Fundamental indicators calculated on the basis of general economic and market conditions
Most traders do not pay attention to such a “trifle” as fundamental indicators. These indicators are calculated on the basis of general economic and market conditions that affect the stock price, as well as financial information relating to the company's activities, its financial success and failures. Instead, most traders focus on technical analysis, as well as trends that can be identified with such an analysis.
If you take time to analyze the fundamentals of companies whose shares you intend to trade, you will get an advantage over the majority of traders. With the help of fundamental analysis you can compare the price of shares of the company you are interested in with the prices of shares of other companies.similar profile, taking into account revenue growth and other key factors, including the conditions for doing business. The material in this chapter will help you to understand the most important elements of the fundamental analysis and how to use the information obtained in the course of fundamental analysis with a view to making more effective decisions regarding the performance of stock purchase / sale transactions.
The first thing you must do when conducting a fundamental analysis is usually the choice of the industry or sector in which you will buy stocks. Sometimes a company is of particular interest to you, and you start your research by studying the main actors in the sector that this company represents, or by analyzing the fundamental indicators of this sector. Wherever you start, you will in any case have to reduce the list of companies that you will compare with companies of a similar profile in the same sector, in order to eventually choose the most suitable option for yourself.
Most of the tools used in fundamental analysis suggest that you will compare at least two companies operating in similar business environments in order to understand the meaning of the relevant information.For the purposes of the discussion presented in this chapter, we look at two large “players” representing the retail sector of household goods and household goods: the Note of Depot and Lowe ’. If you had to monitor business conditions in this sector, then you probably know that these two companies are competing to get the largest possible share in the growing retail market of household goods and household goods by investing heavily in the construction of new stores.
Before you become familiar with the fundamental analysis tools, you must learn how to read the most important financial statements correctly, including the most important parts of the income statement, cash flow reports and balance sheet.
In the statement of profit and loss, the company periodically reports on its income, costs and net profit. The statement of profit and loss, in essence, is a “snapshot” of the income received by the company from its core business, as well as any additional income that could affect the final results of its activities over a certain period of time.After reviewing the income statement, you should be able to determine the effect of taxes, interest payments and depreciation on the income of the respective company and predict its potential for future income growth.
Any profit and loss account consists of three main sections: income, expenses and profits. The “income” section includes all money received by the company as a result of the sale of its products or services, minus any costs directly related to the sale of these products or services. The “expenses” section includes all current expenses of this company, not directly related to the sale of products or services of this company, as well as expenses for physical or moral depreciation, amortization charge, taxes and interest.
The “profit” section includes various profit calculations. Here you can usually find a calculation that reflects the profit after current expenses, but before interest payments, taxes, physical or moral depreciation and amortization write-off. In addition, the “profit” section includes net income, which is the final result that shows how much the company earned after deducting all its costs and expenses.
The indicators for one year contain not so much useful information for you, therefore, in order to predict the growth potential of the company you are interested in or evaluate its achievements in comparison with its competitors, you should analyze the trends that have been formed over the years. A number of sources in which fundamental information can be found is given in Chapter 4.
Of interest are both quarterly and annual financial reports. Comparison of the company's results on a quarterly basis enables the trader to get an idea of the extent to which this company meets the expectations associated with it. In addition, if we, for example, compare the results for the first quarter of 2003 with the results for the first quarter of 2004, we can see if the company's revenues increased or decreased in a similar market environment. While for some categories of companies the first quarter is quite productive, for other categories of companies it is very important to achieve the best possible results in the fourth quarter. That's why it's so important to know the traditional income distribution by quarters of the company whose shares you intend to buy.Focusing on quarterly results allows you to track the results of different companies for the same periods of time.
Annual reports reflect the company's performance for the year. In addition, you can compare the performance of the company this year with the results of its work in previous years and thus assess the dynamics of the company's development.
The first line of any income statement includes the company's earnings from the sale of its products or services. This indicator reflects the entire sales volume achieved by the company, minus any costs. Instead of going into details, most companies only indicate the net amount of sales in the income statement. Analyzing these indicators, you are trying to find clear signs of steady income growth. The decline in income from year to year is a very worrying symptom, which indicates that there are serious problems with the relevant company. Buying shares of such companies is extremely rarely justified.
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