Company analysis in fundamental analysis is a part of the broad three-tier EIC approach.
Company analysis in fundamental analysis means assessing the competitive position, earning capacity, profitability, and prospects of a company.
It consists of searching out the intrinsic value of a company’s security as against its market value.
An investor needs to do a company analysis so that he/she can decide which company is most suitable for his/her investment.
Table of Contents
Factors to be considered in Company Analysis in Fundamental Analysis
given below is the separation of financial and non-financial factors for company analysis in fundamental analysis
Ratio Analysis
| Ratios | Meaning | Formula |
| Current Ratio | Shows the relation between current assets and current liabilities. | Current Assets / Current Liabilities |
| Quick Ratio | Shows the relation between quick assets and current liabilities. Quick assets include all current assets exclude stock and prepaid expenses. | Quick Assets / Current Liabilities. |
| Debt Equity Ratio | Shows the relation between external equity (long-term borrowed funds) and internal equity (owned funds/shareholder funds) | Debt / Equity |
| Total Assets to Debt Ratio | Shows relation between total assets (fixed as well as current assets) and debt (long-term borrowed funds) | Total Assets / Debt |
| Proprietary Ratio | Shows relation between proprietor’s funds (owned funds/shareholder’s funds) and total assets (fixed as well as current) of the business. | Proprietor’s Funds / Total Assets |
| Stock Turnover Ratio | Shows whether the amount invested in stock has been used efficiently or not. Establishes relationship between COGS and average inventory. | Cost of Goods Sold / Average Stock |
| Debtors Turnover Ratio | Shows the number of times the receivables are converted into cash i.e., the efficiency of the company in the collection of amounts due from debtors. | Net Credit Sales / Average Receivables |
| Working Capital Turnover Ratio | Shows the efficiency of a company in working capital utilization. Establishes relation between working capital and sales of a particular company. | Net Sales / Working Capital |
| Gross Profit Ratio | Shows the relation between the company’s gross profit and net sales. Tells whether the gross profit is sufficient to cover administrative and selling expenses, fixed charges, etc. | (Gross Profit / Net Sales) *100 |
| Net Profit Ratio | Shows the relation between the company’s net profit and net sales. Tells about the overall efficiency of the business. | (Net Profit / Net Sales) * 100 |
| Operating Ratio | Shows the proportion of operating cost to net sales. Is a measure of a company’s operating efficiency. | (Operating Cost / Net Sales) *100 |
| Return on Investment (ROI) | Shows whether a company is generating enough returns on its capital employed or not. Establishes relation between net profits (Earnings after tax) and capital employed (debt plus equity) | (Net Profit / Capital Employed) * 100 |
| Earnings Per Share (EPS) | Shows the amount of Profit available per share after making all other payments. | Net Profit after tax / Number of O/S Shares |
Cash flow Statement
The cash flow statement is a financial statement that outline the amount of cash and cash equivalents of a company for a period.
The cash flow statement (CFS) measures how well a company maintain its cash position, meaning how well the company generates cash to pay its debt obligations and funding its operating expenses.
A cash flow statement typically breaks out a company’s cash resources and uses for the period into three categories:
- Cash flow from operating activities
- Cash flow from investing activities and
- Cash flow from financing activities.
Balance-Sheet Analysis
The balance sheet tells investors how much money a company has (assets), how much it owes (liabilities), and what is left when you net the two together (net worth or shareholder equity).
By analyzing a company’s financial information, the investor can determine:
- How much debt the business has relative to its equity
- Whether short-term cash is declining or increasing
- The percentage of tangible assets (e.g., factories, plants, and machinery)
- How many days it takes, on average, to sell the inventory the business keeps in hand
- Whether the research and development budget is producing good results
- The average interest rates a company is paying on its debt
- Whether profits are being spent or reinvested
It is important to read and analyze a balance sheet to make sound investment decisions.
Non-Financial Factors in company analysis in fundamental analysis
Nature of Business:
whether the business is dealing in capital goods or consumable goods; what is the scope of the industry in the future?
Company’s Market Share:
whether the company’s share in comparison to other companies in the industry is less, reasonable, or quite high.
Managerial Efficiency:
the vision and operational efficiency of management should be examined.
Raw Material Availability:
whether the raw material it uses is easily available or not: available domestically or imported.
Government Policy:
whether the government’s policies are in favor of the company’s prospects or not.
Competitive Strength of the Company:
The company’s competitive power in financial and non-financial parameters should be analyzed.
Technology Used:
whether the company uses labor-intensive or machine-intensive technology; latest or outdated techniques.
Growth Cycle of Company:
whether the company has scope for further expansion or not.
Research & Development:
whether the company is spending amount on Research and development for new products, up-gradation of techniques or not.