Fundamental Analysis - About the Organizations Profits

HOW ARE THE GAINS / PROFITS OF THE ORGANIZATION ? HOW IT MAY THRIVE IN FUTURE ? 

INDUSTRY GROWTH 

One way of examining a company's growth potential is to first examine whether the amount of customers in the overall market will grow. This is crucial because without new customers, a company has to steal market share in order to grow.

In some markets, there is zero or negative growth, a factor demanding careful consideration. For example, a manufacturing company dedicated solely to creating audio compact cassettes might have been very successful in the '70s, '80s and early '90s. However, that same company would probably have a rough time now due to the advent of newer technologies, such as CDs and MP3s. The current market for audio compact cassettes is only a fraction of what it was during the peak of its popularity.


THE MARKET PRICE VS EARNING YIELD / STOCK RATIO ! 

Understanding Price to Sales Ratio


You have a number of tools available to you when it comes to evaluating companies with earnings. The first three articles listed at the bottom of this article, in particular deal with earnings directly. You can add the two others on dividends and the one on return on equity to the list as specific to companies that are or have made money in the past.

Does that mean companies that don’t have any earnings are bad investments? Not necessarily, but you should approach companies with no history of actually making money with caution.

The Internet boom of the late 1990s was a classic example of hundreds of companies coming to the market with no history of earning – some of them didn’t even have products yet. Fortunately, that’s behind us.

However, we still have the problem of needing some measure of young companies with no earnings, yet worthy of consideration. After all, Microsoft had no earnings at one point in its corporate life.

One ratio you can use is Price to Sales or P/S ratio. This metric looks at the current stock price relative to the total sales per share. You calculate the P/S by dividing the market cap of the stock by the total revenues of the company.

You can also calculate the P/S by dividing the current stock price by the sales per share.

WHO IS CALLED MANAGEMENT ? 

The team of persons organizing a concern is called Management. They are 

1) Promoters, 
2) C.E.O. (CHIEF EXECUTIVE OFFICER ), 
3) Chairman, 
4) Managing Director and 
5) Board of Directors. 


Generally qualified Managements hold certain principles within themselves. They are, 


1) Satisfied Customer service, 
2) Prompt Tax payers ( Not misusing Tax ) 
3) Quality in Produced products, 
4) Refusing Bribery, 
5) Pertaining to Law, behaving Truly, 
6) Considering Employees Welfare, 
7) Not swallowing Huge salary as they wish, etc….. can be mentioned continuously. 


If we consider only a scale, Quality in Management we can realize the truth that many concerns in India are not maintaining Quality. Merely we can reject all those. Quality is famine in Indian companies. For example:- Real Estate companies ( Infrastructures ). Tata group of Companies, H.D.F.C. Group, Infosys, Mahindra & Mahindra, and some, public sector companies stand erect, because of the belief in people. 


Companies like TATA, not ready to offer Bribe , missed some sectors. Even in Tamilnadu, due to the price hike of Real Estates ( Infrastructure ) TATA Group avoided its plan of commissioning a plant. H.D.F.C Group stocks at anytime being at Highest prices are due to their Qualified Management and Frankness. 

QUALITY OF MANAGEMENT 

After Analyzing Economy and sectors, the various factors required to purchase a stock are,

(i)      Trusted Management,

(ii)      Efficient and Impartial characteristics.

How a government is important for a country, likewise a head of the family for the house, a teacher for a class, similarly to that much level, a management is very important.

In order to execute a business plan, a company requires top-quality management. Just as an army needs a general to lead it to victory, a company relies upon management to steer it towards financial success. 

Investors might look at management to assess their capabilities, strengths and weaknesses. Some believe that management is the most important aspect for investing in a company.   

Even the best-laid plans in the most dynamic industries can go to waste with bad management (AMD in semiconductors).  

Alternatively, even strong management can make for extraordinary success in a mature industry (Alcoa in aluminum). Some of the questions to ask might include:  

  How talented is the management team?

  Do they have a track record ?

  How long have they worked together ?

  Can management deliver on its promises?

If management is a problem, it is sometimes best to move on.

