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Fundamental Analysis

Fundamental Analysis of Stock

Fundamental analysis of stock is through financial and non financial study of a business. In order to invest in a stock for long term it become necessary to understand the business in complete holistic way.
Always fundamentally strong companies appreciate in long term and create wealth for its investors, for example companies, like Reliance Industries, Infosys limited, TCS limited are few names which has created good wealth for their holder.

Can I do fundamental analysis?

Everyone can do fundamental analysis. Basic skills required to do fundamental analysis are:-

                             (i)  Understanding statement of account of a company.

                             (ii)  Sectoral and company news on regular basic.

                             (iii)  Under stand behaviour of top management, that is how ambitious management and vision of management.

For good wealth creation it is always advisable to use both technical and fundamental analysis. Technical analysis is used in short term investment, it helps to identify entry and exit level in short term.

Tools for fundamental analysis of stock?

(i)       Annual performance report of a company.

                          Annual performance report is very important for fundamental analysis. Top management massage and views are reflected in the report. 

(ii)      Sector related data.

                         Sector related data are very important for comparison of performance of the company with other in the same sector.

(iii)     Sector related News.

                        One need to be up to date with news of what is happening in a company and in sector, like technology change how fast company will adapt and government regulation changes with respect to sector. 

If one analyse and comes to know a good company with very good to excellent sale, margins and to maintain the same adapt new technologies at earliest, there is no reason why stock price will not appreciate. Some times price appreciation might get delayed.

Non financial characters for fundamental analysis.

Like it is being discussed earlier that one of the aspect of fundamental analysis is non financial character of a company.

(i) Top management’s Background :-   

                        Mainly to check their capability to handle and grow the business. One need to check for experience, education, background of any previous fraud or criminal cases against the owner.

(ii)  Business ethics :-

                         How fair the top management in running the business.

(iii)  Cooperate Governance :-

                         Transparency of work, appointments of directors. Do management take care of their minority share holder while taking cooperate decision.

(iv)  Salaries to promoters :-

                          Is the management paying themselves heavy salary package.


(v)   Share holding pattern :-

                        Who all are stock holders having of 1% or more of stock of the company. 

Fundamental analysis gives alert if any of the above mentioned attribute is negative for the company. For example if a company is involved in too many related party transaction, ( that is tendering financial favour to promoters relative, friends etc. at cost of shareholders fund ). Then it would signal malpractice by the company, which is bad for share holders on long term.

Because in that case its just matter of time, even if company has good profit margins, and once market deduct such favoritism punishes the stock price, investors are likely lose heavily advised not to invest in such companies.

Though its not easy to identify such malpractice in a company but good fundamental analysis are able to make out from annual report. 

Concluding Statement

Fundamental Analysis of stock is one of the long term investment tool. If you are looking for investment for 7 to 10 years. Then I would recommend one should do the detailed fundamental analysis.

Coming Soon - How to analyse annual report of a company.