What is Fundamental Analysis?？

Fundamental analysis is a very useful method of analyzing the intrinsic value (real value) of securities, covering economic data, industry conditions and company information.。

Fundamental analysis will find out its intrinsic value and compare it to the value of the market (usually the share price) to find out if the stock is reasonably priced, undervalued or overvalued, as a logical reference.。

Fundamental analysis and technical analysis belong to the opposite relationship, technical analysis focuses on price (stock price) behavior, through a variety of modeling tools and price trends to analyze the stock price, generally do not study the company's financial report, and fundamental analysis will study the characteristics of the company's financial report is very different.

What are financial statements?？

Financial statements, as the name implies, record a company's financial position over time, if it is recorded once every three months is a quarterly report, if it is recorded once a year is an annual report, in most cases the company will launch quarterly reports every quarter。

Financial statements are like a company's health inspection report, through the financial statements, investors can see the company's profitability, asset size, cash flow trends, etc., a complete grasp of the financial performance of the past time, as a reference standard for investors.。

Generally, the financial statements are divided into three large blocks: the income statement, the balance sheet and the cash flow statement, all of which are indispensable if you want to find a good company.

Income Statement

The income statement focuses on the company's past earnings performance, which, to put it bluntly, is whether the company is making or losing money.？

The income statement has a lot of details, but here's a summary of the three main items: total revenue, total expenses, and profit and loss.。

The profit and loss of the income statement shows whether the company is making money, if the result is positive (+) is making money, and vice versa if it is negative (-) is losing money。

Balance Sheet

By the nomenclature, a balance sheet is a record of its assets and liabilities, and common asset positions, debt positions, inventory positions, debt service positions, etc. are recorded in the balance sheet.。

The balance sheet has three important items: assets, liabilities and shareholders' equity, which are inextricably linked。

• Assets: are resources that the company fully owns and can benefit from in the future, e.g. cash, inventory, equipment, etc.
• Liabilities: are amounts that the company needs to repay, e.g., accounts payable, loans, etc.
• Shareholders' equity: is the capital injected into the company by shareholders, when all the assets of the company minus liabilities, the rest is the shareholders' money.

Cash Flow Statement

For a company to continue to operate, it is normal for cash to flow in and out all the time, and the cash flow statement is a record of the company's cash flow, allowing investors to see how a company uses money as a basis for investment。

The cash flow statement consists of three major items: operating cash flow, investment cash flow and financing cash flow.。

8 Great Indicators to See

current ratio

• Current assets: assets that can be realized within one year, including cash, accounts receivable, inventory, etc.
• Current liabilities: debts to be repaid within one year, including accounts payable, short-term loans, etc.

The current ratio is an assessment of the company's ability to repay its debts within a year, and if the current ratio performs well, it means that the company can operate stably in the short term (within a year) because the company is ready to pay off its short-term debts; conversely, if the current ratio does not perform well, the company is likely to encounter a crisis in the short term because it is unable to repay its debts in the short term。

In general, a current ratio greater than 2 is a healthy criterion, representing that existing current assets are sufficient to repay twice the current liabilities, and the company's operations are much more robust in the short term.。

But this does not mean that less than 2 implies that the company has a potential crisis, if the current ratio is greater than 1, it means that the company is actually solvent, but relatively unstable, the risk is slightly higher need to pay attention to;。

Compared to other companies with the same current ratio, for example, it's all 2 well, assuming that a company has a higher percentage of cash, it's relatively safer because the cash doesn't need to be liquidated separately and can be repaid directly.。

Quick ratio

Although the above-mentioned current ratio can be seen in the company's short-term solvency, but there is a blind spot, that is, the cause of inventory, inventory is the company has not sold out to realize the goods, assuming that the inventory can not be sold out for a long time, then the asset is not realizable, so the current assets will be discounted, such as 3C equipment, industrial equipment.。

In addition, there is an item in current assets called "prepaid expenses," which can also be turned into ready-made cash, but in fact it is quite small, even negligible.。

To address these two uncertainties, when the current ratio, net of inventory and prepaid expenses, is divided by the current liability, the quick ratio is obtained.

