FUNDAMENTAL ANALYSIS OF STOCK PDF WITH THE INTELLIGENT INVESTOR
30.12.2023
SelfHelpSage.com
10 Minutes to Read
In this Fundamental Analysis of Stock PDF, we will learn the practical principles of value investing, creating a solid financial plan, and several practical steps to financial growth.
WE ARE GOING TO LEARN
Value Investing Principles.
After defining your financial goal let’s understand deeper into the practical steps of applying value investing principles in the share market with a clear example:
What Are Value Investing Principles?
Value investing is like the art of finding hidden treasures in the world of stocks. It’s about buying stocks when they are undervalued, meaning they are priced lower than their actual worth. which helps in buying a share of company below its market value to ensure you get a good deal.
Practical Steps to Apply Value Investing Principles
When you’re considering investing in a company or assessing its financial health, one of the most critical steps is examining the company’s financial reports. These reports are like a scorecard for the company’s financial performance. They provide a comprehensive view of how well the company is managing its money and resources.
There are several key types of financial reports that companies typically release on a regular basis
Income Statement (Profit and Loss Statement): This report shows how much money the company made (revenue) and how much it spent (expenses) over a specific period, typically a quarter or a year. It calculates the company’s profit or loss during that time. The income statement tells you if the company is making more money than it’s spending. Positive net income (profit) is generally a good sign, while consistent losses could be a concern.
Balance Sheet: The balance sheet provides a snapshot of the company’s financial position at a specific moment in time. It lists the company’s assets (what it owns), liabilities (what it owes), and shareholders’ equity (the ownership interest in the company). The balance sheet shows if the company has more assets than liabilities, which is a positive sign.
The balance sheet helps you gauge the company’s financial stability. If it has substantial assets compared to its liabilities, it’s usually considered healthier. If liabilities outweigh assets, it might be riskier.
Cash Flow Statement: This report tracks how cash moves in and out of the company over a period. It breaks down the sources and uses of cash, helping you see if the company is generating enough cash to cover its expenses and investments. Analyzing the cash flow statement lets you see if the company has enough cash to operate effectively, pay its debts, and invest in future growth. Positive cash flow is generally a positive indicator.
Statement of Retained Earnings: This report shows changes in a company’s retained earnings, which is the portion of profits that are reinvested in the business rather than paid out as dividends. It helps you understand how profits are being utilized.
Investors, creditors, and stakeholders rely on these financial reports to make informed decisions. For investors, it helps them decide whether to invest in the company’s stock or bonds. Creditors use this information to evaluate the company’s creditworthiness, and company management uses it to make strategic decisions
examining a company’s financial reports is like reviewing its financial scorecard. It involves analyzing various reports to assess the company’s financial health, profitability, and cash flow. These reports provide essential insights that guide investment decisions and help stakeholders understand the company’s financial standing.
How to check income statement ?
Checking an Income Statement (also known as a Profit and Loss Statement or P&L) is an essential skill for investors to understand a company’s financial performance.
Let’s break down how to do it and use an example from a fictional company, XYZ Inc.
Checking an Income Statement (also known as a Profit and Loss Statement or P&L) is an essential skill for investors to understand a company’s financial performance.
Let’s break down how to do it and use an example from a fictional company, XYZ Inc.
Revenue (Sales)
Revenue (Sales): also called Sales, is revenue derived from the product or service a company sells. Revenue is an important metric that shows how much money a company generates from selling its goods or services over a specific period of time.
Look for the “Revenue” or “Sales” line at the top of the income statement.
Total Revenue is figured out by taking the number of things a company sells and multiplying it by how much each of those things costs.
- Total Revenue = Number of Items Sold × Price per Item.
Imagine XYZ Inc. had a total revenue of 1,000,000 during the year.
Cost of Goods Sold (COGS)
The cost of Goods Sold is how much a company spends to make the stuff it sells. This covers the cost of materials, labor, and wear and tear on equipment. It doesn’t include other costs like sales or office staff.
Subtract COGS from revenue to calculate gross profit.
For example, COGS for XYZ Inc. was $400,000, so its gross profit is $1,000,000 – $400,000 = $600,000.
Operating Expenses
These are costs like salaries, rent, utilities, and marketing. They are subtracted from gross profit to get operating income.
