Fundamental analysis is a method of measuring a stock’s intrinsic value, means analysis of the financial health of the company. How the company is doing business, how much it is expenses, how much money it is earning, and ultimately as a shareholder, how much profit you are getting from the company’s earnings. Everyone think that Fundamental Analysis is very Difficult. If we look at it, there is maximum confusion on this topic, Actually, we have to read only three papers (statements) after reading which we get complete details of the financial condition of the company. Now you can understand Fundamental Analysis help us for Earning Money.
Financial Statement
- Cash Flow Statement
- Profit & Loss Statement
- Balance Sheet
1. Fundamental Analysis of Cash Flow Statement
A cash flow statement is a financial summarizes the amount of cash and cash equivalents Inflow and outflow a company. The three main components of a cash flow statement are cash flow from operations, cash flow from investing, and cash flow from financing. Also we can know from the cash flow statement what and where the company has spent.
Cash Flow
Operating Activity
Operating cash activity means how much it costs to make a product and how much cash we generate from its sale. The company bears all the expenses for manufacturing the product from its own account.
Example – If a product produce cost 1,000, this all amount paid for company account and this is out flow for company. Now we sell this product on 1,500, all this money received in our company account this is inflow for the company.
Operation Cash Flow
Other Two Investing Activity and Financial Activity are not for Investors and Traders.
2. Fundamental Analysis of Profit & Loss Statement
As the name suggests, the profit and loss statement is a financial statement that summarizes the revenues, costs and expenses of a business. When sales and services exceed our expenses we are in profit and if expenses exceed our sales and services we are in loss.
Profit = Selling Price – Cost Price
Loss = Cot Price – Selling Price
Profit & Loss Statement
What we Analyze in Profit & Loss Statement
- Sales YOY
- Purchase YOY
- Expenses
- Gross Profit Margin
- Operating Profit Margin
- Net Profit/Loss YOY
By doing the analysis mentioned above we can decide whether we should invest or not.
3. Fundamental Analysis of Balance Sheet
As the name suggests, in the balance sheet we get information about the balance of the company. Balance sheet statement we get three information, company’s assets, company’s liabilities and shareholders’ balance. The purpose of preparing a balance sheet is to take decisions about business plans.
- Liabilities
- Assets
Balance Sheet)
What do we understand by liabilities?
Share Capital – The share capital should not increase from year to year, it should either decrease or remain the same from year to year.
Reserve – If reserves increase year after year then it is very good for the company and investors.
Borrowing – Borrowings should reduce from year to year and should not exceed the reserve fund. This is a good sign for a profitable company.
What do we understand by Assets?
What do we understand by Assets?
Fixed Assets – Those assets which we can use for a long time are called fixed assets. If it continues to increase year after year, it will be very good for the company and the investor.
Capital Work in Progress (CWIP) – Capital Work in Progress, we can understand with name that capital used for making some product.
Investment – Investments should never exceed fixed assets. If this happens, it will send a message to the investor that the company is focusing more on saving than producing its products.
If the assets of a company are increasing and liabilities are decreasing then this company is considered as a good company and now Now you can understand Fundamental Analysis help us for Earning Money.
