5 Steps to Analyse Company Fundamentals
Whether you’re looking to be a hot shot stock analyst or you simply want to improve your analytical skills and enhance your CFD trading education, you’ve come to the right place!
In a trading context, company fundamental analysis is an effective technique that assists investors in determining the value of a financial security. This is achieved by researching the underlying factors affecting a company in order to determine its potential future value.
Ideally, when you use fundamental analysis and implement it into your trading activities, you are essentially trying to determine whether the company’s revenue is growing, if they will actually make a profit from that revenue, its current positioning in relation to its competitors and so on.
Fundamentals can realistically be anything that contributes and relates to the economic well being of a company. Evaluating these factors will allow you to answer the core question that everyone in trading wants to know: Is this stock a good security to trade and will it likely produce a good return on my investment?
When used effectively, fundamental analysis can be one of the most useful ways to determine the potential ROI for your trading portfolio.
To further expand your CFD trading education, we’ve developed a 5-step guide to analysing company fundamentals.
1. The Company’s Business Model
In order to effectively analyse a company’s fundamentals, you must first have a good understanding of what they actually do, commonly referred to as their business model. You can usually establish this by visiting their website or doing a simple Google search on the company.
By understanding their business model, you will then be equipped to understand what the drivers are for future growth within that industry and will allow you to directly translate how influencers such as economic announcements, global events etc. will impact on the company and inevitably their share value.
2. Analysing Performance
When first researching a company’s performance, you may mistakenly associate this with their share price, however fundamental analysis rarely even considers this. Company performance refers to the goals of a company and how quickly and efficiently the company is moving towards them. The level of that performance is essentially what is used to determine the health of a company in terms of investment potential (or investment poison).
The performance of a company can be measured in a variety of different ways. A good start to this is to look at a company’s ability to generate profit through their earnings, which will give you a basic understanding of the company as a whole.
However, there are a number of different ways to evaluate more specific attributes of a company such as their performance on specific assets, which you can find out by looking at their ROA (return on assets). Do your research and evaluate accordingly.
3. Competitive Advantage
Another consideration when analysing a company’s fundamentals is their competitive advantage. The long-term success and growth of a company is largely driven by its ability to develop and maintain a strong competitive advantage. Having a strong competitive advantage will reap benefits for investors for years to come. In order to do this, investors must analyse an array of key business points:
• The effectiveness of the company’s current strategy – the stronger it is, the less likely it will need radical strategy changes.
• How is the company positioned in relation to a SWOT analysis – evaluating their internal strengths and weaknesses and external opportunities and threats will allow you to gain a thorough understanding of the company’s current situation.
• Compare prices and costs with competitors – comparing prices and costs with that of competitors will give a good insight into the strength of a company.
• Company competitiveness (weaker or stronger) – how does the company compare to key rivals on industry success factors? Why do they have this advantage/ disadvantage?
These are the key questions you need to consider when growing your CFD trading education.
4. Company Management
Unfortunately, evaluating the management aspects of a company is where individual retail investors are truly at a disadvantage compared to professional investors, however that’s not to say it can’t be done.
Each company that is publicly listed will have a corporate information section on their official website. This usually contains a brief biography about each executive, with their employment history, education etc.
But let’s be real, we don’t want the spic n span clean stuff that companies are going to proudly parade on their website. We want the dirt, the juicy stuff that will definitely not be made so easily available by the company. There are a variety of other ways to determine the capability of the company’s management team:
• Evaluate executives past performance – research their employment history and the performance of those companies during the executive’s time working there.
• Insider ownership – majority of large publicly listed companies will compensate their executives with ownership in shares, which is a good sign. When management holds significant stock, you can be assured that they’ll do the right thing.
• Monitor their presence in the media – often executives will be interviewed regularly, conduct public conference calls etc. which is when they’ll usually be asked some pretty tough questions about the company.
• Monitor their responses and evaluate, are they purposely avoiding questions? Do they sound unsure? You can tell a lot by a person’s presence, reactions and comfortability in these situations.
5. Financial Statements
Financial statements are a critical aspect to both your CFD trading education, and your fundamental analysis. This is because they include the main data points which can be assessed to determine the company’s overall health. Financial statements typically include three principle statements:
• The Balance Sheet – compares the assets of a company against its liabilities and stockholders’ equity (which balance each other out).
• The Income Statement – Determines expenses from revenue and subtracts them to get the company’s profit or income.
• The Statement of Cash Flows – An analytical breakdown of the money coming into a company, and the money taken out for specific purposes such as operating expenses, financial, or other investment activities.
In addition to the quantitative analysis that you’ll find in the above financial statements, companies also release an extensive array of public qualitative information for their investors through the release of their annual company report.
In these reports, companies are given an opportunity to explain their performance (whether good or bad) as well as detail their plans for the coming future. Reading and analysing these reports are very important in gaining a thorough understanding of the company’s future which will directly impact on your investment.
CFD Trading Education: The Bottom Line
Fundamental analysis is said to be the cornerstone of investing and assumes that over the long term, the company’s fundamentals and intrinsic value will determine the value of their underlying stock.
Key success factors that aim to evaluate a company’s overall health will give you a valuable insight into understanding what factors will influence the company share price and whether internal or external elements will likely pose a threat to the share price. Having a strong understanding of this analysis technique will not only assist you greatly in identifying promising stocks, but it will expand your CFD trading education to help you become a better, more informed trader.