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What Are the Basics of Fundamental Analysis?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 30 June 2018
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Fundamental analysis is a stock-picking technique where investors review the company behind a stock. The basics of fundamental analysis include a review of the company’s revenue growth, ability to make profit, and debt repayment potential. This analysis often relies heavily on the company’s financial statements released to the public. In short, the company is typically more important in the basics of fundamental analysis rather than the charts that mark a company’s stock price. Additionally, this method involves both qualitative and quantitative analysis.

Revenue growth is typically one of the most important pieces of fundamental analysis. A company with growing revenue indicates strong connections between the company’s products and consumers. Significant growth also provides investors with an idea of how a company is moving into underserved areas of an economic market. Without strong revenue growth, a company will be unable to pay bills and offer financial returns to investors, whether in dividends or stock price increases. The basics of fundamental analysis often look for a percentage of revenue growth that meets or exceeds the industry average.

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Profit is the money a company has left over once it pays all its operating costs and expenses. Even the best companies that generate revenue can have negative profit records. In some cases, the basics of fundamental analysis may overlook negative profit early in a company’s growth cycle. The reason for this negative growth is often the result of heavy investment into the company’s infrastructure and business industry. Once established, however, the company should demonstrate its ability to convert sales into a significant level of profit.

Debt repayment is another tentpole in the basics of fundamental analysis. Most publicly held companies use some external debt to run its operations, especially when starting its business functions. The company should be able to generate sales, turn a profit, and use a portion of the profit to repay the outstanding debt, all without creating significant disruption to operations. An overleveraged company tends to be lagging in its debt repayments. The result is a company that will have to pay its debt prior to investors, making equity investments into the business scarcer and less profitable for outsiders.

Other basics of fundamental analysis are a part of this review process. For example, the company’s management team and audit history may also be in play here. Investors may desire information on how well the company’s management team guides and directs the business. Audit reports that indicate poor accounting practices can be a drawback to investors. The ability for companies to beat out competitors is also part of this analysis process.

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