Understanding Fundamental Stock Analysis

Before you begin investing in the stock market, you need to make some very important decisions about how you will go about it. You must decide the method by which you will make your investment decisions, especially whether you will trade using fundamental or technical analysis. To decide, you need a clear understanding of both.

Today we will briefly introduce the oldest and most utilized analysis: fundamental stock analysis.

What is fundamental stock analysis?

Fundamental stock analysis is like peeling back the layers of an onion. It’s all about digging into the fundamental factors that drive a stock’s value. You want to know if a company is worth your hard-earned money or if it’s just a lemon.

So, what do we investigate? Well, we start with the company’s financial statements, such as the balance sheet, income statement, and cash flow statement. These documents reveal the company’s financial health and performance. It’s like looking at their report card.

The balance sheet tells us what the company owns (assets), what it owes (liabilities), and what’s left over (equity). We want to see if they have more assets than liabilities because that means they own more than they owe. That’s a good sign.

Next up is the income statement, which shows the company’s revenues, expenses, and profit or loss. We want to see if they’re making money or bleeding red ink. Ideally, we want to see consistent growth in revenue and increasing profits over time.

Then comes the cash flow statement. This one is like checking a company’s bank account. We want to see if they’re generating enough cash to cover their expenses, invest in growth, and still have some left over.

Now that we’ve gathered the financial facts, it’s time to put on our thinking caps. We analyze these numbers and compare them to industry benchmarks and competitors. Are they outperforming or falling behind the pack?

It’s not just about numbers

We also need to look at the company’s business model, products or services, market share, and competitive advantage. Is their product a game changer or just another run-of-the-mill offering? Do they have a strong position in the market, or are they struggling to keep up?

We also consider macroeconomic factors, like interest rates, inflation, and industry trends. These can impact the company’s growth prospects and overall profitability.

Once we’ve gathered all this information, we can make an informed decision about whether to buy, sell, or hold stock. We want to find undervalued gems, where the stock price is lower than the company’s intrinsic value. That’s like finding a sweet deal at a yard sale!

Take your time

Remember, fundamental stock analysis takes time and effort. It’s not a quick fix or a crystal ball that guarantees success. By doing your detective work and understanding the fundamentals, you’ll be better equipped to make smart investment decisions. You’ll be happy to know that the publicly held companies you are looking at must provide all the information mentioned every three months, which can be accessed on their websites. 

Just understand that fundamental stock analysis is limited. It can help place a value on a company, but that doesn’t mean the company’s price will reflect that value. The stock market is wild and chaotic, very similar to a casino, and the fundamentals often don’t match up to the price. That’s where technical analysis can come in, and that’s the subject of our next article.

The views expressed represent the opinion of Good Life Asset Strategies, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.