If you invest in stocks, you must have heard the term fundamental and technical analysis. Your colleagues or peers must have advised you to check the fundamentals of the stocks before investing. However, do you know which fundamental questions you need to answer about a stock before buying it? If not, then here you go.
This is a list of 10 questions you should ask yourself and find answers for evaluating the fundamentals of any stock before you opt for online stock trading.
1. What is the nature of the business or which industry does the company belong to?
Suppose you found out stock is increasing in price significantly and seems like a good investment, the first thing to check is to which industry the company belongs. Whether the company is into cyclical business or non-cyclical business? Then whether the company manufactures consumer goods or provides services and others.
2. Is the company growing and is there consistency in the growth?
The second question you need to ask is about the company’s growth. Whether the company is growing or not, and whether the growth is consistent and sustainable. You need to check whether the revenue is increasing year over year, profit, and most importantly, the profit margin is growing or not. Then you can also evaluate whether the cash flow from operating activities/ core business activities of the company is increasing or not and that too consistently.
3. Who are the competitors of the company?
The third thing you need to check is the competitors of the company. Whether the company is growing better than its competitors or not, if its products have something better to offer or not and similar aspects.
4. Who are all in the company’s management, experience, and perception?
A company’s management needs to be studied when investing long-term. You must check whether the management is dedicated and diligent and has high standards of corporate governance or not. You can also check the experience of each board and management member.
5. What is the company’s employee turnover?
Employee turnover reflects the company’s management and its growth trajectory. In the IT sector, it is usually high; however, in other sectors, if the company’s employee turnover is higher than the industry’s, it is a matter of concern.
6. Is there any advantage that the company has over its competitors?
Certain companies have natural or other benefits, which help them become industry leaders and churn out higher profits than their competitors. It can be a geographical advantage, the advantage of the scale of production, and others.
7. Is there excess debt in its financial structure?
For running a business, availing of debt is natural, however, as it helps leverage the business. However, the percentage of debt on the balance sheet must be under check.
8. Are the ROE and RoCE improving?
If increasing, Return on Equity and Return on Capital Employed reflect management’s efficiency in generating profits out of the shareholder’s equity and capital employed, respectively.
9. Does the company pay regular dividends?
You also need to evaluate the dividend payout ratio to determine whether the company has enough cash to payout dividends or not from its profits.
10. What is the intrinsic value of the company’s stock?
Finally, to find a quantitative answer to all these questions above and understand whether the company’s stock is a good buy or not, you need to analyze the financials and find out the company’s intrinsic value.
If you are wondering how you can find all these questions answered, you can refer to the resources and information about companies available on an online stock trading platform and also on companies’ websites.
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