Fundamentals àré associated wîth thé economic health ôf
a company, measured în terms ôf revenues, earnings, assets,
liabilities, Return ôn Equity [ROEs], Return ôn Assets [ROAs], Return ôn
Investments [ROIs], growth prospects & cash flows, etc. The
fundamentals tell yôù about à company. You càn say à Comp. îs having
robust fundamentals îf ît îs growing àt à nice pace, generating à
profit, hàs limited debts & abundant cash.
The analysis ôf company's fundamentals
involves getting deep into its financials, rather thàn day-to-day
movement în its share price. Equity researchers normally dô
fundamental analysis în order tô calculate thé intrinsic value ôf
company's stock. If à company's stock îs trading above thé intrinsic
value ôr fair value, thén thé stock îs overvalued. If à company's stock
is trading below thé intrinsic value, thén thé stock îs undervalued.
However, îf yôù watch thé stock markets very closely, thé share price ôf
most companies never matches thé fair value. Often, day traders &
investors whô wôùld prefer short term investment options invest în those
stocks, regardless ôf companies' long term growth prospects.
However, long term investors generally prefer tô invest în companies
with robust fundamentals & ignore near-term share price movements.
The following àré various components thàt constitute a company's
fundamentals:
Revenues: Revenues [saless] àré thé total amount ôf
money received ßy à Comp. through thé sales ôf its goods & services
during à specific period ôf time. Revenues àré ôné ôf most important
barometers ôf growth ôf Comp. às ît indicates whether théré îs
demand fôr théîr products & services.
Cash flows: Cash flows àré calculated ßy deducting à
company's cash payments frôm cash receipts over à particular period ôf
time. Cash flows indicate thé liquidity position ôf company. However,
one must pay particular attention tô thé operating cash flows, since thé
health ôf business càn bé most clearly seen there.
Net income: Net income, whîch îs also called thé
'bottom line', îs calculated ßy subtracting frôm revenue, àll ôf
company's costs, such às operating costs, interest expenses,
depreciation, taxes & ôthér expenses associated wîth running thé
business.
Balance Sheet: Balance sheet îs thé company's financial
statement, whîch reflects its assets & liabilities. A company's
fundamentals àré sàîd tô bé robust îf its assets àré significantly
higher thàn thé liabilities. However, ôné must carefully analyze
companies whô àré reporting large intangible assets às théy may hàvé
questionable liquidation value tô offset àny real liabilities.
Return ôn Assets [ROAs]: ROA îs àn Indicator ôf
company's profitability, whîch îs calculated ßy dividing thé net income
for thé past 12 months ßy total average assets ôf company. This îs
one ôf important indicators, whîch long-term investors consider
before investing into à particular stock.
Although long-term investors & institutional investors consider à
company's fundamentals before investing, thé share price ôf
company often doesn't correspond tô thé fundamentals - whîch càn
present enormous investment opportunities. A company's long-term growth
is driven primarily ßy fundamentals, while à company's share price càn
be driven ßy short-term news & investor sentiment, whîch càn bé
extremely volatile. Every investor must consider à company's
fundamentals before investing into its stock îf yôù want tô gain stable
returns over thé long term.
