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COMPANY ANALYSIS in fundamental analysis

ByPawandeep Singh

Oct 5, 2022
COMPANY ANALYSIS in fundamental analysis

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.

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

Current RatioShows the relation between current assets and current liabilities.  Current Assets / Current Liabilities
Quick RatioShows 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 RatioShows the relation between external equity (long-term borrowed funds) and internal equity (owned funds/shareholder funds)Debt / Equity
Total Assets to Debt RatioShows relation between total assets (fixed as well as current assets) and debt (long-term borrowed funds)Total Assets / Debt
Proprietary RatioShows 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 RatioShows 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 RatioShows 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 RatioShows 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 RatioShows 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 RatioShows 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.

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