The stock market’s journey can overwhelm a beginner with terms like P/BVPS and leverage. It can confuse someone on what numbers to focus on and how to do their analysis correctly, but what if I tell you you don’t have to focus on much for a fundamental analysis? This article will help you do a basic analysis of a company.
Fundamental analysis is critical to knowing about a company’s growth and plans. After examining a company’s metrics, one can decide whether to invest or not.
To know a company’s actual stock price, you have to study its profit and loss statements, balance sheet, cash flow statement, promoter’s holdings, etc.
This is then compared to a company’s actual stock price, and then a decision is made, but how do you do it?
1. Sales growth
A company’s sales growth is a crucial indicator of its economic strength. An investor’s favorite stock is a company with sustainable growth potential and aligns with GDP growth while outperforming its peers.
2. Operating margins
Operating margins indicate how good a company is in terms of making money or how well it performs when it comes to making money. To achieve higher operating margins, companies use different strategies. The goal is to make more money than the company’s expenses.
3. Cash profits
To know a company’s financial health, one should look at its cash flow. Investors should take a close look at this subject. How efficiently a company turns its profits into cash shows how well it runs its day-to-day operations.
4. Debt Levels
It is crucial to keep an eye on the amount of debt a company has and check how easily it can access cash. Ensuring a company has enough money to support them in their hard times is crucial; a company that runs low on cash may not survive the ups and downs of a business. This helps protect it from the risks of borrowing too much, a situation known as overleveraging
5. Valuation Check
To avoid overvaluation mistakes, assessing a company’s fair worth is essential. It can be done with the help of metrics like the P/E ratio. A high PE ratio might suggest that investors expect strong future growth, while a low ratio could indicate that the stock may be undervalued.
