How to do a fundamental analysis of stocks?

fundamental analysis of stocks


Investing in stocks does not always mean you will be rewarded with profits. As profit will be secured only when you are deriving a complete analysis accompanied by the right entry and exit.


If you have the art of evaluating and selecting the right companies for landing your investment, you are going to make colossal profits. And If you are one who doesn't know, then you are reading the right article to gain an understanding of the fundamental analysis of stocks.


We will direct you on how to do a fundamental analysis of stocks and reveal major fundamental analysis tools that will work as your companion. After knowing the complete process next time you will be deriving expertise at identifying the right stocks.


What is fundamental analysis?

Fundamental analysis is a process determining the financials and business parameters of a company. In simple words, it helps an investor or trader to evaluate which stock is best in terms of the price he is going to pay. 


Example: When you visit a store to buy a mobile phone, you expect to get certain features in return for the amount you are paying. And if you eventually bought an expensive phone with relatively fewer features as compared to other phones then are paying more for less.


The same is the case when you are buying the stocks of a company as you are analyzing its future growth, ratios, earning per share, etc.

All these terms help in judging whether the shares of this company are worth buying at a certain price point or not. Apart from bidding at the right price, the fundamental analysis assist us at extracting competent data for knowing financial strength, management, and outcomes of the company. All in all these variables would derive an accuracy and perfection while tracking a stock.


Having knowledge about the right stocks to buy would definitely reward you with good returns if have long-term goals. Let us jump to some basic factors that are to be kept in mind while doing a fundamental analysis of stocks.

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Fundamental analysis tools

We have prescribed some valuable tools that would help you at analyzing right stocks:

Financial statements

It's good to be choosy while investing in the stock market because your money and time are at stake and you should try not to loose your investment.

The financial statements are quick charts that give an easy glimpse of the profits/losses, cash flows, incomes, and expenses. All these factors can be generated from the balance sheet, Annual & quarterly profit/loss statements, and cash flow statements as a part of financial statements.


Balance sheet

It is one of the financial statement that is prepared by a company annually. It showcase all the assets and liabilities owned by the company to derive the financial position of the company. 

You can check the debts which the company has to pay and current assets that the company can liquidate in case of financial burden. It clearly assures the shareholders to update them with the financial situation, economic value, debts, etc.


Income statement

Studying an income statement helps to generate an idea about the income that the company is gaining. Also, appeal to the total expenses that were been incurred by the company during the year. 

An income statement is one of the best fundamental analysis tools to analyze net profit/loss.


Cash flow statement

The statement list all the activities that summarizes when the cash is been introduced and taken out from the business.

Its main components are operating cash flow, financial cash flow, and investing cash flow. These components divides the cash flow activities in an elementary manner for simplifying the viewers to know the flow of money in the company.


Financial ratios

The financial ratios are the values that help to evaluate the financial condition of the organization. These ratios reveal the best scenario and the position of the organization. The main financial ratios that you should pay attention to while investing are EPS (earnings per share), ROE (return on equity), and P/E ratio (price to earnings).


Earning per share(EPS)

It is one of the best determinant for building a valid fundamental analysis of stocks. Earning per share as the name suggest is calculated by dividing total revenue of the company and number of outstanding shares. 

Generally, a positive ratio is considered as a good ratio also, higher the EPS means higher is the profitability which means you should choose a profitable company to invest in.


Return on equity(ROE)

It refers to the returns which are earned by the shareholders for adding their involvement as a shareholder in the company. In simple terms it means dividing net income earned by the company by shareholder's equity.


Example: A company has earned Rs. 10,00,00 during the year while the shares that were owned by the public were for Rs. 10,000 then ROE would be 100000/10000 = 10%. A normal ROE can be upto 10% while it may vary(increase or decrease) with the type of sector.


P/E ratio (price to earnings) 

This ratio is very useful to individuals who are willing to do a long term investment. P/E ratio is derived by dividing market value of the share by earning per share. Lower the ratio means you are going to pay low price as compared to the earnings while higher the ratio means the price of the stock is overvalued.


Take away

The fundamental analysis of stocks needs your attention to various factors and determinants. These factors would help you invest in the stocks at the right time and at the price as the right price and time are the two crucial essences of successful investing. 

We added the major fundamental analysis tools that would help you to choose the right company on the basis of its financial statements and ratios.

Keep analyzing keep investing!

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