Is This Company Worth Investing In? Looking at Company Value

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Is This Company Worth Investing In? Looking at Company Value

There are many aspects of a company’s financial record that a fundamental analyst must study to get a full picture of a stock’s intrinsic value.

Things To Know

  • Fundamental analysis examines a company’s capitalization, earnings, growth, assets, and liabilities.
  • The balance sheet and the cash flow statement are used extensively in fundamental analysis.
  • Capitalization. Capitalization is the total market value of a company’s available shares. Analysts also look at how a company manages its securities, including its turnover rates and credit debts.
  • Current and past earnings. A company’s current and past earnings are also examined. Earnings include not only money made from sales, but also a company’s investment income. Sales refers to money received as compensation for the company’s products and services.
  • Growth. A company’s growth is also important. An analyst will look to see whether the company has stable or erratic growth over time. If a company’s earnings per share jump around a lot, the fundamental analyst might want to look for another stock.
  • Assets and liabilities. The analyst will compare a company’s assets and liabilities. Assets are valuable items held or owned by the company. These include items such as cash, accounts receivable (money owed to the company), investments, property, and equipment. Liabilities are money that the company owes to others. They include accounts payable, dividends, retirement costs, and income taxes.

Fundamental Analysis of Company Books

The primary source of financial information used by fundamental analysts comes from a company balance sheet.

  • The role of the balance sheet. A balance sheet is a snapshot of a company’s financials at a given point in time. One side of the sheet contains the company’s assets, and the other lists its liabilities. A business’ total asset value must equal its total liabilities and owners’ equity. This is because all assets are purchased with funds from two sources: debt (someone else’s cash) and/or equity (the company’s cash). Thus, when added up at any given time, these assets must equal the sources from which they were derived. To find a company’s revenues and expenses, the analyst looks at the company’s income statement, which lists sales and investment revenue as well as costs, taxes, and other expenses.
  • The cash flow statement. A cash flow statement is another important tool for the fundamental analyst. Cash flow is the difference between a company’s total cash received and total cash used. The cash flow statement measures the amount of cash a company has at the beginning and end of a set period.