It makes sense - even the best business model is doomed if the leaders of the company fail to properly execute the plan. 

So how does an average investor go about evaluating the management of a company? 

This is one of the areas in which individuals are truly at a disadvantage compared to professional investors. You can't set up a meeting with management if you want to invest a few thousand dollars. On the other hand, if you are a fund manager interested in investing millions of dollars, there is a good chance you can schedule a face-to-face meeting with the upper brass of the firm.

Every public company has a corporate information section on its website. Usually there will be a quick biography on each executive with their employment history, educational background and any applicable achievements. Don't expect to find anything useful here. Let's be honest: We're looking for dirt, and no company is going to put negative information on its corporate website.

Instead, here are a few ways for you to get a feel for management:

1. Conference Calls
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) host quarterly conference calls. (Sometimes you'll get other executives as well.) The first portion of the call is management basically reading off the financial results. What is really interesting is the question-and-answer portion of the call. This is when the line is open for analysts to call in and ask management direct questions. Answers here can be revealing about the company, but more importantly, listen for candor. Do they avoid questions, like politicians, or do they provide forthright answers?

2. Management Discussion and Analysis (MD& A)
The Management Discussion and Analysis is found at the beginning of the annual report (discussed in more detail already in this tutorial). In theory, the MD&A is supposed to be frank commentary on the management's outlook. Sometimes the content is worthwhile, other times it's boilerplate. One tip is to compare what management said in past years with what they are saying now. Is it the same material rehashed? Have strategies actually been implemented? If possible, sit down and read the last five years of MD&As; it can be illuminating.

3. Ownership and Insider Sales
Just about any large company will compensate executives with a combination of cash, restricted stock and options. While there are problems with stock options (See Putting Management Under the Microscope), it is a positive sign that members of management are also shareholders. The ideal situation is when the founder of the company is still in charge. Examples include Bill Gates (in the '80s and '90s), Michael Dell and Warren Buffett. When you know that a majority of management's wealth is in the stock, you can have confidence that they will do the right thing. As well, it's worth checking out if management has been selling its stock. This has to be filed with the Securities and Exchange Commission (SEC), so it's publicly available information. Talk is cheap - think twice if you see management unloading all of its shares while saying something else in the media.

4. Past Performance
Another good way to get a feel for management capability is to check and see how executives have done at other companies in the past. You can normally find biographies of top executives on company web sites. Identify the companies they worked at in the past and do a search on those companies and their performance.

Fundamental Analysis - Balance Sheet

HOW IS THE COMPANIES BALANCE SHEET ?

A Companies stocks if purchased by an investor, skilled investors, go through the various hidden factors about the stock also. 

                  

While matching a Boy( Bride) with a Girl( Bridegroom) for a Marriage, then 

         

(i)   Their Age,

(ii)  Educational qualification

(iii) Complexion,

(iv) Height,

(v)  Weight,

(vi) Their Horoscopy matching, etc are considered for a celebration. 

         

Moreover in some cases we have heard of “X” Ray, Scan, E.C.G, Cardiogram, are taken if required. 

                  

Like the above a companies internal health must also be assessed. 

Introduction to Financial Statements

The massive amount of numbers in a company's financial statements can be bewildering and intimidating to many investors. On the other hand, if you know how to analyze them, the financial statements are a gold mine of information. 

Financial statements are the medium by which a company discloses information concerning its financial performance. Followers of fundamental analysis use the quantitative information gleaned from financial statements to make investment decisions. Before we jump into the specifics of the three most important financial statements - income statements, balance sheets and cash flow statements - we will briefly introduce each financial statement's specific function, along with where they can be found.  

THE MAJOR STATEMENTS 
THE BALANCE SHEET 
The Snapshot of Health

The balance sheet, also known as the statement of financial condition, offers a snapshot of a company's health. It tells you how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called "net assets" or "shareholders equity". 

The balance sheet tells investors a lot about a company's fundamentals: how much debt the company has, how much it needs to collect from customers (and how fast it does so), how much cash and equivalents it possesses and what kinds of funds the company has generated over time.  