FOR Example XYZ Inc.: Operating expenses were $300,000, so its operating income is $600,000 – $300,000 = $300,000.
Interest and Taxes
Interest and Taxes: These are any interest payments on debt and income taxes the company owes.
for Example: XYZ Inc. paid $50,000 in interest and $100,000 in income taxes.
Net Income (Profit or Loss)
Net Income (Profit or Loss): Subtract interest and taxes from operating income to find the company’s net income.
for Example XYZ Inc.: Net income for XYZ Inc. is $300,000 – $50,000 – $100,000 = $150,000.
Remember that the income statement is just one part of a company’s financial picture. It’s important to analyze it in conjunction with other financial statements, like the balance sheet and cash flow statement, to get a comprehensive view of the company’s financial health.
The cost of Goods Sold is how much a company spends to make the stuff it sells. This covers the cost of materials, labor, and wear and tear on equipment. It doesn’t include other costs like sales or office staff.
BALANCE SHEET
The balance sheet will present a snapshot of the company’s financial position at a specific point in time. It consists of three main sections: Assets, Liabilities, and Shareholders’ Equity.
example of a balance sheet for XYZ Inc. as of the end of the year:
Assets:
Current Assets:
Cash and Cash Equivalents: $2,000,000
Accounts Receivable: $1,500,000
Inventory: $1,000,000
Non-Current Assets:
Property, Plant, and Equipment: $4,000,000
Investments: $3,000,000
Intangible Assets: $500,000
Other Assets: $200,000
Total Assets: $12,200,000
Liabilities:
Current Liabilities:
Accounts Payable: $800,000
Short-Term Debt: $1,000,000
Non-Current Liabilities:
Long-Term Debt: $2,000,000
Other Liabilities: $500,000
Total Liabilities: $4,300,000
Shareholders’ Equity:
Common Stock: $1,000,000
Retained Earnings: $6,900,000
Total Shareholders’ Equity: $7,900,000
The balance sheet provides an overview of a company’s financial position at a specific point in time. In our example:
Total Assets: XYZ Inc. has assets worth $12,200,000.
Total Liabilities: The company has liabilities totaling $4,300,000.
Total Shareholders’ Equity: The shareholders’ equity is $7,900,000.
This balance sheet follows the fundamental equation: Assets = Liabilities + Shareholders’ Equity. In this case, $12,200,000 equals $4,300,000 plus $7,900,000.
By analyzing a company’s balance sheet, you can assess its financial stability, liquidity, and solvency. It shows what the company owns (assets) and what it owes (liabilities) at a specific point in time. Shareholders’ equity represents the residual interest in the company’s assets after deducting its liabilities.
Cash Flow Statement
The cash flow statement typically includes three sections: Operating Activities, Investing Activities, and Financing Activities.
- Cash Flows from Operating Activities:
– Net Income: $2,000,000
– Depreciation and Amortization: $500,000
– Changes in Working Capital:
– Increase in Accounts Receivable: ($300,000)
– Decrease in Inventory: $100,000
– Increase in Accounts Payable: $200,000
– Other Operating Activities: $50,000
Net Cash Provided by Operating Activities: $2,450,000
- Cash Flows from Investing Activities:
– Purchase of Property, Plant, and Equipment: ($1,000,000)
– Sale of Investments: $500,000
– Acquisition of Other Companies: ($2,000,000)
Net Cash Used in Investing Activities: ($2,500,000)
- Cash Flows from Financing Activities:
– Issuance of Common Stock: $1,000,000
– Repurchase of Common Stock: ($500,000)
– Payment of Debt: ($750,000)
Net Cash Provided by Financing Activities: $250,000
Net Change in Cash: $200,000
In our example, the Cash Flow Statement for XYZ Corporation shows how cash flows in and out of the company:
- Operating Activities: XYZ Corporation generated $2,450,000 from its core operations after accounting for changes in working capital.
- Investing Activities: The company invested ($2,500,000) in purchasing property, plant, and equipment, and acquiring other companies.
Financing Activities: XYZ Corporation raised $250,000 from issuing common stock and reduced its debt, resulting in a net inflow from financing activities.
The Cash Flow Statement helps investors understand how a company generates and uses its cash. Positive operating cash flows are generally a good sign, indicating that the company is generating cash from its core operations. However, investors should also consider the context and the company’s overall financial health in their analysis.
