Fundamental Analysis of a Publicly Traded Company

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Video Transcription:

Hello traders. Welcome to the Stock Trading Course and the 6th Module Investing, Stock-Picking.

In this lesson, we are going to go through the fundamental analysis for publicly traded company. And we are going to start…well this module entirely is about how to analyze on a fundamental basis our publicly traded company. And right now, we are going to start at the beginning, which means that we are going to look at the financial statement. Much of the information you need to know when you’re looking to buy a company share can be found on the financial statement. This information can also be used to decide whether or not you should sell your position if you are already long in the company. Now, this is important because you are going to…well, first of all learn how to read this information and then you are going to learn how to use this information to either decide to buy shares on a company, or decide to close your long position or your investment in this company.

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A financial statement allows you to evaluate a company’s financial health and its ability to cover its debts and obligations. And when we’re talking about debts and obligations, we are talking about payroll, taxes, etc. Basically, a financial statement shows investors how the company has performed over the last quarter. And we are talking about on a quarterly basis because these financial statements are released to the public by companies on a quarterly basis when they release their earning and their other reports that we are going to go through in later lessons.

Now let’s look at the components of a financial statement. First of all, we have the balance sheet. This is the snapshot of the company each quarter. It determines the equity of the company by detailing its assets and liabilities. And when we talk about liabilities, we are talking about the company’s debts. If you’re starting to understand, the balance sheet will give you an overall idea of the company’s profitability. Now, you can calculate the equity or the share-holder’s equity of the company just by subtracting liabilities to assets. You can also calculate the overall assets of the company by adding the equity to the liabilities of the company. So you can start playing with these numbers and look at what you have in front of you and you’re going to have an idea. Looking at the balance sheet gives you an overall idea of the company’s financial health.

Now assets, these are all of the company’s physical properties. Included here are inventories, equipment, and facilities. For bigger companies with a recognized brand, like Coca Cola, Pepsi, Apple, etc., all of its trademarks and brands will be included in this category. And the reason is that for these companies, its brands and trademarks have incredible value. So they are listed as assets of the company.

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Now, liabilities. Liabilities include any negative cash flow and debt. In this category are included obligations to banks, suppliers, the government and its employees. So when we talk about liabilities, we are talking about the company’s debts to the banks, whether or not they have incurred in a loan to support its daily operations to its suppliers, taxes for the government and the overall payroll of its employees.

We also have a profit and loss statement. This statement details the revenue and expenses that a company has generated in the last quarter. So the revenue of a company is a total income produced by the sale of its products. And of course, expenses, or a company’s expenses usually refer to administrative and operative costs. So from the financial statement we can verify a net income for the company, which is revenue minus expenses.

Now, when we start to get deep into the financial statement, we can see the true profitability of a company for the last quarter when we calculate the net income. In the quarterly financial statement, we can look at a comparison on a quarter over quarter basis or a year over year basis. So when this statement is released by the companies, you can look at the last quarter’s or the previous quarter’s numbers to see if there is a growth in the company. And you can also look at the same quarter but on the last financial year to see if there is a year over year growth in the company.

You can start to shape a very precise idea of how the company has been doing for the last year just by looking at the quarterly financial statement. And this will give us an idea if the company’s profitability is rising or decaying.

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