Fundamental Analysis includes Economy, Industry, and Company Analysis. Today we are going to discuss the basics of the company analysis of fundamental analysis. There are some important points we will discuss
Fundamental Analysis –
- Management Analysis
- Profit and Loss Statement
- Balance Sheet
- Cash Flow
1. Management Analysis – Management analysis includes all detailed investigations about management. Like who is running a company, their records, background, their salaries, education, experience, any fraud, and all basic things about them.
2. Profit and Loss Statement – The profit and Loss Statement tells us the performance of a company within that year or quarter. It is basically like a mark sheet or the result of a student.
The above figure is an example of a basic P&L statement. Basic terms are
- Income / Revenue – Income means whatever money a company gets by selling its product or service.
- Cost or COGS – Cost means whatever money costs to the company to make their product or service. COGS means Cost Of Goods Sold.
- Gross Profit – Gross Profit means whatever profit a company makes after subtracting all the costs related to manufacturing and selling their product or service.
- Expenses – Expense is nothing but cost to the company related to operating, marketing, employee, and others.
- Net Income – Net Income is a thing but the profit of a company after subtracting all costs, expenses, taxes, interest, depreciation, and amortization.
- EBITDA – It is Earning Before Interest, Tax, Depreciation, and Amortization.
- EBIT- It is Earning Before Interest and Tax.
3. Balance Sheet – The balance sheet tells us what the company owns and what the company owes. There is a basic equation
Asset = Liability + Shareholder’s Equity
The above figure is an example of a basic balance sheet. Basic terms are
- Asset – An asset is something that generates money for a business. Assets are of two types Current assets and Non-current assets. A current asset is short-term asset means which can be converted into cash within one year and a Non-current asset is a long-term asset that can’t be converted into cash within one year. Current assets are cash and cash equivalent, inventory and receivable and Non-current assets are lands, property, and furniture.
- Liability – Liability is something that takes money away from a business. Liability also has two types Current liability and Non-current liability. A current liability is short-term liability means which the company has to pay within one year and Non-current liability is a long-term liability that which company doesn’t have to pay within one year. Current liabilities are payable, tax payable, salaries, and wages and Non-current liabilities are long-term debt.
- Shareholder’s Equity – Shareholder’s equity is the shareholder’s fund which is also a liability because it is not companies fund but it is a shareholder’s fund so the company has to pay them back.
4. Cash Flow – Cash flow tells us to cash in and cash out of the company.
The above figure is a basic example of cash flow. It is divided into 3 types
- Operating Cash Flow – Operating cash flow is nothing but whatever cash a company generates by selling its product or service. It may differ from net profit because cash flow counts as actual cash.
- Investing Cash Flow – Investing cash flow is nothing but cash inflows or outflows because of investing activities, such as buying or selling their investments or equipment.
- Financing Cash Flow – Financing cash flow is nothing but cash inflows or outflows because of financing activities, such as debt.
P&L statement, Balance sheet, and Cash flow of fundamental analysis are available on the company website or other financial websites. Management analysis part of fundamental analysis is little critical job because you have to study the management of the company which is normally not available anywhere. As we know fundamental analysis also includes economy and sector analysis we can use government data and industry-related data for analysis. Fundamental analysis is used for investment purposes so it is used for the long term.
Also check – Investopedia article on Financial Statements