what is fundamental analysis of a stock and its significance

If you want to become an investor you must have to know “What is fundamental analysis” and its importance in investing, I am letting you know how to do an analysis of company stock.

To start with we need to know how Investors use fundamental analysis to determine the intrinsic value and predict the future value of a company stock.

Read more: what is fundamental analysis of a stock and its significance

Stock prices may not reflect actual stock value. Therefore, stocks may be undervalued or overvalued on the stock market.

To determine the intrinsic value, this is mainly to do an analysis to examine the company’s underlying health.

first of all, analyze both qualitative and quantitative metrics such as company revenues.

In addition, will have to see profit margins and return on equity.

This method is used to identify strong companies to make long-term investments.

To do an analysis of company stock you must have to know about Stock Market.

significance of Fundamental Analysis

This analysis is to be the first step to becoming an investor. It will make all the sense about the company, as it is fundamentally strong or not.  

analysis of fundamentals gives you clear information on how to invest in companies or stocks in the stock market. It helps you to determine the stock’s fair value.

Stock fundamentals can also be used to evaluate the performance and health of an organization using key numbers and economic indicators.

You can predict future price movements and determine if a stock’s value is too high or low by this analysis.

It also helps you analyze a company’s strength, and its ability to beat its competition.

A complete analysis of a company or its stock can help willing to know the business model and working status of the management.

Fundamental analysis is an intellectual move to take a decision about investment in a stock of a company.

reports of Fundamental analysis

To determine the stock’s actual value, investors use many different tools too. These tools are most important include:

Financial Reports

Financial reports are very important such as Balance sheets, Income statements, Cash flow statements, Reserves and surplus, Total Liabilities, and Total assets.

Earnings Reports

Quarterly earnings and projected future earnings.

Earnings will give you companies growth statements in year-on-year earnings and quarterly-based earnings in present-year growth.

Financial Ratios

All the financial ratios like EPS, P/E, ROE, etc., determine stock value more than reports of top-line reports.

Let’s look at an example to show how fundamental analysis can be used to create wealth on the stock market just look at Reliance Industries Ltd.

In the above picture of Reliance Industries, you can see the market capital of the company and dividend yield, face value, book value, ROCE, and ROE by these values you can decide whether this company belongs to large-cap, mid-cap, and small-cap.

How to read fundamental analysis reports of a company?

Image 1.1

In the above (image 1.1) you can see the company’s total market cap is above 20,000 crores which we can say it is large cap stock.

Large-cap stocks have very liquidation, are not volatile, and have consistent compounding growth.

Market capitalization = No. of shares x Current Market Price

Similarly, you can capture the P/E ratio, Book Value, Dividend yield, ROCE, ROE, and Face Value you can learn about these details in further posts.

However, all the Nifty 50 Companies are Large-cap stocks

Balance Sheet Report in fundamental analysis

Image 1.2

A company Balance sheet can clearly show you what is the position of the company’s assets and liabilities.

Many companies post profits every quarter but we do not know behind the company’s debts and loans, assets, and surplus.

We must have to know all details about companies before we invest in those stocks the above image(image 1.2) shows year-wise data of Reliance assets growth.

Profit & Loss Statement in fundamental analysis

Image 1.3

Even large-cap stocks also post losses for some continuous quarters or years which means, if the company performs in bad, we will not get a good profitable income through investing like those stocks.

In the above (image 1.3) you can see Reliance sales, expenses, operating profit, profit before tax, and net profits these are very important while investing to observe.

Ratios Reports in fundamental analysis

Image 1.4

What is Ratios? How important is this analysis ???

Ratios are very reliable data to analyze stock quickly and we can find the value of the stock through the limits of the ratio, if we found ratio data is out of the limits we have it is overvalued.  

Quarterly Results

Image 1.5

We must observe every result of the stock it can be quarterly or yearly the stock becomes very volatile in the results posting time.

Share Holding Pattern in fundamental analysis

Image 1.6

This is very important to know what is the promoter holding percentage in the company if they have confidence in the company or not will know through the shareholding pattern.

And will know by this what is other institutions and investors interested in this as above (image 1.6) shown.

Fundamental analysis is very easy to learn and do practice the stocks in the market you will become a good investor.

All the above images are taken from www.screener.in

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