The Fundamental Analysis Approach Of Analyzing A Company

There are actually several types of approaches or methods when it comes to analyzing stocks from a certain company or business that you want to invest it, whether it's worth going for the long term or not. The most common and widely use approaches of stock analysis are; fundamental and technical analysis.

I'll be focusing on fundamental analysis as this is the most appropriate for beginners and for long term investment. Technical analysis, on the other hand, is more geared towards experience traders and is suited for short-term investments. Day traders are always using this type of analysis on a daily basis to determine whether it is good to buy or sell that particular stocks in that given day.

Ok, let's dive into fundamental analysis and how to use it to check a company's stock potentials. We won't be using in complex formula's here to complicate things. My goal here is to provide you a clear overview on how to go about using fundamental analysis.

Basically, fundamental analysis is nothing more than checking the health of the company's financial status, how is the company's earnings going, up or down, the management, etc. Although, you can buy any stocks based on hearsay or news or perhaps tips from your stock broker, but it's good to know the basics of analyzing it so that in times when there is confusion because of too many differing suggestions, you can always opt your decision based on your own analysis and outlook.

Almost all if not all investors has its very own specific way of determining the stock potentials based on fundamental analysis. However, I will mentioned some common basis in which you can based your analysis and get started. These are the common metrics utilized ever since the beginning of stock market and being use currently by the big boys of the stock market such as Warren Buffett.

Three Fundamental Things For Analyzing A Company

• Earnings - look for companies which consistent income and possible growth or expansion. A company that is strong and growth oriented tend to have higher market value on their shares or stocks. A company that has consistent growth and earnings for the consecutive 5 to 6 years, this is a very nice indicator.
• Determine the future growth of the company or its future earnings - How do you gonna do this? Most stock brokers specially online-based brokers will provide tools that can do this analysis. Usually, this will be based on historical data which they have records since that company is listed as securities in the stock exchange.Check if the company has a low price earnings growth ratio compare to its competitor. Normally, dividing the PE Ratio by the projected growth rate then compare it to their competitors.
• Strong return of equity - This is a good indication how solid the management of that company to handle cash. Will they be going to reinvest to expand the company or otherwise, this can be analyze based on its historical data and the company's balance sheet which is publicly available to its investors. A 15% return or higher is the most common benchmark or indicator that the company possess a solid and good management which has a potential to expand in the future.

Above are the common metrics you can use to get started, although you can also include metrics like cashflow, price to book ratio and dividend growth. Also, do your own detailed research about the company or business you want to buy stocks or shares from. That way, you won't completely rely or based your analysis on stock analyst you encounter in business news in TV or in newspapers.