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Fundamental Analysis: What Is It?
Fundamental Analysis: What Is It?
Jake Crandall avatar
Written by Jake Crandall
Updated over a week ago

Fundamental analysis is a research technique that focuses specifically on a company’s business and profits – basically a focus on the money. Sometimes, investors can use these criteria to estimate the economic stability and growth potential of a company. 

Here are some of the most important details you should consider when starting your fundamental analysis research so that you get a better understanding of how a company operates. 

Business Model: What does the company do and what is its plan to make money? Information like this can be found by reading through a company’s website closely. Noticing aspects like advertising sales or membership fees might be important to your understanding of a company’s business model.

Income Statement: These statements are released quarterly (called 10-Q statements) or annually (called 10-K) by the Security and Exchange Commission (SEC) and contain the company’s most current numbers. Most times, they will give you a good feel for a company’s revenue, expenses, and earnings. A company’s revenue tells you how much the company made from selling goods or services since its last report. 

  • The expenses number will tell you how much the company spent on making products and hiring labor and how much it lost through factors like people returning goods, etc. The earnings will tell you how much a company actually made since its last report-its revenue minus its expenses (profit) during this period. 

  • The earnings per share will tell you the company’s earnings divided by the number of shares of stock it has publically listed. You should look at these numbers in comparison to previous income statements. This will give you a better feeling for how well the company is achieving its goal of selling goods and how you might expect to see the company perform in the future. 

Cash Flows: These are most commonly found in “Cash Flow Statements” that are given out every quarter to every year. Cash Flow Statements will tell you how much is going into a company and how much is coming out, essentially which way cash is flowing. Cash flows consider three main activities: operations, investing, and financing. These three factors show you how much money moves in and out of a company during a standard period of time and may help you better evaluate how the company can expect to do in the future.

  • Audit Reports: Reports from outside auditors will give you more holistic options on how a company is representing itself financially, including opinions on its income and cash flow statements.

  • Market Share: What percentage of the market does this company occupy? This percentage can tell you a lot about a company’s competition in its industry and how it stacks up to other companies. 

  • Industry Growth: Are the company and its competitors continuing to grow? Do the companies in this industry seem to be expanding and profiting for the most part? Are the companies’ income statements and cash flows growing over time? The growth of the entire industry itself is important to consider before you invest in a specific company.

Debts: Does the economic information you’ve gathered about the company and its biggest industry suggest that the company will not be able to only minimize but also pay off debts on time? Positive financial practices could be a good sign for the financial stability of the company. 

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