Investors often overlook the balance sheet. The balance sheet represents a record of a company's assets, liabilities and equity at a particular point in time. Assets and liabilities aren't nearly as sexy as revenue and earnings. While earnings are important, they don't tell the whole story. 

The balance sheet is named by the fact that a business's financial structure balances in the following manner: 

Assets = Liabilities + Shareholders\' Equity

Assets represent the resources that the business owns or controls at a given point in time. This includes items such as cash, inventory, machinery and buildings. The other side of the equation represents the total value of the financing the company has used to acquire those assets. Financing comes as a result of liabilities or equity. Liabilities represent debt (which of course must be paid back), while equity represents the total value of money that the owners have contributed to the business - including retained earnings, which is the profit made in previous years. 

The balance sheet highlights the financial condition of a company and is an integral part of the financial statements. (To read more on financial statement basics, see What You Need To Know About Financial Statements and Advanced Financial Statement Analysis.) 

The Balance Sheet's Main Three 
Assets, liability and equity are the three main components of the balance sheet. Carefully analyzed, they can tell investors a lot about a company's fundamentals. 

Assets 
There are two main types of assets: current assets and non-current assets. Current assets are likely to be used up or converted into cash within one business cycle - usually treated as twelve months. Three very important current asset items found on the balance sheet are: cash, inventories andaccounts receivables. 

Investors normally are attracted to companies with plenty of cash on their balance sheets. After all, cash offers protection against tough times, and it also gives companies more options for futuregrowth. Growing cash reserves often signal strong company performance. Indeed, it shows that cash is accumulating so quickly that management doesn't have time to figure out how to make use of it. A dwindling cash pile could be a sign of trouble. That said, if loads of cash are more or less a permanent feature of the company's balance sheet, investors need to ask why the money is not being put to use. Cash could be there because management has run out of investment opportunities or is too short-sighted to know what to do with the money. 

Inventories are finished products that haven't yet sold. As an investor, you want to know if a company has too much money tied up in its inventory. Companies have limited funds available to invest in inventory. To generate the cash to pay bills and return a profit, they must sell the merchandise they have purchased from suppliers. Inventory turnover (cost of goods sold divided by average inventory) measures how quickly the company is moving merchandise through the warehouse to customers. If inventory grows faster than sales, it is almost always a sign of deteriorating fundamentals. 

Receivables are outstanding (uncollected bills). Analyzing the speed at which a company collects what it's owed can tell you a lot about its financial efficiency. If a company's collection period is growing longer, it could mean problems ahead. The company may be letting customers stretch their credit in order to recognize greater top-line sales and that can spell trouble later on, especially if customers face a cash crunch. Getting money right away is preferable to waiting for it - since some of what is owed may never get paid. The quicker a company gets its customers to make payments, the sooner it has cash to pay for salaries, merchandise, equipment, loans, and best of all, dividends and growth opportunities. 

Non-current assets are defined as anything not classified as a current asset. This includes items that are fixed assets, such as property, plant and equipment (PP&E). Unless the company is in financial distress and is liquidating assets, investors need not pay too much attention to fixed assets. Since companies are often unable to sell their fixed assets within any reasonable amount of time they are carried on the balance sheet at cost regardless of their actual value. As a result, it's is possible for companies to grossly inflate this number, leaving investors with questionable and hard-to-compare asset figures. 

Liabilities 
There are current liabilities and non-current liabilities. Current liabilities are obligations the firm must pay within a year, such as payments owing to suppliers. Non-current liabilities, meanwhile, represent what the company owes in a year or more time. Typically, non-current liabilities represent bank and bondholder debt. 

You usually want to see a manageable amount of debt. When debt levels are falling, that's a good sign. Generally speaking, if a company has more assets than liabilities, then it is in decent condition. By contrast, a company with a large amount of liabilities relative to assets ought to be examined with more diligence. Having too much debt relative to cash flows required to pay for interest and debt repayments is one way a company can go bankrupt. 

Look at the quick ratio. Subtract inventory from current assets and then divide by current liabilities. If the ratio is 1 or higher, it says that the company has enough cash and liquid assets to cover its short-term debt obligations. 

