Fundamental Analysis 101 - What gives a stock “strong fundamentals”?

Updated: Jul 28, 2021

This article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.


Today it seems like you can’t go anywhere without hearing about investing... Or about how AMC is going to the moon and how all Hedge fund managers are evil and blah blah blah… Robinhood this...Bitcoin that.


Maybe you know what you’re doing. Maybe you don’t. But to us, all of this hype means one thing - people care about their financial future.


Everyone is investing now. Tons and tons of people are trying to learn but not everyone knows what to look for or where to start.


People have been investing in things like AMC and Gamestop because they hear about it on the news or they know someone who made enough money to buy a brand new Tesla...But people are forgetting that there are practical and efficient ways to analyze what they are investing in.


If you want to get serious about investing in the stock market, there are two main ways to analyze stocks: Fundamental Analysis and Technical Analysis.


Today, we are going to be talking about fundamental analysis and what to look for if you want a stock with “strong fundamentals.”


Intro to Fundamental Analysis - What to look for when buying a stock...


If you’ve been following us for a while now, you’ve probably heard us use the phrase “strong fundamentals” when talking about stocks like Apple or Microsoft.


But what the heck does that even mean?


To break it down, fundamental analysis can be separated into two categories: Quantitative and Qualitative analysis


If you remember, in school you may have learned that the word quantitative means to measure something in numbers while qualitative means to measure something in terms of quality.


Here are some different qualitative and quantitative attributes to look for when researching a company’s fundamentals.


First, we will talk about quantitative analysis...


Quantitative


When looking for a company’s quantitative attributes, you can usually find everything you need on sites like Yahoo Finance, Investor.com, or Ycharts. You can even go on a company’s website or hop on Google and type the *name of company* and “investor relations.”


So if you want to look at the financial statements of a company like Microsoft, you would type “Microsoft Investor Relations.”


Once you’ve chosen a way to look at your company’s information, here are a few things you can look for:


Financial Statements

Financial statements are records of the financial activities of a company.


Some of the most important financial statements you can learn about include...

  • Income Statement

  • Balance Sheet

  • Cash Flow Statement


When looking at these, you can see different factors like how much revenue a company is earning every year, how much debt they have, or how much they are reinvesting into the growth of their business.


Most of the quantitative factors of a company can be found on these financial statements.


Revenue Growth

A company’s revenue growth refers to how much a company increases its revenue every year. That’s right. You can keep track of how well your company is doing by looking specifically at how much revenue they are generating.


As you can see here, you can find a company’s revenue growth on its income statement. In this example, Microsoft’s revenue continues to grow every year. This is a good indicator of a valuable company.



Price to Earnings (P/E) Ratio

The P/E ratio can be used to evaluate whether a stock price is overvalued or undervalued. Oftentimes, if a stock is overvalued, then it is likely to see a “correction.”


If a correction happens, then the stock price will significantly decrease and reflect a more accurate price based on the numbers you see on the financial statements rather than the hype of a stock.


If a P/E ratio is too high then this usually means that the stock is overvalued. Generally speaking, a lower P/E ratio is a good indicator of a stock's value.


Profit Margin

The Profit Margin indicates how well a company is handling its finances overall. The profit margin shows how much a company is earning in profit minus its sales.


A good profit margin is usually anything above 10%. Continuing with our Microsoft example, Microsoft currently has a profit margin of 37.6%.


This is a great profit margin because it is well over 10%.


Total Assets vs Total Liabilities

If you have ever read Rich Dad Poor Dad, you know that you always want your assets to be greater than your liabilities.


Assets reflect anything that is owned by a company that can be converted into cash. Liabilities usually refer to sacrifices or expenses that a company deals with.


You can find both of these on a company’s Balance Sheet.

Qualitative

Typically you will hear about quantitative factors when analyzing a company. But it’s important to remember that human beings also play a role in the value of a company.


Here are some qualitative factors to consider when evaluating a company:


Company Management

When considering the strength of a company, it is important to account for who is running the show. Stay updated about changes in management like a new CEO. Who is the CEO? What is his/her track record? What is their experience?


Customer Satisfaction

What service or products does the company offer? Take Microsoft for example. Their business model includes software as a service (Saas). In other words, they offer annual subscriptions to their software like Microsoft Office. Long-term subscriptions usually indicate certainty of a company's long-term revenue. They also have little to no production costs since they simply have to design and sell their software compared to someone like Nike who has limited supply and has to physically produce everything they sell.


Generally speaking, if a company has a reputation for taking good care of their customers then they are likely to remain reputable in the long-term.



Other factors

Qualitative factors are a little more random and hard to track compared to quantitative factors...So some additional things to look out for might include:

  • A company’s advantage over its competition.

  • A company's brand value.

  • Tangible assets (factories, trucks etc.).

  • Patents.

What does all this mean?

When doing your research, it is rare that you will find a company that satisfies every single one of these factors.


But now that you have read this article, we hope that you have learned something new about investing.


Right now, it may be very tempting to follow all the hype and invest money in whatever will make you quick cash. But there is no strategy or analysis in buying hype-stocks. Now, you can look at investing with a new approach and make wiser decisions about stocks with strong fundamentals.

Now what?

Okay, we just threw a ton of terms at you. Take your time learning about fundamental analysis. Read this article over again if you need to. If you find this information valuable, you can share it with a friend. This article was written so you have a guideline of what to look for when researching a company’s fundamentals.


We encourage you to read more of our articles, watch our videos, and use these steps as a guide to expand on your own research. There are a vast number of factors you can look at when evaluating the value of a company. You may even find that there are other fundamental traits that you like to look for in a company aside from the ones we mentioned here.


If you are serious about investing, continue learning!


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