DESCRIBING FUNDAMENTAL ANALYSIS

Fundamental Analysis is about analyzing the company based on its important key aspects which are known as its fundamentals. Analysis which is purely based on fundamentals is mainly for making long-term investments in the equity market (stock market. Long-term investment can be of several months or for a year. In the short term,  there are speculative aspects present. It is expected that stock takes a little time to move towards its intrinsic value. Due to the speculative practices and psychological aspects, technical analysis considers the trends, patterns, indicator and pattern recurring.  Trades or investment taken based on technical analysis is part of short-term investment. Fundamentals of a company can be decided by looking at the factor which is both internal and external, factor which includes capital structure, management, labor, tax rates, rules and regulations, foreign investors etc. 




Fundamentals can be classified into 2 categories:


Qualitative factors

The above mentioned fundamentals are related to the quality of the company and include factors like: Organization Structure, Management, Business Model, Competitive Advantage, etc.


Quantitative factors

Quantitative fundamentals are linked with the numerical aspects of the company and include factors like: revenue, cash flow, expenditure, dividends, etc. There is a very little source to analyze these aspects of a company. Investor reports and investor presentations are usually included by it and made available quarterly and involve the financial statements, management discussion, etc. and the news provided by unbiased sources. To provide you with the best and unbiased information for fundamental analysis, screening applications and websites are always there on the internet

 

Financial Ratios

Numeric ratios derived from the financial statements of a company in which balance sheets, income statements and cash flow statements are included. An integral part of the company is formed by quantitative analysis of a company and helps an investor determine the financial health of the company by providing an investor.

 

These ratios are broadly distributed into 4 categories:

 

Profitability Ratios

These ratios reflect how much profit was made concerning how much was put in to generate that profit.

 

PAT Margin = PAT (Profit After Tax) for the Year / Total Revenue.

EBITDA Margin = EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) / (Revenue - Other Income)

Return on Equity (RoE) : Net Profit / Shareholders’ equity

Return on Assets (RoA) : Net Profit / Total Assets

Return on Capital Employed (RoCE) : EBIT (Earnings before interest and taxes) / (Total Assets - Current Liabilities)

 

Operating Ratios

Fixed Asset Turnover = Net Sales (or Revenue) / Average Fixed Assets

Working Capital Turnover = Net Sales (or Revenue) / Average Working Capital

Total Asset Turnover = Net Sales (or Revenue) / Total Assets

Inventory Turnover Ratio = Sales / Average Inventory

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

 

Leverage Ratios

These ratios exhibit the openness of a company and tell us about its financial health and sustainability.

Debt ratio = Total Liabilities / Total Assets

Interest Coverage Ratio: EBIT (Earnings before interest and taxes) / Interest Expense

Debt to Equity Ratio = Total Debt / Total Equity

Debt service coverage ratio = Operating Income / Total Debt Service

 

Valuation Ratios  

Through these ratios, the price of the stock is put in perspective of the company’s financial analysis.

 

Price to Earnings (P/E): Market price / Earnings per Share

Price to Book Value (P/B): Market price / Book Value per Share

Price to Sales (P/S): Market price / Sales per Share

Price to Cash Flow (P/CF): Market price / Cash Flow per Share.
Location: Noida, Uttar Pradesh, India

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