All investors would primarily like to invest in stocks that has strong fundamentals. Whenever any expert or analytic of stocks talks on television, the word ‘fundamental’ will always be on the forefront. So as a prospective investors some where we know that Fundamental of stock is important but what do we actually mean by Fundamentals of Stocks? In this article we will try to understand what business parameters of companies contributes to their strong fundamentals. Objective of this article will be to enable my readers to evaluate the fundamentals of stocks before investing in them.

Fundamental Analysis

Stock fundamental is a very general term used to describe the business-health of a stock. The market price of all stocks stands on the foundation of its business health. If business health is improving means income of investors from their stock-holding will also increase. While doing a fundamental analysis of stocks, investors will dig deep into the financial statements of the company (for last 5 years or more) to understand its current financial/business strong hold and their ability to improve in future.

Here we will give you some key indicators the analysis of which will give you an idea that the companies’ fundamentals are improving, worsening or is stagnant.

1. Products Brand Name
2. Accumulated reserves (Net Worth)
3. Book Value
4. Sales/ Turnover of company
5. Net income/ Profits of company
6. Net Profit Margin
7. Earning Per Share (EPS) Growth rate
8. Cash Flows
9. Consistency of Return to shareholders (Dividend Yield).

Stock market is a platform for investors where they are free to buy hundreds and thousands of stocks at their free will. These days with advent of online trading possibilities, you can any stocks with a click of a button. Fundamental Analysis of stocks is your tool to identify profitable stocks from the plethora of stocks available for sale. While doing a fundamental analysis of stocks, investors would more concentrate on the points listed above than worrying about volatility of market price of stocks. If the above mentioned parameters (point 1 to are justified and still the dividend yield (point 9, consistent dividend disbursement) of the stock is high it means that the stocks has strong fundamentals and still available for purchase at bargain price. Let me tell you it is not a east thing to find such a stock.

For a fundamental analyst it is very important to forecast/ estimate the future earning capabilities of a company. There can be two cases here, either we are looking at a small company which has possibility to grow in future, or we are looking at a large/stable company which has a possibility of maintaining its earnings in future. In both the cases (growth or stability) the driver will be brand name, competitive advantage of its products and marketing and sales effectiveness. By looking at the companies’ improving sales and profit margin figures you will get a hint about growth/stability prospects of company.

Value Investors will generally talk a lot about intrinsic value of stocks. I think except for the great master Warren Buffett, not many know how to calculate the intrinsic value of stock. But from this article I can give you a hint that approximately how you can approximately estimate the intrinsic value of stocks. Considering that your stocks in consideration satisfies our above listed points from 1 to 8. Currently the risk-free rate available in the market is 6% and calculated dividend payout (averaged for last 10 years) is say 9%. It means that by buying this stock, your income just from dividends will be 9% per year (leave aside the great possibility of capital appreciation). By this way you can estimate that the a stock is overvalued or undervalued. In risk free rate is higher than average dividend yield it means you will be too much dependent on market price appreciation of stock. This calls for some risk. Intrinsic value of such stocks will be lower. But in case for those stocks whose averaged dividend yield is higher than risk-free rate it automatically means that the share is a good buy (having higher intrinsic value).

Conclusion

Investors must note that just by buying stocks of fundamentally strong company will not ensure your profits. Investors must always buy stocks at undervalued prices. At undervalued price levels not only the dividend yield of stocks is high (which is much sure income possibility from stocks) but investors will also get to cash on the possibility of capital appreciation. Investing in undervalued stocks (fundamentally strong) for long term is the key. This is the magic wand all investors have in their hand. Play within these three domain of (1) fundamentally strong stocks, (2) available at undervalued levels (3) which also has strong market price appreciation possibilities. In order to effectively learn the trick of fundamental analysis of stocks, investors must spend time to learn to read the financial statements of companies.

Related posts:

1. How to pick a long term stocks: Fundamental Analysis Stock Market Investment is not every ones piece of cake....