Should an investor use fundamental analysis or technical analysis? Well, it all depends on your goals as an investor and, of course, your expertise level. Most beginner investors have an easy time working with fundamental analysis.
Generally, fundamental analysis is as easy to understand as the new games on FairGo casino. The analysis focuses on a company’s management, the assets that the company has, how much a company makes, products, and intellectual property. The objective of fundamental analysis is to evaluate the health of the company an investor is interested in.
You can look at several metrics to evaluate a company’s financial health.
- Balance Sheet
By looking at a company’s balance sheet, an investor can establish the amount of cash in hand and its debt. It gives a clear breakdown of the company’s assets, both in cash and cash equivalent.
An investor can calculate ratios using the information on the balance sheet to establish the cash a company has.
- Book Value per Share
To calculate the book value per share, you must divide the net worth of the company, which is indicated in the balance sheet, by the total outstanding shares of stocks that represent the company. With this information, you can tell if you are getting a discount when you buy shares of the company or if you are paying a premium to book value. That is after you compare the book value per share and the current share value.
- Debt-to-Equity Ratio
This value is achieved by dividing the company’s debt by its net worth. This will shed light on the company’s financial standing and whether it can meet its debt obligations. If the company’s debt-to-equity ratio is high, then it means that the company is struggling financially, and you might want to reconsider your investment decision.
- Free Cash Flow
Free cash flow is the amount of money a company is left with after paying all of the expenses that have been paid. Free cash flow is calculated by finding the sum of the company’s income, non-cash expenses, and working capital changes and subtracting the capital expenditures from a given quarter.
If the free cash flow is high, then it means that the company’s finances are stable.
- Quarterly Earnings Per Share (EPS)
This is the company’s net income for a given quarter, divided by the number of outstanding shares of the company. Why is this metric used in the fundamental analysis?
- The effectiveness of strategies
The earnings per share of a company may be going high, even if the revenues indicate otherwise. This usually happens in companies when they are changing their strategies to pay more attention to more profitable ventures. When the revenues are falling and the earnings per share increase, it sends a good signal to the investors, who translate this as effectiveness in a strategy to increase the company’s profits.
- Growth
Calculating quarterly earnings per share can also help an investor establish if the company is experiencing any growth. Comparing the earnings of the different quarters will help you point out if the company is experiencing growth.
- Quarterly Revenue
Any amount of money that a company brings in a financial quarter is called the quarterly revenue. Quarterly revenue is evaluated to establish whether a company is experiencing economic growth. This is done by comparing the revenues of the most recent quarterly reports.
Investors should know whether the company they are interested in is growing financially, experiencing stagnation, or has intermittent revenue patterns. This will help establish if it is smart to invest there.
- Intellectual Property
A company’s intellectual property speaks volumes about a company’s suitability for investment. Intellectual property consists of documents such as trademarks and patents. If the intellectual property portfolio of a company is strong, then it means that competitors may not be able to get into the same business.
- Institutional Interest
Institutional interest in a given company’s stocks is an essential element to consider when making an investment decision. Big investors like banks, financial institutions, and hedge funds have people hired to analyze the market and look for companies that present significant opportunities. If no institution is showing interest in the company, it might mean that the investment is not so good.
On the other hand, if there are several big institutions, it is an indicator that the company is a strong investment opportunity.
Who Does Fundamental Analysis Help?
- Long Term Investors
Long-term investors believe in value investing, and fundamental analysis helps them evaluate an investment’s viability for a long-term investment. Long-term investors do not focus on the short-term volatility of a stock and are willing to wait and hold onto their positions for as long as it may take.
Worth noting, however, is that the long-term investors are only patient with companies that are not in problems that would cost them their investment, and this is where the fundamental analysis comes in.
Fundamental analysis helps them identify trends, be it technological, demographic, or economic, that will make their wait worthwhile.
- Value Investors
Benjamin Graham is one of the world’s most influential value investors who laid the foundation for stock analysis. This was after he lost all his investment in the Stock Market Crash of 1929. This further paves the way for fundamental analysis, which value investors have held onto religiously.
Wrapping Up
Value investors like Tom Gayner of Markel Corporation (MKL) use an investment technique that involves picking stocks trading for less than their book value and then waiting for the stock to rise to their true value. Alternatively, the company might grow, and the undervalued stock at the time will consequently increase, giving them a chance to make money.
Fundamental analysis helps value investors identify whether stocks are undervalued or overvalued. This information drives their long-term investment decisions.