Quick Ratio =

Current Assets - Inventories Current Liabilities

Equity 
Equity represents what shareholders own, so it is often called shareholder's equity. As described above, equity is equal to total assets minus total liabilities. 

Equity = Total Assets – Total Liabilities

The two important equity items are paid-in capital and retained earnings. Paid-in capital is the amount of money shareholders paid for their shares when the stock was first offered to the public. It basically represents how much money the firm received when it sold its shares. In other words, retained earnings are a tally of the money the company has chosen to reinvest in the business rather than pay to shareholders. Investors should look closely at how a company puts retained capital to use and how a company generates a return on it. 

Most of the information about debt can be found on the balance sheet - but some assets and debt obligations are not disclosed there. For starters, companies often possess hard-to-measure intangible assets. Corporate intellectual property (items such as patents, trademarks, copyrights and business methodologies),  goodwill  and brand recognition are all common assets in today's marketplace. But they are not listed on company's balance sheets. 

There is also off-balance sheet debt to be aware of. This is form of financing in which large capital expenditures are kept off of a company's balance sheet through various classification methods. Companies will often use off-balance-sheet financing to keep the debt levels low.

The Cash Flow Statement

The cash flow statement shows how much cash comes in and goes out of the company over thequarter or the year. At first glance, that sounds a lot like the income statement in that it records financial performance over a specified period. But there is a big difference between the two. 

What distinguishes the two is accrual accounting, which is found on the income statement. Accrual accounting requires companies to record  revenues  and  expenses when transactions occur, not when cash is exchanged. At the same time, the income statement, on the other hand, often includes non-cash revenues or expenses, which the statement of cash flows does not include. 

Just because the income statement shows net income of $10 does not means that cash on the balance sheet will increase by $10. Whereas when the bottom of the cash flow statement reads $10 net cash inflow, that's exactly what it means. The company has $10 more in cash than at the end of the last financial period. You may want to think of net cash from operations as the company's "true" cash profit. 

Because it shows how much actual cash a company has generated, the statement of cash flows is critical to understanding a company's fundamentals. It shows how the company is able to pay for its operations and future growth. 

Indeed, one of the most important features you should look for in a potential investment is the company's ability to produce cash. Just because a company shows a profit on the income statement doesn't mean it cannot get into trouble later because of insufficient cash flows. A close examination of the cash flow statement can give investors a better sense of how the company will fare. 

Three Sections of the Cash Flow Statement 
Companies produce and consume cash in different ways, so the cash flow statement is divided into three sections: cash flows from operations, financing and investing. Basically, the sections on operations and financing show how the company gets its cash, while the investing section shows how the company spends its cash.

Cash Flows from Operating Activities 
This section shows how much cash comes from sales of the company's goods and services, less the amount of cash needed to make and sell those goods and services. Investors tend to prefer companies that produce a net positive cash flow from operating activities. High growth companies, such as technology firms, tend to show negative cash flow from operations in their formative years. At the same time, changes in cash flow from operations typically offer a preview of changes in net future income. Normally it's a good sign when it goes up. Watch out for a widening gap between a company's reported earnings and its cash flow from operating activities. If net income is much higher than cash flow, the company may be speeding or slowing its booking of income or costs. 

Cash Flows from Investing Activities 
This section largely reflects the amount of cash the company has spent on capital expenditures, such as new equipment or anything else that needed to keep the business going. It also includes acquisitions of other businesses and monetary investments such as money market funds. 

You want to see a company re-invest capital in its business by at least the rate of depreciationexpenses each year. If it doesn't re-invest, it might show artificially high cash inflows in the current year which may not be sustainable. 

Cash Flow From Financing Activities 
This section describes the goings-on of cash associated with outside financing activities. Typical sources of cash inflow would be cash raised by selling stock and bonds or by bank borrowings. Likewise, paying back a bank loan would show up as a use of cash flow, as would dividend paymentsand common stock repurchases. 

