit before tax- Income tax
- multi-step format statement: -
Below images shows how to evaluate multi-step format:-
Accrual Accounting: -
What does accrual mean?
An accrual is a record of revenue or expenses that have been earned or incurred but have not yet been recorded in the company's financial statements. This can include things like unpaid invoices for services provided, or expenses that have been incurred but not yet paid.3)Cash flow: -
What is cash flow in simple terms?
Cash flow is the movement of money in and out of a company. Cash received signifies inflows, and cash spent is outflows. The cash flow statement is a financial statement that reports a company's sources and use of cash over time.What are the 3 types of cash flows?
3 types of cash flow
- Operating cash flow: -
A company’s operating cash flow offers a portrait of its day-to-day operating activities: namely, the income from sales and outflows from salaries, vendor fees, lease payments, taxes, and interest payments. A company whose sales exceed its operating expenses is cash flow positive.
- Investing cash flow: -
Cash flow from investing activities (CFI) refers to monies linked to long-term investments. When a company invests in, say, a startup, its investing cash flow is negative (more money out than in). When a company cashes out on its investment by selling its startup shares, its investing cash flow is positive.
- Financing cash flow: -
Financing cash flow or cash flow from financing activities (CFF)—refers to the net cash linked to financing activities that power many companies. Some companies sell ownership shares to investors to raise money for operating expenses. Some financing activities bring in money, like selling bonds to generate cash, and others send money out, like paying dividends and buying back stock from investors. For some startups, financing cash flow will play a more significant role than operating cash flow in the company’s overall cash flow management.
How to calculate cash flow: -
cash flow = Cash on hand - expenses
How to calculate free cash flow: -
Free cash flow = cash from operations – capital expenditures
How to calculate operating cash flow: -
Operating cash flow = (operating income + non-cash expenses) – (taxes + changes in working capital)
How to calculate a cash flow forecast: -
Ending cash = beginning cash + projected cash inflows – projected cash outflows
Is cash flow positive or negative?
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