In general, the quick ratio should be greater than 1 to be healthier, and like the concept of the current ratio, when today to repay all current liabilities, net of inventory and prepaid expenses of current assets can be repaid immediately, if so, it means that the company's solvency is good, and vice versa to pay attention to。

After understanding these two ratios, it can be seen that the current ratio is a relatively conservative indicator, while the quick ratio is more direct, usually these two indicators will be used together to find out the company's ability to repay short-term debt under different conditions.

EPS EPS

EPS is an almost certain metric that will be mentioned in fundamental analysis, i.e., how much money per share you can make, and you can see through EPS the company's ability to make money for shareholders。

Net profit after tax is the profit from total revenue after deducting costs and tax rates, representing the true amount of money the company ultimately earns。

The total number of shares outstanding is the total number of common shares in circulation on the market, which is the total number of shares that our general public can buy.。

P / E Ratio

In principle, the smaller the P / E ratio, the better, representing faster and faster time to return。

In fact, the P / E ratio can be thought of from three perspectives, in addition to the most common "how many years it takes to get back to the original" mentioned above, there are two more.

• How much does it cost to earn a dollar?
• yield

So the smaller the P / E, the better?？In fact, after all, different industries get different P / E ratios, if the industry is developing at a high speed, the P / E ratio may be very high, but if it is a traditional industry, the P / E ratio may not be high, so the best solution is to use the P / E ratio only in the evaluation of the same nature of the industry, more able to see the same nature of the company, which has a lower P / E ratio。

P / B Ratio to NAV

The full name of P / B is Price-Book Ratio in English and Price-to-Net Ratio in Chinese, which can be used as an indicator of the reasonableness of stock prices.。

Remember the formula mentioned in the balance sheet?？The net value per share refers to the net value of shareholders' equity (assets minus liabilities) divided by the total number of outstanding shares, which can be compared with the current share price.。

P / B is based on 1, if the result is greater than 1, it means that the share price may be overvalued; if the result is less than 1, it means that the share price may be undervalued.。

ROE Return on shareholders' equity

ROE is also a very commonly used indicator of fundamental analysis, it can quickly determine whether the company is profitable, the full name in English is Return on Equity, Chinese can be called return on equity, return on shareholders' equity。

• Net profit after tax: that is, all revenue net of costs and taxes (EPS will also be used oh)
• Shareholders' equity: also known as capital, which is the figure obtained by subtracting all liabilities from all assets.

In general, the higher the ROE, the better, i.e., the higher the profitability of the representative company。It also means that the higher the value that can be created for shareholders, after all, the denominator of ROE is shareholders' equity, that is, shareholders' money, if ROE increases year after year, the value created for shareholders will be higher and higher.。

Free Cash Flow Free Cash Flow

Free Cash Flow (FCF) can be very broad and complex, and here's just a quick note, it can calculate the amount of free money a company can use now。

• Operating cash flow: is the company's cash increase through various operating activities.
• Capital expenditure: refers to the expenditure invested by the company to maintain its operations.

Although operating cash flow can be seen in the company's operating conditions, but not enough to prove whether the existing funds are insufficient risk, also can not see whether there is an outflow of funds, so to recalculate capital expenditure, in order to get a more accurate financial situation。

If the company gets good free cash flow, it may be paid out as dividends to investors, or left behind as future investments, or used as emergency funds for future economic downturns.。

Free cash flow can be used as an early indicator to facilitate investors' assessment of future earnings, as if free cash flow improves, representing an improvement in revenue or sales performance, it may also be returned to investors in the future。When stock prices are low and free cash flow is up, there is a lot of room for stock prices to rise, so free cash flow is also a fundamental analysis that investors love to use.。

D / E Ratio of liabilities to equity

D / E English full name is Debt-To-Equity Ratio, Chinese called "debt-to-equity ratio," can be used to see how a company is using financial leverage.。

The ratio of a company's debt to shareholders' equity, and probably a high percentage of its total liabilities, is money borrowed from banks, so if the D / E ratio is higher, it means that the company's financial leverage is higher, the degree of lending is higher relative to shareholder contributions, and the investment risk is higher。

So when evaluating the D / E of companies in the same industry, it's best to find the lower the better, otherwise the investment risk is getting higher and higher.。