Cash Flow Statement Considerations: 
Savvy investors are attracted to companies that produce plenty of free cash flow (FCF). Free cash flow signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business. Free cash flow, which is essentially the excess cash produced by the company, can be returned to shareholders or invested in new growth opportunities without hurting the existing operations. The most common method of 

calculating free cash flow is: 

Ideally, investors would like to see that the company can pay for the investing figure out of operations without having to rely on outside financing to do so. A company's ability to pay for its own operations and growth signals to investors that it has very strong fundamentals.

Statement of Cash Flows 
The statement of cash flows represents a record of a business' cash inflows and outflows over a period of time. Typically, a statement of cash flows focuses on the following cash-related activities: 

• Operating Cash Flow (OCF): Cash generated from day-to-day business operations
• Cash from investing (CFI): Cash used for investing in assets, as well as the proceeds from the sale of other businesses, equipment or long-term assets
• Cash from financing (CFF): Cash paid or received from the issuing and borrowing of funds

The cash flow statement is important because it's very difficult for a business to manipulate its cash situation. There is plenty that aggressive accountants can do to manipulate earnings, but it's tough to fake cash in the bank. For this reason some investors use the cash flow statement as a more conservative measure of a company's performance. 

Other Important Sections Found in Financial Filings

The financial statements are not the only parts found in a business's annual and quarterly SEC filings. Here are some other noteworthy sections:  

Management Discussion and Analysis ( MD& A )                                                              

As a preface to the financial statements, a company's management will typically spend a few pages talking about the recent year (or quarter) and provide background on the company. This is referred to as the management discussion and analysis (MD&A). In addition to providing investors a clearer picture of what the company does, the MD&A also points out some key areas in which the company has performed well. 

Don't expect the letter from management to delve into all the juicy details affecting the company's performance. The management's analysis is at their discretion, so understand they probably aren't going to be disclosing any negatives. 

Here are some things to look out for: 

• How candid and accurate are management's comments?
• Does management discuss significant financial trends over the past couple years? (As we've already mentioned, it can be interesting to compare the MD&As over the last few years to see how the message has changed and whether management actually followed through with its plan.)
• How clear are management's comments? If executives try to confuse you with big words and jargon, perhaps they have something to hide.
• Do they mention potential risks or uncertainties moving forward?

Disclosure is the name of the game. If a company gives a decent amount of information in the MD&A, it's likely that management is being upfront and honest. It should raise a red flag if the MD&A ignores serious problems that the company has been facing. 

The Auditor's Report The auditors' job is to express an opinion on whether the financial statements are reasonably accurate and provide adequate disclosure. This is the purpose behind the auditor's report, which is sometimes called the "report of independent accountants". 

By law, every public company that trades stocks or bonds on an exchange must have its annual reports audited by a certified public accountants firm. An auditor's report is meant to scrutinize the company and identify anything that might undermine the integrity of the financial statements. 

The typical auditor's report is almost always broken into three paragraphs and written in the following fashion: 

Independent Auditor\'s Report  Paragraph 1  Recounts the responsibilities of the auditor and directors in general and lists the areas of the financial statements that were audited.  Paragraph 2  Lists how the generally accepted accounting principles (GAAP) were applied, and what areas of the company were assessed.  Paragraph 3  Provides the auditor\'s opinion on the financial statements of the company being audited. This is simply an opinion, not a guarantee of accuracy.

While the auditor's report won't uncover any financial bombshells, audits give credibility to the figures reported by management. You'll only see unaudited financials for unlisted firms (those that trade OTCBB or on the Pink Sheets). While quarterly statements aren't audited, you should be very wary of any annual financials that haven't been given the accountants' stamp of approval. 

The Notes to the Financial Statements 
Just as the MD&A serves an introduction to the financial statements, the notes to the financialstatements (sometimes called footnotes) tie up any loose ends and complete the overall picture. If the income statement, balance sheet and statement of cash flows are the heart of the financial statements, then the footnotes are the arteries that keep everything connected. Therefore, if you aren't reading the footnotes, you're missing out on a lot of information. 

