Basics of Fundamental Analysis: How to Read Financial Statements
Financial statements provide crucial insights into the financial stability of a company and assist in deciding the company’s valuation in the stock market. These statements are the report card of a company that helps investors predict the company’s future performance.
Types of Financial Statements
Every company needs to maintain three types of financial statements.
Balance Sheet: It reveals the company’s worth in terms of book value at the end of a specific year. A balance sheet consists of three main parts: assets, liabilities or debts, and shareholder’s equity.
Income Statement: It is a detailed record of the company’s revenue earnings and expenses in a particular past period. An income statement is called a profit and loss statement.
Cash Flow Statement: It is the record of the liquid cash or cash equivalent circulating in the company. It is an important document that assists in evaluating a company’s financial health.
Methods of Financial Statement Analysis
The three common methods to analyse the financial statements are horizontal analysis, vertical analysis, and Ratio and Trend analysis.
Horizontal Analysis: It is the comparison of performance of two or more periods and helps in analysing a company’s progress over a period.
Vertical Analysis: It helps to establish a correlation between different line items in a ledger and gives analysts an understanding of overall performance in terms of revenue and expenses.
Ratio analysis: This method of financial analysis is used to compare one financial component against another and reveal a general trend.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
Basics of Fundamental Analysis: The Impact of Macroeconomic Factors on Trading
Investors need to be mindful that macro economic factors impact all companies and their stock prices. It is important to understand, however, that broad economic indicators and policies impact different market sectors and companies in different ways.
Repo Rates
It refers to the rate at which commercial banks borrow money from the Reserve Bank of India (RBI). Higher repo rates make borrowing more expensive, thus reducing corporate profits and stock prices, while the lower repo rates have the opposite effect. Unchanged rates can also impact the market.
Inflation
Since inflation impacts everything from production to consumption, it becomes essential to understand how it can affect the market. The production costs are increased due to high inflation which can reduce profit margins and stock prices. In case of low inflation, the stock price can potentially increase. The Consumer Price Index (CPI) helps measure the inflation in the economy.
Gross Domestic Product
It is the measure of the total value of the services and goods produced in the economy. A favourable and promising GDP outlook can boost the stock market as companies tend to perform well in a growing economy.
Foreign Direct Investment
It refers to the investments made by foreign entities in Indian businesses. A higher FDI inflow generally indicates increased confidence in the country’s economic growth prospects and has a positive impact on the stock market.
Other Macroeconomic Factors
Index of Industrial Production
Exports and Imports
Index of Eight Core Industries
High-Frequency Indicators (HFIs)
Infrastructure Development
Power Consumption
Goods and Services Tax (GST) Collection
Rail Freight and Port Cargo Traffic
Volume of E-Way Bills
Government Policies
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
An annual report is an important and comprehensive document that is published annually by a company and contains a large volume and variety of information. It is a sacrosanct document as the information is directly provided by the company and the information is considered to be trustworthy.
Decoding Annual Reports
The annual report of a company usually contains all the important information that is necessary for its shareholders or general audiences. The sections and subsections of a report should provide comprehensive and detailed information and data about the company. Here are some of the major sections covered in the report.
Financial Highlights: It is a financial snapshot of a company and provides a comparison of past years.
Management Statement: Here the people at the decision-making level of the company talk about the past performance and future plans. This section provides a window into management’s thinking on recent development and planned actions.
Management Analysis and Review: It gives insights into the macro-economic trends affecting the industry and the company’s coping mechanism.
Statutory Reports: It contains the director’s report, business responsibility report and the corporate governance report.
Financial Statements: It provides detailed financial performance of the company on the consolidated, and also, standalone, basis.
Notes: It provides details of each line item in the balance sheet, profit and loss statement, and the cash flow statement.
Review of Subsidiary: It provides a snapshot of performance of the major subsidiaries
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. Investments in securities market are subject to market risks, read all the related documents carefully before investing.