What Investment Fundamentals to Look For
When you’re practicing fundamental analysis, knowing what makes a company tick isn’t as convoluted as it may sound. Companies are so regulated and scrutinized, all the things you need to pay attention to are usually listed and published for all to see. Generally, when you hear about a company’s fundamentals, the key elements to be concerned will fall into several categories including:
- Financial performance: Here you’re looking at how much a company collects from customers who buy its products or services, and how much it keeps in profit. Terms you probably hear quite a bit about, such as earnings and revenue, are examples of ways fundamental analysts evaluate a company’s financial performance.
- Financial resources: It’s not enough for a company to sell goods and services. It’s not even enough to turn a profit. Companies must also have the financial firepower to invest in themselves and keep their businesses going and growing. Aspects of a business, such as its assets and liabilities, are ways to measure a company’s resources.
- Management team: When you invest in a company, you’re entrusting your money to the CEO and other managers to put your cash to work. Fundamental analysis helps you separate the good managers from the bad.
- Valuation: It’s not enough to identify which companies are the best. What’s a “good” company anyway? Definitions of “good” can run the gamut. You also need to consider how much you’re paying to own a piece of a company. If you overpay for the best company on the planet, it’s still likely you’ll end up losing money on the investment.
- Macro trends: No company operates in a vacuum. A company’s performance is highly influenced by actions of competitors or the condition of the economy. These broad factors need to be incorporated into fundamental analysis.