Fundamental Analysis : Most Important Factors

In Stock market most use technique to identify stocks for long term investment is Fundamental Analysis. On layman terms Fundamental Analysis is  about understanding business of company and its viability to become profitable on longer run.Profit is very important term as at the end what Investor is looking for is the company which can be profitable for longer period of time. Here we going to talk about few Basic Factors which one need to be understand before entering into stock market.

Business Of Company

  • Look for Business that is Profitable and can’t be replicate easily. Let’s take one simple example.
  • Maruti Suzuki ,  one of the Leading Car manufacture in India . Very few company in India are in car manufacturing business and it is very difficult for new entrant to start as this business required huge investment.
  • And with 1.2 Billion Population , Demand of Car is not going to dry out soon. So Profitability is visible for at least next 10 years for Maruti Suzuki.
  • One other had starting IT business is easy, even 20 year old collage going also start it.
  • And technology is changing rapidly, what IT company is doing today might be outdate year later. So not clear visibility of Profit.
  • In same example , another factor is Pricing power.
  • In case of Car company , Pricing power is in hand of Company not consumer as Consumer has very little options to choose.
  • On other hand in IT company, Consumer/Client have power to get service at the price they want as there many company which are lined up to offer same service.
  • In Simple word what investor have to look into business is: Monopoly and Profitability .

Global Economy/Domestic Economy

  • World is now getting more and more connected. And So the business of world.
  • We will not dig too much in this topic, what basic thing need to understand about company is who is company’s end consumers and where are they from :  Domestic or Global.
  • Big IT company in India have global reach. So they are more effected by Currency Rate and  Global Growth.
  • In Domestic front , company in business of luxury products like Electrical Goods are first to effect by slow down in Economy.

Business Cycles

  • Business Cycles are directly linked with Global and local economical conditions.
  • There are two types of Industry :
  • Cyclical industries: This do well in growth periods of economy  but poorly in recession, e.g., durable goods such as automobile and washing machines
  • Defensive industries: This are essential goods and   less impacted by  business cycles, such food (Rice, Editable Oil)
  • Understanding of Business Cycle is very much important for Long term investors.

Management of Company

  • Just as an army needs a general to lead it to victory, a company relies upon management to steer it towards financial success.
  • Even the best business model is doomed if the leaders of the company fail to properly execute the plan.
  • If we look at Most Successful business group of Indian like Tata. The important factor came out is the visionary  leaders they have.
  • Also look for company’s owner wealth source. When you know that a majority of management’s wealth is in the stock, you can have confidence that they will do the right thing.

Financial Statements

  • At the end Numbers Speaks the truth. For value investor one need to be very good at Reading the corporate results.
  • Finical Statement itself is big topic of Fundamental Analysis, which we will  cover in details in another video. But for now what most important Number to look at in the Statements are: Revenue , Expense, Profit , EPS, Reserves , Share capital, Assets, Liability, Promoters share holding.
  • One need to see this numbers are inline with overall industry growth and how this grow over long period of time by looking at past 5-10 years numbers.

There are an endless number of investment strategies that are very different from each other, yet almost all use the fundamentals. Fundamental  Analysis is not only about  number  it about  your vision to understand the business and its prospect in far future

Warren Buffett Once Said:

 It’s far better to buy a wonderful company at a fair    price, than a fair company at a wonderful price.”

Be Smart. Invest Smartly. 

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