Fundamental analysis is the process of examining a company's financial statements to help decide if its stock is a good investment. Financial statements include balance sheets, income statements, and cash flow statements.This information helps determine the financial makeup of the company behind the stock. so, we'll explain how this kind of analysis uses these statements to help evaluate a company.
The balance sheet helps you see how a company raises money for its assets and can help you determine if the company is overextended. However, if you want to know how the company earns money, you'd look at its income statement.
An income statement shows a company's revenues and expenses. These are the costs associated with running the business, including operations, interest paid on loans, and taxes. When you take revenues and subtract expenses, you get net income.(earning of company) Earnings are usually handled in two ways. The first way is to share the earnings with shareholders by paying a dividend. The 2nd way is to reinvest these earnings into the company. As a result it can help a company's cash position. A company with a good cash position It's why the cash flow statement is an important item to consider. The statement shows how the company uses its cash to operate business and make investments. It also shows how much is borrowed from a bank or a bondholder. These figures are totaled to show changes in the company's overall cash position. This statement is important because it gives a more detailed account of how the business generates revenue, and is therefore much more difficult to manipulate than an income statement.
As you can see, there is a lot of information in the three
With all of these facts and figures,
analysis can be a little tricky.
This is why some investors may use ratios.
There are many ratios that can help a trader or an investor compare
stocks, but we'll focus on one of the most common, the price
to earnings or P/E ratio.
Let's say you have one stock that's trading at a $6 share,
another at $35 a share, and a third at $132 a share.
How would you know which one is the best value?
Some might assume the $6 stock is the best value, because it's
However, this might not be the case,
because a company's value may depend largely
on the company's earnings.
The P/E ratio allows you to see which company could be the best value.
To create The P/E ratio, 1st, divide the net income
or earnings by the number of outstanding shares.
This number is named Earnings Per Share( EPS).
Next, divide the price of the stock
by the EPS to get the P/E ratio.
The first company
The first company is trading at $6 and has an EPS of $0.20, resulting in a P/E of 30.
The 2nd company
The second company is trading at $35 a share and has an EPA of $1.40 for a P/E of 25.
The 3rd company
The final company is trading at $132 per share and has an EPA of $3.90 for a P/E of 34.