The footnotes list important information that could not be included in the actual ledgers. For example, they list relevant things like outstanding leases, the maturity dates of outstanding debt and details on compensation plans, such as stock options, etc. 

Generally speaking there are two types of footnotes: 

Accounting Methods - This type of footnote identifies and explains the major accounting policies of the business that the company feels that you should be aware of. This is especially important if a company has changed accounting policies. It may be that a firm is practicing "cookie jar accounting" and is changing policies only to take advantage of current conditions in order to hide poor performance. 

Disclosure - The second type of footnote provides additional disclosure that simply could not be put in the financial statements. The financial statements in an annual report are supposed to be clean and easy to follow. To maintain this cleanliness, other calculations are left for the footnotes. For example, details of long-term debt - such as maturity dates and the interest rates at which debt was issued - can give you a better idea of how borrowing costs are laid out. Other areas of disclosure include everything from pension plan liabilities for existing employees to details about ominous legal proceedings involving the company. 

The majority of investors and analysts read the balance sheet, income statement and cash flow statement but, for whatever reason, the footnotes are often ignored. What sets informed investors apart is digging deeper and looking for information that others typically wouldn't. No matter how boring it might be, read the fine print - it will make you a better investor. 

The Income Statement

 

While the balance sheet takes a snapshot approach in examining a business, the income statement measures a company's performance over a specific time frame. Technically, you could have a balance sheet for a month or even a day, but you'll only see public companies report quarterly and annually. 

The income statement presents information about revenues, expenses and profit that was generated as a result of the business' operations for that period. 

The income statement is basically the first financial statement you will come across in an annual report or quarterly Securities And Exchange Commission (SEC) filing. 

It also contains the numbers most often discussed when a company announces its results - numbers such as revenue, earnings and earnings per share. Basically, the income statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain time period. 

When it comes to analyzing fundamentals, the income statement lets investors know how well the company's business is performing - or, basically, whether or not the company is making money. Generally speaking, companies ought to be able to bring in more money than they spend or they don't stay in business for long. Those companies with low expenses relative to revenue - or high profits relative to revenue - signal strong fundamentals to investors. 

Revenue as an investor signal 

Revenue, also commonly known as sales, is generally the most straightforward part of the income statement. Often, there is just a single number that represents all the money a company brought in during a specific time period, although big companies sometimes break down revenue by business segment or geography. 

The best way for a company to improve profitability is by increasing sales revenue. For instance, Starbucks Coffee has aggressive long-term sales growth goals that include a distribution system of 20,000 stores worldwide. Consistent sales growth has been a strong driver of Starbucks' profitability. 

The best revenue are those that continue year in and year out. Temporary increases, such as those that might result from a short-term promotion, are less valuable and should garner a lower price-to-earnings multiple for a company. 

What are the Expenses? 

There are many kinds of expenses, but the two most common are the cost of goods sold (COGS) and selling, general and administrative expenses (SG&A). Cost of goods sold is the expense most directly involved in creating revenue. It represents the costs of producing or purchasing the goods or services sold by the company. For example, if Wal-Mart pays a supplier $4 for a box of soap, which it sells to customers for $5. When it is sold, Wal-Mart's cost of good sold for the box of soap would be $4. 

Next, costs involved in operating the business are SG&A. This category includes marketing, salaries, utility bills, technology expenses and other general costs associated with running a business. SG&A also includes depreciation and  amortization. Companies must include the cost of replacing worn out assets. Remember, some corporate expenses, such as research and development (R&D) at technology companies, are crucial to future growth and should not be cut, even though doing so may make for a better-looking earnings report. Finally, there are financial costs, notably taxes and interest payments, which need to be considered. 

Profits = Revenue - Expenses 
Profit, most simply put, is equal to total revenue minus total expenses. However, there are several commonly used profit subcategories that tell investors how the company is performing. Gross profit is calculated as revenue minus cost of sales. Returning to Wal-Mart again, the gross profit from the sale of the soap would have been $1 ($5 sales price less $4 cost of goods sold = $1 gross profit). 

