Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't really investing if you aren't performing fundamental analysis.Because the subject is so broad, however, it's tough to know where to start. There are an endless number of investment strategies that are very different from each other, yet almost all use the fundamentals.
Goals
Financial analysts often assess the following elements of a firm:
1. Profitability - its ability to earn income and sustain growth in both the short- and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;
2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;
Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.
4. Stability - the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. etc.(http://en.wikipedia.org/wiki/Financial_analysis)
Company Overview
A report should start with a description of the company in order to help investors understand the business, its industry, its motivation and any edge it might have over its competitors. These factors can prove invaluable in helping to explain why a company might be a profitable investment or not. A firm’s annual report, 10-K filing or quarterly 10-Q with the Securities & Exchange Commission provide ideal starting points; it is surprising how rare it is for industry experts to refer to original company filings for important details. More valuable detail can be obtained from industry trade journals, reports from key rivals and other analyst reports
The most important component of analyzing past trends is to synthesize it into a forecast of the company’s performance. No analyst has a crystal ball, but the best ones are able to accurately extrapolate past trends into the future, or decide which factors are the most important in defining success for a company going forward.
Valuation
The most important part of any financial analysis is to come to an independent value for the stock and compare this to the market price. There are three primary valuation techniques: The first, and arguably most fundamental, technique is to estimate a company’s future cash flows and discount them back to the future at an estimated discount rate. This is generally referred to as a discounted cash flow analysis. The second is called relative value where the fundamental metrics and valuation ratios (price to sales, price to earnings, P/E to growth, etc.) are compared to competitors. Another comparison analysis is to look at what other rivals have been bought out for or the price paid for an acquisition. The third and last technique is to look at book value and try to estimate what a company might be worth if broken up or liquidated. A book value analysis is especially insightful for financial stocks, for instance.
Key Risks
This section can be part of the bull/bear story in the investment thesis, but is meant to detail key factors that may derail either a bullish or bearish stance. The loss of patent protection for a blockbuster drug for a pharmaceutical company is a great example of a factor that can weigh heavily on the valuation for its underlying stock. Other considerations include the industry in which the firm operates. For example, the technology industry is marked by short product life cycles, which can make it hard for a firm to keep its edge following a successful product release.
Other Considerations
The above sections could prove sufficient, but depending on the stones uncovered during a financial analysis, other new sections might be warranted. Sections covering corporate governance, the political environment or nearer-term news flow, might be worthy of a fuller analysis. Basically, anything important that can impact the future value of a stock should exist somewhere within the report.
(http://www.investopedia.com/articles/investing/032113/basics-financial-analysis-report.asp)
There are dozens of financial ratios available, I've chosen some measurements that are the most relevant to the investing process and organized them into six main categories as per the following list:
Liquidity Measurement Ratios
Current Ratio
Quick Ratio
Cash Ratio
Cash Conversion Cycle
Profitability Indicator Ratios
Profit Margin Analysis
Effective Tax Rate
Return On Assets
Return On Equity
Return On Capital Employed
Debt Ratios
Overview Of Debt
Debt Ratio
Debt-Equity Ratio
Capitalization Ratio
Interest Coverage Ratio
Cash Flow To Debt Ratio
Operating Performance Ratios
Fixed-Asset Turnover
Sales/Revenue Per Employee
Operating Cycle
Cash Flow Indicator Ratios
Operating Cash Flow/Sales Ratio
Free Cash Flow/Operating Cash Ratio
Cash Flow Coverage Ratio
Dividend Payout Ratio
Investment Valuation Ratios
Per Share Data
Price/Book Value Ratio
Cash Flow Coverage Ratio
Price/Earnings Ratio
Price/Earnings To Growth Ratio
Price/Sales Ratio
Dividend Yield
Enterprise Value Multiple
Goals
Financial analysts often assess the following elements of a firm:
1. Profitability - its ability to earn income and sustain growth in both the short- and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;
2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;
Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.
4. Stability - the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. etc.(http://en.wikipedia.org/wiki/Financial_analysis)
Company Overview
A report should start with a description of the company in order to help investors understand the business, its industry, its motivation and any edge it might have over its competitors. These factors can prove invaluable in helping to explain why a company might be a profitable investment or not. A firm’s annual report, 10-K filing or quarterly 10-Q with the Securities & Exchange Commission provide ideal starting points; it is surprising how rare it is for industry experts to refer to original company filings for important details. More valuable detail can be obtained from industry trade journals, reports from key rivals and other analyst reports
The most important component of analyzing past trends is to synthesize it into a forecast of the company’s performance. No analyst has a crystal ball, but the best ones are able to accurately extrapolate past trends into the future, or decide which factors are the most important in defining success for a company going forward.
Valuation
The most important part of any financial analysis is to come to an independent value for the stock and compare this to the market price. There are three primary valuation techniques: The first, and arguably most fundamental, technique is to estimate a company’s future cash flows and discount them back to the future at an estimated discount rate. This is generally referred to as a discounted cash flow analysis. The second is called relative value where the fundamental metrics and valuation ratios (price to sales, price to earnings, P/E to growth, etc.) are compared to competitors. Another comparison analysis is to look at what other rivals have been bought out for or the price paid for an acquisition. The third and last technique is to look at book value and try to estimate what a company might be worth if broken up or liquidated. A book value analysis is especially insightful for financial stocks, for instance.
Key Risks
This section can be part of the bull/bear story in the investment thesis, but is meant to detail key factors that may derail either a bullish or bearish stance. The loss of patent protection for a blockbuster drug for a pharmaceutical company is a great example of a factor that can weigh heavily on the valuation for its underlying stock. Other considerations include the industry in which the firm operates. For example, the technology industry is marked by short product life cycles, which can make it hard for a firm to keep its edge following a successful product release.
Other Considerations
The above sections could prove sufficient, but depending on the stones uncovered during a financial analysis, other new sections might be warranted. Sections covering corporate governance, the political environment or nearer-term news flow, might be worthy of a fuller analysis. Basically, anything important that can impact the future value of a stock should exist somewhere within the report.
(http://www.investopedia.com/articles/investing/032113/basics-financial-analysis-report.asp)
There are dozens of financial ratios available, I've chosen some measurements that are the most relevant to the investing process and organized them into six main categories as per the following list:
Liquidity Measurement Ratios
Current Ratio
Quick Ratio
Cash Ratio
Cash Conversion Cycle
Profitability Indicator Ratios
Profit Margin Analysis
Effective Tax Rate
Return On Assets
Return On Equity
Return On Capital Employed
Debt Ratios
Overview Of Debt
Debt Ratio
Debt-Equity Ratio
Capitalization Ratio
Interest Coverage Ratio
Cash Flow To Debt Ratio
Operating Performance Ratios
Fixed-Asset Turnover
Sales/Revenue Per Employee
Operating Cycle
Cash Flow Indicator Ratios
Operating Cash Flow/Sales Ratio
Free Cash Flow/Operating Cash Ratio
Cash Flow Coverage Ratio
Dividend Payout Ratio
Investment Valuation Ratios
Per Share Data
Price/Book Value Ratio
Cash Flow Coverage Ratio
Price/Earnings Ratio
Price/Earnings To Growth Ratio
Price/Sales Ratio
Dividend Yield
Enterprise Value Multiple
