Learn Financial Analysis: A Comprehensive Guide To Trading Methods And Applications
All of us want to make money in the stock market, to grow our wealth as quickly as possible. Stock trading and investing to make monetary gains require hard work. Two main aspects of stock trading and analysis include fundamental and technical analysis. You can learn about financial analysis through financial modeling, financial analysis, or chartered financial analysis courses at Imarticus Learning.
Fundamental analysis involves a detailed study of the financials of the company to determine the intrinsic value whereas technical analysis involves the study of historical prices of the stock through chart patterns to project the future price and the trend in stock prices.
What is Financial Analysis?
Financial analysis is the holistic study of the financial position of the company, including past trends, ratio analysis, and cash flows of the company to determine the solvency, liquidity, financial strength, and intrinsic value of the company. When you do a financial analysis of a company or a stock, it should be able to help you determine whether undertaking an investment in a particular company is worthwhile.
It helps you choose the best possible investment opportunities. It involves the study of the balance sheet, profit and loss accounts, cash flow statements, and ratio analysis. You can opt for a financial modeling course or a chartered financial analyst’s course to hone your skills in financial analysis.
Uses of Financial Analysis
Financial analysis can be divided into two components—corporate financial analysis and investment financial analysis.
Corporate Financial Analysis
- Forecasting economic trends in the company/stock.
- Companies use financial analysis to enable them to determine future trends in financial policy, long-term budgeting exercises, peer comparison, etc.
- Project identification teams also use financial analysis to make a comparative analysis of cash flows and return to determine the most investable project. Measures like internal rate of return and net present values form an integral part of financial analysis. Financial modelling courses can help you build your skills in this area.
- Improve working capital management by improving the efficacy of collection of receivables/payables management, etc.
Investment Financial Analysis
There are two popular approaches to doing financial analysis:
Top-down going from the macro to micro: This starts from analyzing major economic trends in the economy including GDP growth, the future direction of interest rates, inflation, exchange rates and currency trends, movement of the economic policy, looking at sectoral trends or factors that accelerate or impede the growth of the industrial sector, and then cherry-picking the industrial sectors poised to perform very well in the economy.
After the macro analysis, the next step is drilling down to the micro. Looking at specific companies in the selected industrial sectors, conducting ratio analysis and financial analysis of the selected companies, and doing both intra-firm and inter-firm analyses to finally choose the best investment opportunities.
Value-based investing: This is going from the bottom to the top. Selecting a company based on its intrinsic value and validating all other assumptions about the macro aspects affecting the company. If the stock markets are particularly choppy, it is always better to use a value-based approach to pick your stocks.
In both the above strategies, analyzing past performance using ratio analysis and other financial analyses is key. Per-share ratios such as price-earnings, price/book value, price to sales, price to enterprise value, leverage ratios like debt/equity, debt to total assets and interest coverage ratios, return ratios like return on equity, return on assets, gross profit margin, net profit margin are all important and can be used in the analyzing the past trends as well as in peer comparison.
All of the above analyses help in determining the intrinsic value and whether the company is overvalued or undervalued compared to its long-term historical averages. Ratios such as dividend payout ratio and the earnings per share growth help determine whether the company is growing at a sustainable rate and whether it can maintain its growth momentum.
Technical analysis: Technical analysis is based on the presumption that the current stock price reflects the intrinsic value and charting historical prices of shares will help project the future share price momentum. Various techniques such as bar charts and candlestick charts are used to portray the chart patterns. Various studies interpret different chart patterns to decide whether the stock is likely to give a breakout on the upside or the downside. This helps decide the price point of stock at which you should enter.
Both fundamental and technical analyses should be used in conjunction with each other and not in isolation. Also, you must be aware that market sentiment depends on macro-economic trends influencing the economic policy of the country and also the impact of central bank action around the world.
Recently, all central banks around the world raising interest rates due to excessive inflationary pressures in concert has turned market sentiment bearish. This has resulted in large falls in both the indices as well as stock prices.
Doing financial analysis before undertaking any investment activity is very important as it is your hard-earned money at stake. Poor judgment calls or poorly done homework means significant portfolio losses. If you are a beginner in stock markets, learn both fundamental and technical analysis.
Only when you are proficient in both should you take stock of investment decisions or decisions to build your portfolio. Don't delay. Register for a financial analysis course, a financial modeling course, or a chartered financial analysis course today. It is the difference between growing your wealth and losing it.