Fundamental Analysis, a closer look

In the previous lesson, I mentioned that there were two different methods that are currently being used to analyze stocks and such, fundamental and technical analysis. This lesson will focus a greater effort on taking a closer look at fundamental analysis.

Let’s say a distant friend of yours told you about XYZ company, and said you have to invest in these guys, they’ve been around for a while now – and their stock is about to explode- it’s the next Wal-Mart. Now, would your just take their word for it that company is a good buy? I surely wouldn’t. So, how would I go about determing if that stock is worth what it is being sold for, in terms of the current price and how it relates to their future ability to make me money?

As mentioned in the previous lesson, you have (if the company is already publicly traded) the ability to look at a companies’ financial position through looking at their financial statements. These financial statements, in general, consist of three major statements, the P&L or profit and loss statement (or income statement), the balance sheet, and the statement of cash flows. This sounds more complicated than it really is; The P&L has multiple names, but don’t let them confuse you. Here, you are only concerned with the revenue a company generates, and the money it costs the company to generate that revenue. Next, the Balance sheet, this is where you can analyze the companies’ assets and liabilities, or the money, investments and properties a company owns along with what money is still owed to other comapnies (as it will not show in expenses until it is paid). Lastly, the cash flow statement shows you how the company finances or pays for their daily operations. If a company has limited cash flows, they may have a difficult time paying their bills.

You can gauge their financial statements by using different ratios to determine if the company is valued correctly. We will discuss in further lessons the different types of financial ratios you can use to compare similar companies within an industry and or the company you are soley interested in.


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