NEWS AFFAIRS 7 : WHERE EVERY STORY HAS IT'S AFFAIR!
Last updated on September 4th, 2024 at 09:37 am
Think of fundamental analysis of stocks as getting to know a company by looking at its financial health and how it runs its business. It’s like checking a person’s health by looking at their diet, exercise, and lifestyle. For a company, you look at how much money it makes, how it spends, and how well it manages its resources.
Fundamental analysis helps investors figure out the true worth of a stock.
- Fair Value: This is what analysts believe the stock is really worth based on its financial health, performance, and other factors.
- Undervalued: If the stock is currently selling for less than this fair value, it means the stock is a good deal and might be a good buy.
- Overvalued: If the stock’s price is higher than the fair value, it means the stock is too expensive and might not be a good buy.
In short, fundamental analysis helps investors decide if they’re getting a good deal or if the stock is too pricey compared to its true worth.
Stock Prices vs. True Value:
When you buy a stock, it’s not like buying a fixed-price item in a store. Stock prices go up and down based on what people are willing to pay. Fundamental analysis helps you figure out what a stock is really worth. For instance, if PNB Bank shares are priced at Rs 1200, fundamental analysis helps you decide if this price is too high or just right based on how well the company is doing.
Key Financial Ratios to understand a company’s health :
Earnings Per Share (EPS) shows how much profit the company makes per share.
- Simple Formula: EPS = Profit / Number of Shares
Price to Earnings Ratio (P/E Ratio) helps you see if the stock price is too high compared to the earnings.
- Simple Formula: P/E Ratio = Stock Price / EPS
Price to Book Ratio (P/B Ratio): Compares the stock price to the company’s book value, which is useful for banks and financial firms.
- Simple Formula: P/B Ratio = Stock Price / Book Value
Debt to Equity Ratio (D/E Ratio) Shows how much debt the company has compared to its own money.
- Simple Formula: D/E Ratio = Total Debt / Shareholder’s Equity
Return on Equity (RoE) Indicates how well the company is using shareholders’ money to make profits.
- Simple Formula: RoE = Net Income / Shareholder’s Equity
Top-Down vs. Bottom-Up Analysis:
Top-Down: Start by looking at the big picture, like the economy and industry trends, then focus on individual companies.
Bottom-Up: Start with individual companies, analyzing their financials and management, and then build your investment strategy.
pros and cons of fundamental analysis:
Advantages:
- Long-Term Investment Focus: Ideal for investors who want to hold stocks for a long time, as it helps identify undervalued companies with strong growth potential.
- Comprehensive Insight: Provides a complete picture of a company’s financial health, including revenue, earnings, and debt.
- Value Determination: Helps determine a stock’s intrinsic value, which can indicate if it’s undervalued or overvalued compared to its market price.
- Company Analysis: Examines business models, management quality, and competitive advantages, giving a deeper understanding of a company’s potential.
Disadvantages:
- Data Availability: Requires access to detailed financial data and reports, which may not be available or easily interpreted by all investors.
- Complex and Time-Consuming: Involves analyzing various financial statements and metrics, which can be complex and require significant time and effort.
- Lag in Information: Financial statements are often released quarterly or annually, so they may not reflect the most current market conditions.
- Subjectivity: Interpretation of data can be subjective, leading to different conclusions based on the same set of information.
In Short: Fundamental analysis helps you find out the “true worth” of a stock by looking at its financial health and performance. If the stock’s market price is lower than its true worth, it could be a good buy. If it’s higher, you might want to wait or avoid it.
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