what is fundamental analysis of a stock and its significance

If you want become investor you must have to know “What is fundamental analysis” and it's importance in investing and, I am letting you know how to do analysis of a 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.

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 the mainly to do analysis to examine the company's underlying health.

first of all analysis 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 analysis of a company stock you must have to know about Stock Market.

Significance of Fundamental Analysis

This analysis is to be first step to become 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 how to invest in companies or stocks in 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 analyses a company's strength, and its ability 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.

Key reports of Fundamental analysis

To determine the stock's actual value, investors use many different tools too. These tools are most importantly 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 about stock value more over 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.

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

How to read fundamental analysis reports of a company?

Reliance market capital

Image 1.1

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

Large cap stocks are have very liquidation, not volatile and 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

What is balance sheet

Image 1.2

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

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

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

Profit & Loss Statement in fundamental analysis

what is profit loss statement

Image 1.3

Even large cap stocks also posts losses some continuous quarters or years that means, the company performs in bad, we will not get the good profitable income through investing like those stocks.

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

what is financial ratios of a stock

Image 1.4

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

Ratios are very reliable data to analysis stock quickly and we can find value of the stock through the ratios limits, if we found ratios data is out of the limits we have to it is over valued.  

Quarterly Results

how to know year on year growth of stock

Image 1.5

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

Share Holding Pattern in fundamental analysis

Reliance share holding patterns

Image 1.6

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

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

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

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

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