Hi everyone, this is my first post and I am new to reddit so constructive feedback would be nice and such.
A little bit about myself is that I am a finance student and an active investor in the stock market; with finance also comes some knowledge of understanding accounting. I got bored today and have been reading a lot of posts on reddit and found that there is not many in-depth attempts on fundamental analysis other than vague discussion on certain sectors and their potential for the future.
But maybe that’s because people don’t know enough regarding fundamental analysis itself and/or don’t have enough time to learn it?
Fundamental analysis is not only observations on the sector and what the company has done/wants to do, but its also how well-equipped is the company able to achieve not only its own expectations, but Wall Street’s expectations? How has the company performed in the past quarters and how will they LIKELY perform in the following quarter(s)?
Large dips in the stock price from prior months obviously signify a lacking investor sentiment, but practicing actually going over what made the stock drop will make you a better investor. Don’t just read the articles! Go to the earnings report and/or the conference call, did they report less revenue than expected? Did they not beat EPS? Did they cut their outlook?
There is a lot of information that many people do not know in terms of reading financial statements and one glance at it can often turn people away since they can be somewhat difficult to read.
So I thought that I would make a short, little mini-guide and provide some general tips and info on how to read them and what to look for!
- Pick a company and follow along with the post!(If you’re a business mjr student, you probably already know all this)
First, Look At The Balance Sheet.
This is usually the deal-breakers for many potential investors.Covering all of the balances will take too long, so I’ll go over some basic and important ones
- Consider how much on-hand cash do they have (Cash and cash equivalents)
- Accounts receivables? (Money that they are expecting to come in sometime soon)
- Inventories (value of their merchandise)
- Goodwill (this arises when companies acquire another company and its the value of their intangible assets, think of patents, the value of the brand name, etc)
- Intangible assets (patents, trademarks, etc, they are all essentially non-physical assets to the company)
I don’t generally consider/look at (gross property, plant) but these include land, buildings and equipment etc; they decrease in value per year but again I would not really stress these over too much.
LIABILITIES ARE EXTREMELY IMPORTANT
Again, I’ll cover some basic important balances:
- Accounts payable (short term dues that need to be paid off to vendors/creditors)
- Accrued liabilities (similar to accounts payable, these are expenses that need to be paid off but have not been officially logged)
- Long Term debt (debts that are not owed within the next 12 months, can include long-term loans, bonds, notes, etc.)
- Deferred revenue (this is revenue that the company receives in advance from customers or other companies, but the service itself has not yet been provided)
COMPARE HOW MUCH LIABILITIES THEY HAVE COMPARED TO THE ASSETS In many articles, the amount of liabilities and debt that they have are often discussed, this was and is ESPECIALLY important with the emergence of Canadian marijuana companies last year; look at ACB (they’re drowning in debt with not much cash).
Check if they are paying off their debt or are incurring more.
Debt is not necessarily bad so long as its sustainable and not burdening (it shows that the company is growing)
If you are looking at banks and credit card companies (AXP, Visa, etc.) looking at doubtful accounts or bad debts expense is especially helpful, but you can check it for any company; these essentially show the amount the company lost to customers unable to pay their dues; these can be potentially dangerous if their customers have a worrying history of being unable to pay.
This covers the revenues and expenses of the company and their net income! A lot of the general ones are self-explanatory so I’ll cover the main ones
- Total Revenue (Revenue without the costs)
- Cost of Revenue (can also be referred to as “cost of goods sold,” how much money it took to generate said profit. Example: The box sold for $5 but it costed $3 to acquire/produce)
- Gross Profit (Total revenue-Cost of Revenue. THIS IS DIFFERENT FROM NET INCOME!)
- Operating Income (This is income after operational expenses)
- Net income (the difference between this and operating income is that it weighs in factors such as interest expense, income taxes, etc. THIS IS THE BOTTOM LINE PROFIT AFTER EVERYTHANG)
Of course there are many balances of expenses but they are self-explanatory as you look at them.
Observe the net income, is it positive or negative? Is it rising or falling?If the company is not yet profitable, potentially how close is it to profitability?
Unprofitable companies should not necessarily be written off just for the sake of being unprofitable, just look at what happened with Tesla; you can also say the same with Uber and how they now forecast profitability by the end of this year- there is lots of renewed interest in the company despite being unprofitable.
These are located in the 10k financials and also quarterly earnings financials (I am unsure if the 10k has more cited risk factors). Not only do they show the risk and potential problems the company may face but reading them can also give you some insight on how the industry works and whether or not it is seasonal.
Example: Risk factor for Yeti- They have mainly two manufacturers. These two manufacturers produce over 80% of all their products.
We can conclude that if one of these manufacturers were to run into some problems then the supply chain would be drastically affected.
Lastly, we have management whom of which is crucial for steering the direction the companies are moving in. For this, you have some options, you can either look up the upper management’s backgrounds online or you could go to the proxy statemen t.
The proxy statement shows the amount of stock the CEO and the other senior officers have as well as their backgrounds/experience; a CEO that is strapped to their company through equity/stocks/options is good in that they have plenty to lose if the company doesn’t do well, this will give them more incentive to perform well.
That is pretty much all I have, I was considering whether to cover calculations for EPS, PE ratio, stock dividends, market cap, ROA (return on asset/investment) etc. but I feel that this post is already dense and I dunno if people will actually find it helpful so I’ll end it there. Obviously, there is waaaaaaaay more to cover but if this helps at least one person, then coolio! GOOD LUCK AND HOPEFULLY YALL MAKE THAT $$MULAA$$