The Power Of Fundamental Stock Analysis Part One

If you are considering stock market investment you'll definitely want to take a closer look at Fundamental Analysis. As a stock investor there are many tools available to help you decide which stock you're going to buy, in today's computer age technical analysis has become more popular but it will pay you not to overlook the more well-established system known as Fundamental Analysis. Fundamental analysis, that is to say examining what are known as the key ratios of the stock provide a method of quickly showing how much the stock is worth and how well the company is performing compared to other companies in the same sector.

The objective of fundamental analysis is to help you understand how much money the company you are considering investing in is making and how those earnings are expected to change in the future. Like all things company earnings are always subject to speculation, if the company has a good earnings record this will help to give investors confidence in the stock because they will expect the stock price and the companies dividends to rise as the earnings rise.

All listed companies must report their earnings on a regular basis, these reports are subject to detailed analysis and if the figures do not meet the market's expectations there are bound to be a downturn in the company's stock price.

Fundamental analysis relies on a detailed examination of the companies financial statements. Every company that is traded on the stock market must publish these financial statements regularly, in the past it was normal to produce these as just printed reports but today they are also readily available on the Internet via the company's website and as such are easily accessible to anybody who is considering investment in the company's stock. All financial statements include a least the following items, an income statement, the company balance sheet, the external auditors report, cash flow statement, a description of the company's business activities and the expectation of earnings for the next financial year.

Before we cover the actual key ratios lets consider the individual parts of a typical company financial statement.

Perhaps the most important part of the financial statement is the external auditors report. The company's auditor is always an independent certified public accountancy firm which is required to examine the company's financial reports to establish if the information provided in the financial statement is a true and accurate description of the company's earnings. The Independent auditors report expresses the auditors opinion of the accuracy of the information in the financial statement, any financial statement that does not have an independent auditor's report is worthless because obviously it could contain misleading information which could result in a bad investment decision. It must be remembered that an independent auditor's report is not an absolute guarantee of the accuracy of that report but without it the financial statement has no credibility at all.

The company balance sheet is also an important source of information for fundamental analysis, the balance sheet is actually a snapshot of the company's financial affairs at a given point in time. The balance sheet will allow you to see the interrelationship between the company's assets that is to say property and equipment inventory and cash against its liabilities and the retained equity in the company.

The company's income statement will show information about income generated by the company's activities and the costs which were incurred in generating that income this will allow you to establish the earnings per share on both the gross and net basis.

And finally we come to the statement of cash flow this is rather like the income statement but it gives a more detailed picture of how the money flows into or out of the company over the financial year. The income statement shows money coming in from sales, investments in the company, or borrowing and how the company handles its expenses. It is a very valuable indication of how the company is managed on a day-to-day basis.

In part two of this article I will go into greater detail about key financial ratios that are use in fundamental analysis and how they can help you in arriving at stock investment decisions.

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