Companies with high gross margins will have a lot of money left over to spend on other business operations, such as R&D or marketing. So be on the lookout for downward trends in the gross margin rate over time. This is a telltale sign of future problems facing the bottom line. When cost of goods sold rises rapidly, they are likely to lower gross profit margins - unless, of course, the company can pass these costs onto customers in the form of higher prices. 

Operating profit is equal to revenues minus the cost of sales and SG&A. This number represents the profit a company made from its actual operations, and excludes certain expenses and revenues that may not be related to its central operations. High operating margins can mean the company has effective control of costs, or that sales are increasing faster than operating costs. Operating profit also gives investors an opportunity to do profit-margin comparisons between companies that do not issue a separate disclosure of their cost of goods sold figures (which are needed to do gross margin analysis). Operating profit measures how much cash the business throws off, and some consider it a more reliable measure of profitability since it is harder to manipulate with accounting tricks than net earnings. 

Net income generally represents the company's profit after all expenses, including financial expenses, have been paid. This number is often called the "bottom line" and is generally the figure people refer to when they use the word "profit" or "earnings". 

When a company has a high profit margin, it usually means that it also has one or more advantages over its competition. Companies with high net profit margins have a bigger cushion to protect themselves during the hard times. Companies with low profit margins can get wiped out in a downturn. And companies with profit margins reflecting a competitive advantage are able to improve their market share during the hard times - leaving them even better positioned when things improve again. 

Conclusion 
You can gain valuable insights about a company by examining its income statement. Increasing sales offers the first sign of strong fundamentals. Rising margins indicate increasing efficiency and profitability. It's also a good idea to determine whether the company is performing in line with industry peers and competitors. Look for significant changes in revenues, costs of goods sold and SG&A to get a sense of the company's profit fundamentals. 

Fundamental Analysis - Analyzing about the Organization

ORGANIZATIONS, OPPORTUNITIES, THREATS, COMPETITORS ! 

OPPORTUNITY AND THREAT ANALYSIS  

The opportunity and threat analysis, also referred to as environmental analysis, is a strategic planning method for identifying and analyzing external opportunities to improve an organization’s performance as well as external risks to the organization’s success. It is part of the SWOT analysis which is commonly used to evaluate the strengths, weaknesses, opportunities, and threats of an organization or project. In addition to strategic planning, the opportunity and threat analysis can also be used for quality development, marketing purposes, location analysis, as well as in product politics.

External factors analyzed may include macroeconomic, technological, political, and socio-cultural change as well as changes in the marketplace or competitive position. The opportunity and threat analysis can be applied to a wide variety of aspects of an organization, including financial, personnel, technology, and products. The method helps organizations to minimize threats and take the greatest possible advantage of opportunities available to them which can result in competitive edges. 

COMPETITION 

Simply looking at the number of competitors goes a long way in understanding the competitive landscape for a company. Industries that have limited barriers to entry and a large number of competing firms create a difficult operating environment for firms. 

One of the biggest risks within a highly competitive industry is pricing power. This refers to the ability of a supplier to increase prices and pass those costs on to customers. Companies operating in industries with few alternatives have the ability to pass on costs to their customers. A great example of this is Wal-Mart. They are so dominant in the retailing business, that Wal-Mart practically sets the price for any of the suppliers wanting to do business with them. If you want to sell to Wal-Mart, you have little, if any, pricing power. 

REGULATION 
Certain industries are heavily regulated due to the importance or severity of the industry's products and/or services. As important as some of these regulations are to the public, they can drastically affect the attractiveness of a company for investment purposes. 

In industries where one or two companies represent the entire industry for a region (such as utility companies), governments usually specify how much profit each company can make. In these instances, while there is the potential for sizable profits, they are limited due to regulation. 

In other industries, regulation can play a less direct role in affecting industry pricing. For example, the drug industry is one of most regulated industries. And for good reason - no one wants an ineffective drug that causes deaths to reach the market. As a result, the U.S. Food and Drug Administration(FDA) requires that new drugs must pass a series of clinical trials before they can be sold and distributed to the general public. However, the consequence of all this testing is that it usually takes several years and millions of dollars before a drug is approved. Keep in mind that all these costs are above and beyond the millions that the drug company has spent on research and development. 

