Fundamental Analysis will help you determine how a company is performing financially and commercially. Therefore it is very crucial to do a fundamental analysis of stock before investing.
If you’re already old in this market, you’re very familiar with the words Technical Analysis. And if you’re a novice or about to start in stock marketing, let me tell you that technical analysis is an approach to find out the entry and exit time stock for intraday trading (short term).
Fundamentals Analysis in the Stock Market
Smart and experienced people use their brain smartly to use different technical indicators efficiently. They keep their hawk eye on multi-bagger stocks that can give high returns years after years. Thus, to find multi-bagger stocks. Understanding and implementing the Fundamental Analysis in the right way is always crucial. To get multiple times returns, you should remain invested in a stock for a longer-term.
Short term turbulences are obvious. Either they bring stock into the uptrend list or else into the downtrend list. But companies having strong foundations won’t get much affected by short term turbulence for a longer period. Being glued with these stocks will bag you the highest returns in the market.
Here are 6 easy steps guides on how you can do a fundamental analysis on stocks and make your investment in the companies that have a strong foundation in the market.
Financial Ratio For Initial Screening
Over 5,500 stocks get listed on the Indian Stock Exchange. If you start analyzing the financial reports, it may take years to analyze them all. Going into every company’s profile manually is almost impossible, and at the same time, they are not worthy.
But for initial screening, there are various ratios like – Price to Earnings, Price To Book Value, Dividend Yield, CAGR ratio, and others. Therefore, if you want to learn stock market fundamentals in detail, join the best stock market course by Ashish Chadha.
Understanding the Company
Once the screening process is over, the next on the list is understanding the company. Understanding a company is highly essential before investing in them. Before investing, you should always look into the foundation of the company, how well the company is growing, and how much it gets affected by stock market fluctuations.
Various steps that the company is taking to drive towards the future. How well competitors are performing and whether you should hold or sell the stocks.
Financial Reports Analysis of the Company
When you finish with the initial phases and understand the company and its products, and find it appealing, the next comes the analysis of the financial report. This financial report analysis includes balance sheets, profit-loss statements, and cash flow statements.
Pro tips:- Analyse the last five years’ report on revenue/sales, net profit, along with other financials like operating cost, expenses, assets, liabilities, etc.
Finding Out Debt and Red Flags
Although triumph in the stock market is all about taking risks. Thus, Analyzing the total debts of the company is a crucial factor to check whether you should invest there or not. A company in huge debt can never perform well in the stock market. Therefore, the best advice would be never to invest there.
Pro tips:- Always invest in those companies who have a debt/equity ratio of less than one. Also, the red flags indicate a continuous decline in profit/margin and low liquidity of the company.
Doing Competitor Analysis
It’s always essential to do competitor analysis before making investments. Here you can understand what the competitors are doing and where they are forward or backward. The focus should be on brand value, Unique Selling Point, low costs products, high costs products, upcoming projects, and all other factors.
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Future Prospects Forecasting
Most of the best investments are based upon the future potential of the company. The prime focus is on how much return they can get from it in the future. Therefore, the best advice for you is to invest in those companies that have strong foundations and long prospects. Choose those companies that have products that don’t get obsolete in a limited time. Always look for companies that can sell products for a longer time (at least 20 years or more.)
Final Thoughts
Fundamental Analysis is a traditional and proven method to find strong companies that are best for long term investment. The main objectives of it are to find out the company’s profit and revenues, finding out misleading data, evaluate management bodies for internal decision making.
To find out the competitors and future growth of the company. And if the company has debts, will it be able to repay? You will get answers to every little detail about the company and others.
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