Part of the due diligence you should practice when considering investing in a company is checking its fundamentals. That’s because 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 otherwise? Find out the answers to these and more, below.
Business basics
Some people refer to the fundamentals as the basics of any business, because these are the things that any for-profit company will have.
Of these, profitability is a measure of the scope of a company’s profit in relation to the size of its business. This reflects on its efficiency, or how well it makes money using its resources.
Revenue 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.
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.
The liabilities of a company are the obligations and debts that it owes. These 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 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 see if they should put their money in it. Taken together, these may give you an idea of the growth potential of the business and your money.
Where to find them
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.
When you know what the company’s fundamentals are, you’ll probably have enough information to make a decision on whether or not to invest in it. That’s because you can then do fundamental analysis to come up with statistics such as its debt-to-earnings ratio, price-to-earnings ratio, and degree of financial leverage.
For private companies, on the other hand, there is no such requirement and so it can be difficult to take a peek into its operations. Investing in such companies can be difficult, and so this is better left to the experts.
Back in the day, these reports are things you’d have to cull yourself either from manual research or by downloading historical data and piecing them all together. But nowadays, there are readily available financial statements and even fundamental analysis from online stock brokerage firms to help you make easier investment decisions.
