Business

6 Things to Know About Fundamental Analysis

6 Things to Know About Fundamental Analysis

Fundamental analysis is one of the two ways investors study the profit potential of a given stock. Along with technical analysis, fundamental analysis offers keen insights into the more qualitative aspects of a company’s operations. Here are six essential facts that get to the heart of how investors evaluate corporations.

There are Two Kinds

Fundamental analysis can be qualitatively or quantitatively based. Measures like EPS (earnings per share) are quantitative, while areas like management background, pending lawsuits, and new products are ways to measure corporate quality and performance. Technical analysis differs from quantitative fundamental analysis in that technical indicators look mainly at price action, whereas fundamental analysis’ main components, like EPS, focus on the more general health of the company.

Immense Help to Penny Stock Traders

One fact about fundamental analysis that often goes unstated is this: even the smallest corporations lend themselves to non-quantitative studies. This is especially true because it often happens that new, small organizations don’t have a long enough share price history for technical indicators to be of much help. However, even a tiny startup business has managers, revenue, structure, recent growth rates, a turnover rate, a particular debt structure, and other components that investors can study. Keep in mind that it’s still imperative to use a penny stock trading guide to gain a broad insight into which companies are doing well and which aren’t. The value of a trading guide for new investors cannot be over-emphasized.

Plays a Central Role in Long-Term Predictions

There’s an informal rule about fundamental analysis, namely that it is best used for long-term analysis, while technical studies are more useful for short-term price prediction. Whether the rule holds in every case is questionable. However, traders who operate in very short time frames, as day traders and scalpers do, rely almost exclusively on numerical technical analysis. Financial planners who focus more on guidelines for consistent budgeting and work with retirement investing rarely employ technical analysis. Instead, they follow the essentials of qualitative performance, like growth rates and earnings per share.

EPS is the Most Watched Figure

If you watch the financial news programs on television, it’s obvious that EPS is the most watched of all the fundamental figures. One reason is that the number gives lots of information at once. Not only does it track changes in earnings, but it also measures changes in the number of shares issued. Its main value is as a shorthand method of telling investors what a share’s intrinsic value is.

Pending Lawsuits Can be a Game Changer

Legal action against a corporation can signal huge problems ahead. While large organizations often have several pending lawsuits listed in their quarterly reports, small organizations facing legal action are often on their way to bankruptcy, at worst, or being delisted, at best.

Management Team Experience Means a Lot

If you want a quick overview of a business’s long-term prospects for success, read the resumes of its management team. Depth of experience and education are good signs, while job hopping and association with failed organizations do not bode well. The overall quality of a leadership team is especially relevant for smaller corporations and startups. It’s easy enough to scan manager bios and get a feel for what is in store for the company.

About the author

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Mike K. Watson

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