Fundamental Analysis For Dummies book cover

Fundamental Analysis For Dummies

By: Matthew Krantz Published: 05-02-2016

Determine the strength of any business with fundamental analysis

Have you ever wondered the key to multibillionaire Warren Buffet's five-decade run as the most successful investor in history? The answer is simple: fundamental analysis. In this easy-to-understand, practical, and savvy guide, you'll discover how it helps you assess a business' overall financial performance by using historical and present data to forecast its future monetary value—and why this powerful tool is particularly important to investors in times of economic downturn.

It's more important than ever for investors to know the true financial stability of a business, and this new edition of Fundamental Analysis For Dummies shows you how. Whether you're a seasoned investor or just want to learn how to make more intelligent and prudent investment decisions, this plain-English guide gives you practical tips, tricks, and trade secrets for using fundamental analysis to manage your portfolio and enhance your understanding of shrewdly selecting stocks!

  • Predict the future value of a business based on its current and historical financial data
  • Gauge a company's performance against its competitors
  • Determine if a company's credit standing is in jeopardy
  • Apply fundamental analysis to other investment vehicles, like currency, bonds, and commodities

With the help of Fundamental Analysis For Dummies, you just may find the bargains that could make you the next Warren Buffet!

Articles From Fundamental Analysis For Dummies

page 1
page 2
page 3
page 4
page 5
44 results
44 results
Fundamental Analysis For Dummies Cheat Sheet

Cheat Sheet / Updated 02-16-2022

Make the most of fundamental analysis by getting familiar with financial statements and investment terms as well as knowing the best places to find fundamental data.

View Cheat Sheet
Ways the Economy Can Alter Your Fundamental Analysis

Article / Updated 09-12-2016

Incorporating the economy's health into your fundamental analysis might seem like a daunting task. How can you consider something as grand as the U.S.'s economic growth when you're poring over one company's financial statements? Still, it's important to recognize the economy can have big-time effects on business, especially in regard to a company's: Ability to service its debt: A company's level of debt might look very manageable during normal economic times. In fact, companies carrying a bit of debt will often generate higher returns for stock investors. But that debt can come back to haunt companies when the economy slows. It might be easier to understand how a poor economy can turn debt into poison for a company by thinking about a plain, old mortgage. Let's say a young couple making $50,000 a year takes on a $1,000-a-month mortgage payment. That's really not too onerous. But if one breadwinner in the family loses a job, and the couple's annual income falls to $25,000 a year, suddenly that mortgage payment is going to be a big nut to deal with every month. The same concept goes for a company. If the economy causes net income to fall, what had been a manageable level of debt might become difficult to handle going forward. Capacity to borrow: During the credit crunch, which intensified in 2008, many companies were no longer able to borrow at favorable interest rates or to borrow at all. That unavailability of capital caused many companies to have to finance, or pay for, their expenses and needed improvements out of their cash balances. What if they didn't have much cash? Welcome to bankruptcy court. The opposite happened in 2010 and later. Short-term interest rates were left at nearly 0% for about seven years, encouraging companies to borrow. All that changed in late 2015 when the Federal Reserve raised short-term interest rates. The Federal Reserve is the central bank of the United States. It has the power to make decisions that can affect companies' revenue and earnings, and therefore is one of the most powerful forces for fundamental analysts to pay attention to. Fundamental analysts need to factor in this important change into their models. During severe economic contractions, the companies with access to large sums of cash are often able to make moves to improve their position when the economy ultimately heals. Walt Disney, for instance, invested heavily to upgrade and expand its theme parks amid the 2008 recession. When the economy improved, the company benefitted greatly as the parks were able to raise prices and boost profitability. Some companies may also use their cash to buy weaker competitors, giving them greater market share when the economy improves. Cost structure: Some companies are able to adjust their costs and expenses rapidly during a downturn, usually by laying off workers. Yet other companies, which are capital intensive or reliant on large and expensive facilities, may have a more difficult time reducing their overhead costs. Closing a plant or facility may take longer than just giving a bunch of workers pink slips. Reliance on a strong economy: Some industries are more subject to the health of the economy. For instance, companies that make durable consumer goods such as homes, appliances, and automobiles, usually see the largest drop-off in business as spending on such big-ticket items cools. Companies with profits that are closely tied to the economy are described as being cyclical.