All in all, investors should always be on the lookout for regulations that could potentially have a material impact upon a business' bottom line. Investors should keep these regulatory costs in mind as they assess the potential risks and rewards of investing. 

Fundamental Analysis - Swot Analysis

What are the Strength / Weakness of the Organization ?

In Management a term “ Swot Analysis” is used. Where    

S – Strength  

W – Weakness 

O – Opportunities 

T – Threats.   

A SWOT analysis is commonly used in marketing and business in general as a method of identifying opposition for a new venture or strategy. Short for Strengths, Weaknesses, Opportunities and Threats, this allows professionals to identify all of the positive and negative elements that may affect any new proposed actions.

The purpose of a SWOT analysis

The SWOT analysis enables companies to identify the positive and negative influencing factors inside and outside of a company or organization. Besides businesses, other organizations, in areas such as community health and development and education have found much use in its guiding principles. The key role of SWOT is to help develop a full awareness of all factors that may affect strategic planning and decision making, a goal that can be applied to most any aspect of industry.

SWOT is meant to act primarily as an assessment technique, though its lengthy record of success among many businesses makes it an invaluable tool in project management.

When to use SWOT

SWOT is meant to be used during the proposal stage of strategic planning. It acts as a precursor to any sort of company action, which makes it appropriate for the following moments:

·                                 Exploring avenues for new initiatives

·                                 Making decisions about execution strategies for a new policy

·                                 Identifying possible areas for change in a program

·                                 Refining and redirecting efforts mid-plan

The SWOT analysis is an excellent tool in organizing information and presenting solutions, identifying roadblocks and emphasizing opportunities.

The elements of a SWOT analysis

A SWOT analysis focuses entirely on the four elements included in the acronym, allowing companies to identify the forces influencing a strategy, action, or initiative. Knowing these positive and negative impacting elements can help companies more effectively communicate what elements of a plan need to be recognized.

When drafting a SWOT analysis, individuals typically create a table split up into four columns so as to list each impacting element side-by-side for comparison. Strengths and weaknesses won’t typically match listed opportunities and threats, though some correlation should exist since they’re tied together in some way.

Internal factors

The first two letters in the acronym, Strengths and Weaknesses, refer to internal factors, which means the resources and experience readily available to you. Examples of areas typically considered include:

·     Financial resources, such as funding, sources of income and investment   

      opportunities.

·     Physical resources, such as your company’s location, facilities and equipment.

·     Human resources, such as employees, volunteers and target audiences.

·     Current processes, such as employee programs, department hierarchies and software systems.

When it comes to listing strengths and weaknesses, individuals shouldn’t try to sugarcoat or glaze over inherent weaknesses or strengths. Identifying factors both good and bad is important in creating a thorough SWOT analysis.

External factors

Every company, organization and individual is influenced and affected by external forces. Whether connected directly or indirectly to an opportunity or threat, each of these factors is important to take note of and document. External factors typically reference things you or your company does not control, such as:

·      Market trends, such as new products and technology or shifts in audience needs.

·      Economic trends, such as local, national and international financial trends.

·      Funding, such as donations, legislature and other foundations.

·      Demographics, such as a target audience’s age, race, gender and culture.

The SWOT analysis is a simple, albeit comprehensive strategy in identifying not only the weaknesses and threats of a plan, but also the strengths and opportunities available through it. While an excellent brainstorming tool, the four-cornered analysis prompts entities to examine and execute strategies in a more balanced way.

SWOT Analysis Template

Here is a SWOT Analysis template with some examples filled in: 

Strengths	Weaknesses
·                                 Political support ·                                 Funding available ·                                 Market experience Strong leadership	·                                 Project is very complex ·                                 Likely to be costly ·                                 May have environmental impact Staff resources are already stretched
Opportunities	Threats
·                                 Project may improve local    economy ·                                 Will improve safety Project will boost company's public image	·                                 Environmental constraints ·                                 Time delays Opposition to change

The stocks we ought to invest, these swot can be researched.