Part of the due diligence you should practice when considering investing in a company is checking its fundamentals.
These factors can tell you a lot about that organization, including how it’s being run and if it’s likely to grow in the future.
But what exactly are these fundamentals? And how can you tell if they’re in good shape or not? Find out the answers to these and more, below.
What are fundamentals?
Some people refer to the fundamentals as the basics of any business, because these are the things that any for-profit company will have. Here are the types to look out for:
- Profitability
This is a measure of the scope of a company’s profit in relation to the size of its business. It reflects a company's efficiency, or how well it makes money using its resources.
- Revenue
This is the total amount of money that a company earns through doing business without taking into account any expenses. It is calculated by multiplying the average sales price by the number of units sold.
- Assets
When you look at assets, you’ll be checking out the things of value that a company owns, makes, or benefits from. These are used to run the business, and directly or indirectly make money.
- Liabilities
These are the obligations and debts that a company owes. They can come from things like bank loans to pay for a new factory, bonds to finance new business, and payables (which is money that is owed to suppliers).
- Cash flow
This refers to the movement of money in and out of a company. When it is received, it is called an inflow, while an outflow is money spent.
While there are other factors which can be viewed as a company’s fundamentals, these are the ones that are typically checked by would-be investors to guide their decisions.
Put together, these may give you an idea of the growth potential of the business and your money.
Where can you find a company's fundamentals?
You can find these fundamentals in the company’s financial statements, which it is required to reveal as long as it’s a public company (meaning, its stocks are available for the general public to purchase).
You may have to sift through the various documents in order to find the data that you’re looking for. Still, the information that you get may end up being worth the effort.
That’s because you can use the information to do fundamental analysis. You can check crucial statistics such as its debt-to-earnings ratio, price-to-earnings ratio, and degree of financial leverage.
Nowadays, there are readily available financial statements and even fundamental analysis from online stock brokerage firms to help you make easier investment decisions.