View Article
How a Company's Industry Can Influence Its Value

Article / Updated 09-12-2016

The battle for companies, and entire industries, to remain relevant in light of new ways of doing things is something you need to account for in your fundamental analysis. The rise and fall of companies and industries follows a pretty standard script. Generally, things kick off when entrepreneurs get frustrated with existing products that don't seem to fit some kind of need they have. By tinkering on the kitchen table or in the garage, these entrepreneurs may create a prototype of a product and often literally sell it out of the back of their cars. Before you know it, this little company grows and the product might get so popular it threatens the survival of the companies that sold the undesirable products in the first place. Entire industries are born, and sometimes destroyed, by this constant upheaval in our economic system. You want to be aware when a company you're investing in might be threatened by a game-changing company or new technology. Almost overnight, all the revenue and earnings on the financial statements might not be meaningful if the business model, or way the company makes its money, is turned upside down. This is often referred to as disruption. The constant assault against established industries is part of our capitalist system. Remember, air travel threatened railroads, personal computers threatened large mainframe systems used in business, and the Internet is an attack on traditional media.

View Article
Applying Moving Averages to Fundamental Analysis

Article / Updated 09-12-2016

One technique used in long-term forecasts in fundamental analysis is the moving average. With this analysis, investors attempt to smooth out unusual bumps in a company's results. A moving average serves the same role as your seatbelt when your airplane hits turbulence. Moving averages may be applied to annual results or to quarterly results, based on how volatile the company's profits are. To conduct a moving-average analysis, you first must choose how many years you want to incorporate. A common time period would be three years. You add up the company's results over three-year chunks and then divide by the number of years, or 3. The table shows you what a three-year moving-average analysis on Oracle's operating income would look like. Getting a Move On With Oracle Fiscal year ended Three-year operating-income moving average at the end of . . . (in $ millions) 2011 $10,383 2012 $12,217 2013 $13,739 2014 $14,491 2015 $14,568 Using this analysis, you can see that the company's compound average annual growth rate is now really starting to slow down. Oracle's compound average growth rate based on five moving-average periods is 8.8 percent. That might be a reasonable basis with which to make a forward-looking growth forecast.

View Article
Fundamental Analysis and the Income Statement

Article / Updated 09-12-2016

Fundamental analysis requires you to pay close attention to the income statement for any sign the company isn't progressing as it should or, conversely, doing better than many thought it could. By buying shares of stock, you're claiming a piece of the company's future revenue and profits. The trick, though, is making sure the company is keeping its end of the bargain by generating a profit. That's where the income statement comes in. Companies that have issued stock on a stock market exchange such as the New York Stock Exchange or Nasdaq, or borrow money from the public, are required to issue an income statement. The income statement spells out in exhaustive detail how the company did during each quarter and year. No two income statements look identical, and subtle differences can make comparing one company's income statement with other companies' problematic (you can read about making comparisons more in Chapter 16). Income statements can also vary a bit depending on what line of business a company is in. Luckily for investors, the accountants have somewhat standardized the way companies must prepare the income statement. Income statements tend to follow the same basic structure. You can dedicate a great deal of time obsessing over every nuance of financial statements, including the income statement. If that's of interest to you, check out Reading Financial Reports For Dummies (Wiley, 2013), which gets into the nitty-gritty of financial reporting. In this book, the one you're holding, you'll get a look at the basic layout of the income statement and what you'll need to do some serious fundamental analysis. The basic structure of an income statement includes these items: Revenue: This is how much money the company brought in by selling goods and services. Revenue is often called the "top line." Cost of goods sold: It takes money to make money. Cost of goods sold measures what a company must spend to actually create the good or service sold. These are direct costs, meaning they are costs for items that may literally go into the products. Cost of goods sold, for many manufacturing companies, is the largest single cost of doing business. For instance, with an automaker, the cost of goods sold might include the cost of steel used to build the cars. Operating expenses: Indirect expenses are incurred by companies as they conduct business, but may not go directly into the product. These costs are usually necessary or important, but peripheral. These indirect costs are called operating expenses or better known as overhead. Operating expenses may include: Marketing expenses: Include advertising and other promotional expenses. Research and development: What a company spends to cook up new products or services to sell to customers. Administrative expenses: Expenses connected with support staff, such as legal, human resources, and other functions that are directly tied to manufacturing the product. Other income: Companies sometimes bring in money for things other than selling products and services. This income is recorded as other income. For instance, a company might win a legal settlement or sell a factory. Other expenses. Just as "other income" doesn't qualify as revenue, other expenses do not qualify as normal operating expenses. Other expenses might include the cost to restructure a unit of the company, paying severance to lay off employees, or depreciation — accounting for wear and tear (see the sidebar, "Appreciating depreciation"). Earnings before interest and taxes. After you subtract cost of goods sold, operating expenses, and other expenses from revenue, what you're left with is earnings before interest and taxes. Interest expense. Most companies borrow money to fund their operations or to buy inventory. Here, the company discloses how much it's paying to borrow money. Taxes. Companies must pay taxes too. Here, companies disclose how much they they paid to Uncle Sam. Net income. Finally, after paying all these costs and expenses, what's left is the profit, or net income. This is how much the company earned during the period, based on accounting rules or GAAP. Ever hear a company say it used GAAP? No, that doesn't mean they used expense accounts to buy khakis and collared shirts at a popular clothing store. Instead, I'm talking about GAAP — Generally Accepted Accounting Principles — painstakingly detailed rules that instruct companies on the right way to report results.

