Analysis written by Vinay Soni
Imagine you're picking a company to invest in, like choosing a team for a game. You wouldn't just pick the coolest logo, right? Or you wouldn’t want to pick a team just because you heard recent positive news, right? You'd want to know how well they played in the past to determine whether there's a chance they’ll continue! That's where fundamental analysis comes in. It's like checking out a company's history via its report card to see if it's a good investment. In finance, these reports are called financial statements.
There are three financial statements to look at:
Balance Sheet: This is like a snapshot of the company's valuable items it owns (assets) and any obligations (liabilities). Think of it like your piggy bank - how much cash you have (assets) vs how much you owe (debts). A healthy company should have more cash than debt. There is another thing on the balance sheet, this is called shareholders equity, this is the amount of money that would be left over for shareholders if the company shut down, sold its assets, and paid its liabilities. Balance is achieved when Assets = Liabilities + Shareholders’ Equity.
Income Statement: This shows how much money the company makes (revenue) and its costs of running the business (expenses). It's like your allowance - how much you get (revenue) vs how much you spend (expenses). A good company makes more than it spends, leaving extra money (net income). Net Income is usually used in two ways, firstly, as dividends which is sharing earnings with shareholders and secondly, reinvesting to improve the company.
Cash Flow Statement: This shows the company's overall cash position, where the company's money comes from and goes. It’s broken down into three sub-statements: Cash Flow from Operations, Cash Flow from Investing and Cash Flow from financing. It's like tracking your allowance - where you get it from (financing) and where you spend it (operating, investing). A strong company has a healthy cash flow, meaning it can handle economic ups and downs and utilise cash to improve the company.
Remember, this is just the starting line. But hopefully, this gives you a clearer picture of how fundamental analysis works.
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