Fundamental Analysis
The investor has many tools at hand when
making decisions about which stocks to buy. One of the most useful of
these is – examining key ratios which show the worth of a stock
and how a company is performing.
The goal of fundamental analysis is to determine
how much money a company is making and what kind of earnings can be
expected in the future. Although future earnings are always subject
to interpretation, a good earning history creates confidence among investors.
Stock prices increase and dividends may also be paid out.
Companies are required to report earnings on a regular
basis and stock market analysts examine these figures to determine if
a company is meeting its expected growth. If not, there is usually a
downturn in the stock's price.
There are many tools available to help determine
a company's earnings and its value on the stock market. Most of them
rely on the financial statements provided by the company. Further fundamental
analysis can be done to reveal details about the value of a company
including its competitive advantages and the ratio of ownership between
management and outside investors.
Financial Statements
Every publicly traded company must publish regular financial statements.
These statements are available in printed form or on the Internet. All
statements must include an income statement, a balance sheet, an auditor's
report, a statement of cash flow, a description of the business activities
and the expected revenue for the coming year.
Auditor's Report
The auditor's report is one of the most important sections of the financial
statement. The auditor is an independent Certified Public Accountant
firm which examines the company's financial activities to determine
if the financial statement is an accurate description of the earnings.
The auditor's report contains the opinion of the auditor concerning
the accuracy of the financial statement. A financial statement without
an independent auditor's report is essentially worthless because it
could contain misleading or inaccurate information. An auditor's report,
although not a guarantee of accuracy, at least provides credibility
to the financial statement.
Balance Sheet
Another important section of the financial statement is the balance
sheet. This is a 'snapshot' as it were, of the financial condition of
the company at a single point in time. The balance sheet shows the relationship
between assets (cash, property and equipment), liabilities (debt) and
equity (retained earnings and stock).
Income Statement
The income statement shows information about the revenue, net income,
and earnings per share over a period of time. The top line of the income
statement shows the amount of income generated by sales, underneath
which the costs incurred in doing business are deducted. The bottom
line show the net income (or loss) and the income per share.
Cash Flow
The statement of cash flow is similar to the income statement –
it provides a picture of a company's performance over time. The cash
flow statement, however, does not use accounting procedures such as
depreciation – it is simply an indicator of how a company handles
income and expenses. A statement of cash flow shows incoming and outgoing
cash from sales, investments, and financing. It is a good indicator
about how the company is run on a day-to-day basis, how it handles creditors
and from where it receives growth capital.
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