View Article
The Dangers of Initial Public Offerings

Article / Updated 09-12-2016

If there's a time when investors often turn off their reasoning and fundamental analysis skills, it's with initial public offerings (IPOs). With an IPO, a company that had been private offers its shares to the public for the first time. There's often a great deal of hoopla and excitement when a company's shares are in the public's grasp. Some investors love to buy IPOs, practically sight unseen. It's not because there's a lack of information on IPO. Companies going public for the first time must provide everyone interested in investing with a regulatory filing called the prospectus. A prospectus is a gigantic file of regulatory disclosures that are kind of like the 10-K, 10-Q, and proxy statement all rolled into one. Prospectuses contain all the financial statements you could ever want. But often, new companies coming public have such a positive story, investors can't seem to help themselves. Here's a startling fact: A huge number of companies aren't even profitable when they're launching their IPOs. In 2014, for instance, 83 percent of all technology companies launching an IPO lost money, says Jay Ritter, professor of finance at the University of Florida. It's not a recent phenomenon either. And get this: Back in 2000, 80 percent of the companies that sold stock to the public weren't profitable. Investors, though, routinely ignore the fundamentals and buy these IPOs anyway. As you're probably guessing already, investors who buy IPOs with no understanding of the fundamentals are usually sorely disappointed. Investors who bought IPOs between 1980 and 2013, and held the stocks for three years, wound up lagging the rest of the stock market by 18.4 percent, Ritter says. Some IPO wipeouts are especially stunning. One that comes to mind is Etsy, an online retailer where artisans can sell handmade items that sold shares to the public for the first time in April 2015. Online companies were the hot thing again on Wall Street in the mid-2010s, as investors saw the success of Amazon.com and hoped to get on the ground floor of the next hot online retailer. Etsy soared 88 percent on its first day of trading to close at $30 a share. But, again, investors doomed themselves by paying top dollar for a risky business. The company's losses continued to accumulate in 2015, and Etsy shares sank to roughly $9 a share in December 2015 for a crushing 70 percent loss for investors who bought on the stock's first day.

View Article
Stock-Split Information

Article / Updated 09-12-2016

Money for nothing is hard to find on Wall Street. But sometimes investors get additional shares — well, sort of. When a company's stock price rises dramatically and begins to approach $50 a share or more, the executives might decide to split the shares. In a stock split, the company cuts its share price, say in half, by cutting the shares into multiple shares. For instance, let's say you own 100 shares in a stock trading for $60 a share. If the company has a 2-for-1 split, you will suddenly have 200 shares, but they'll be worth $30 apiece. Management feels some investors are more likely to buy stock in a company for $30 a share than $60. The theory goes that some naïve investors, who read too much into a stock's per-share price, might assume a stock trading for $50 or more is too expensive. Some investors assume that a stock split is a major boon because they suddenly have more shares. The per-share price of a stock doesn't tell you much. The value of your shares is still $6,000, whether you own 100 shares at $60 or 200 shares at $30 a share. The company's market value also stays the same. Understanding when stock splits occur is important for fundamental analysis, though, because it can affect the number of shares outstanding. You'll need an accurate count of shares outstanding to do some of the fundamental analysis. Fortunately, many companies provide stock-split histories on their websites. But not all do — and you might want to look up stock splits at multiple companies without navigating to several investor relations websites. That's where other online tools can help you find when splits happened and how many shares were affected come in. Yahoo! Finance helps you look up if, and when, a company split its shares. Here's how: Log into Yahoo! Finance. Enter the name of the company or symbol in the Quote Lookup blank and click on the name of the company. For GE, for instance, enter GE and click the General Electric link. Click on the Interactive link below the Charts heading on the left side of the screen. This will take you to Yahoo Finance's advanced charting feature. Choose the timeframe. If you want to see all the company's split in its history, choose Max. Observe the chart. If the stock has been split, you'll see a small purple hexagon with the letter "S" in the center on the bottom of the stock chart. For instance, the chart tells you that GE last split its stock, by 3 for 1, on May 8, 2000.

View Article
How to Find Stocks' Dividend Histories

Article / Updated 09-12-2016

Dividends are periodic cash payments some companies make to their shareholders. The dividends are paid out of the company's cash as a way of returning profits to the shareholders. Dividends are a very important piece of your total return on an investment. Don't ignore dividends. These cash payments, over time, account for about one-third of the total return investors make on the market, according to Standard & Poor's. The remaining two-thirds of total return come from the stock price rising. During difficult times for the stock market, when stock prices fall, the dividends might be the only gains you get. Dividends are also important ways to help value a company. Companies that pay dividends generally pay them quarterly. The best way to look up a dividend history is on the company's website. Nearly all companies provide an area of their websites where dividend payment histories can be looked up. The Bing search engine can save you a step finding this corner of companies' websites. From Bing.com enter the name of the company and "dividend history." Many times, you'll be given a link that takes you directly to the company's website that lists all the dividends paid. You can also navigate to the dividend history by finding the investor relations section of a company's website. Go to GE's website and click on the "investor" link at the top of the page. Next, click on the Stock Information link on the left-hand side. Scroll down and you'll find GE's Dividend History, which lists GE's dividend payments going back for two decades.

View Article
Pull Fundamental Data from Websites into Spreadsheets

Article / Updated 09-12-2016

Sometimes reading a company's financial statements using the SEC's EDGAR database isn't enough. If you want to perform much fundamental analysis, you'll likely need to download the data into a spreadsheet. If the company you're analyzing provides XBRL data, it's easy to download into a spreadsheet. Luckily, there's a handy trick using Microsoft Excel all fundamental analysts should know about. While it's possible to cut-and-paste the financial data from a company filing into a spreadsheet, the results can be a disorganized mess. Instead, use an Excel function that's built to order. Here's how: Open the filing. Find the filing you're interested in downloading using the steps above. Copy the web address from the address bar in your browser by highlighting the address and holding the Control button and the C key. Open Microsoft Excel. Instruct Excel to find the filing. Choose Excel's Data menu on the ribbon and click the From Web option on the left-hand side of the screen. A new window, titled New Web Query, will pop up. Enter the Web address of the filing into the New Web Query window. Paste the filing's address by holding down the Control button and choose the V key, in the address bar at the top. Import the filing. Click the Go button at the top of the New Web Query page in Excel. Select the relevant financial data. Scroll down in the New Web Query window in Excel until you see the financial data you would like to download. Click the small yellow arrow next to the data, click the Import button, and then the OK button in the Import Data window. After you follow these steps, the financial information you want, such as the company's income statement or balance sheet, will automatically appear in a spreadsheet. This will be a handy skill that can help you with the analysis you'd do later in the book.

View Article
How to Get Data from the SEC's Database

Article / Updated 09-12-2016

The SEC's website is a treasure trove for fundamental analysis. You'll find all the financial forms you need. All the fundamental data are stored in the SEC's Electronic Data Gathering, Analysis and Retrieval, or EDGAR, database. You can use EDGAR to look up any public company's filings and even download the financial statements to your computer so you can do further analysis. Now that you know how powerful EDGAR is, it's time to dive in and discover how to get what you need from it. In the example below, you get the 10-Q, 10-K, and proxy statement for General Electric. Just follow these steps: Log into the SEC's website. Click the Company Filings link on the upper right-hand corner of the page. Enter the name of the company in the Company name blank. It's the first blank in the top page as shown. Type in general electric for this example. If you know the company's symbol, GE in our example, you can enter that in the Fast Search blank. Click the Search button. Choose the company name. Because General Electric has separate business units, you'll see companies like General Electric Capital Assurance Co. But you want the main company, so click on the red numbers to the left of where it says General Electric Co. Click on the form you want. If you want GE's 10-Q, scroll down until you see the form 10-Q listed and click on the Documents button. If you want the 10-K, choose 10-K, and the proxy is marked as 14-A. You'll be taken to a page outlining everything contained in that filing. Click on the red code under the document column in the first line. This line should have the form under the Type head, which in this case is the 10-Q. When you're downloading the 10-K, the line should read 10-K. When you're scrolling down through the list of forms, you might notice that some have a blue button that says Interactive Data. These forms are presented in a special format that computers can read, called eXtensive Business Reporting Language or XBRL. Financial statements available in XBRL can be easily processed and downloaded. If you click on the Voluntary Interactive Data button, you'll be moved to an area of the SEC's website that lets you view financial reports using XBRL. You can easily skip between the income statement and balance sheet without scrolling, for instance. XBRL also lets you easily download the financial statements to a spreadsheet. Because it's not required to file using XBRL, only a few companies do. But that's changing. Most of the major web portals, such as Yahoo! and MSN provide summaries of companies' primary financial statements. Most companies, too, put their financial data on their websites. But as a fundamental analyst, it's important to know how to get the data direct from the source: The SEC's EDGAR database.

View Article
page 1
page 2
page 3
page 4
page 5