Important aspects of a company for fundamental analysis:
It is necessary, especially when investing for the long term, to carry out an in-depth analysis of the company or companies in which we want to invest. In other words, those in which we are interested in investing if our analysis so determines. There are very important aspects to take into account such as those mentioned below:
Market cap by company
This is the total value of the company. In other words, it is the sum of the value of all the outstanding shares of a company, in dollars. It can be in euros in the case of companies listed on European stock exchanges, and each region has its own currency.
This data can be found on any financial portal as “Market cap”.
This value is calculated by multiplying the total number of shares in circulation by the price of each share.
For example, if the company ABC has 300,000 shares at a value of u$s 15 each, its market cap is: 300,000×15= 4,500,000 dollars.
The market cap is a measure of a company’s importance, since companies with higher market capitalisation have a much greater weight in stock market indices.
Market cap should not be confused with a measure of a company's future performance. It is only a measure of total value, so a company with a large market cap is not necessarily a better investment in the long run. It simply gives an idea of the size of a company.
It is necessary to check if the company we are analysing has business plans that allow it to maintain its leadership and competitiveness in the ever-changing market. Many companies have disappeared because their plans have become obsolete and they have not been able to adapt to the changes that have taken place.
The aspects we need to analyse are:
- The capacity to adapt to current and future socio-cultural, demographic and economic changes.
- The agreements it may have with potential suppliers and customers in other countries in order to be a more competitive and global business.
- The incorporation of new technologies to its activity, in order not to fall behind its competitors and to stay in the market.
Competition and alliances
Analysing the competition serves to understand to what extent the company has a presence in its sector and industry and how much of a leader it is or is not. This allows us to predict or determine whether it can be sustained over time.
Nowadays, many companies enter into strategic alliances with others in their sector to strengthen their position in the market and exploit new opportunities.
We have to be aware of this type of alliances because in the stock market, when these alliances take place, the shares of the bought company are generally valued and those of the buying party are slightly devalued. However, in the long term, both become stronger. This is not always the case; often when mergers or alliances take place, the shares may or may not increase in value, either those of both companies or those of just one, depending on the case. Whether or not this happens, it is interesting to see how investors react to the news of such alliances.
Every quarter, companies are required to provide information on their financial statements and their economic outlook for the coming months. This is known as earnings season on the New York Stock Exchange, as all companies are required to do so.
Prior to earnings season, the dates, times and estimated eps (earnings per share) for the relevant quarter are published on the financial portals. Earnings per share estimates mean what is estimated to be earned in dollars for each share held by investors in that quarter. It is an estimate because it is precisely a figure that is given in the earnings report at a public conference, which each company has its own day and time to give it.
The achievement or not of this estimated result generates a change in the price of a company’s shares. Many times, these changes occur a few minutes after the result is known and depending on how it is, the share price will go up or down.
How is Earnings Per Share (EPS) calculated?
Earnings Per Share (EPS) is a measure of a company’s profit. It is calculated by subtracting dividends from the company’s profit and dividing that result by the number of outstanding shares.
Net profit – dividends ÷ shares in circulation
The CEO of a company is very important for investors. Depending on the results of the CEO’s management, investors will either accept or reject him or her, and this has the effect of affecting the share price.
For example, the resignation of a well accepted CEO can lead to rejection and a drop in the share price, especially if the replacement is not accepted or liked by investors. Or the opposite may be the case, causing the share price to rise.
It is important to be aware of who the directors of a company are, this information is on all financial portals, and if changes are expected in some of the positions.
Patents and licences
Patents are an asset of the company as they represent ownership of an invention developed by the company.
Licenses are necessary for your operation as they are the state permits you need for production and marketing processes.
These licenses must be renewed every certain amount of time in order to continue operating normally. When this does not happen due to some inconvenience, it can be seriously compromised and investors may see it as a bad sign, selling their shares and causing a drop in the share price. Therefore, it is important to study what licenses and patents the company you want to invest in has and what state they are in.
The demand for a company’s product is related to the company’s sales forecast for that product. It is therefore important to analyse it, as it estimates or forecasts the sales of the product or service and this gives an indication of whether the company is growing or not.
This data is known when companies present estimates based on quarterly sales volume, and it is also presented in their marketing plans when they give the earnings conference.
What is the market demand?
Market demand can be defined as the quantity of goods and services required by a group of people affected by interests, needs and trends in a particular market.
Market demand calculation
It is a simple formula that states that “the demand of the identified market segment is equal to the average quantity of product purchased by each buyer multiplied by the number of buyers”.
The history of an organisation is of interest to investors because it shows all the relevant aspects of the organisation. How it was created, what the initial idea was, and all its performance since it was founded. In addition, the history shows how the products or services it sells were developed, what the sales levels were year by year, the profits and losses, the legal situation, among other things.
When investors want to invest for the long term, it is very important that they look at the company’s history, as this allows them to analyse the above and make better investment decisions. For example, if a company has a lot of legal problems, its share price is likely to fall, which would make investors who are analysing it not to look at it or to discard it and look for a better one.
What is a bussines model
A business model is the way in which a company seeks to generate profits. It is a summary of how the company plans to achieve its profits, detailing how it will serve its customers, and detailing both its strategy and its implementation. What a company’s business model does is reflect the structure of the company. It should include:
- Customer profile
- Product differentiation
- Customer acquisition and retention
- Advertising strategies
- Product distribution strategies
- How to create customer utility
- Among others
What interests us as investors is to analyse whether the company’s business model can be sustainable over time, whether it has competitive differences, whether it has diversified revenues or products, etc.
Macroeconomics definition and current situation
What happens in the world economy is important and is reflected in the stock market. Stock prices are susceptible to macroeconomic events, and these events can have a major impact on stock prices. For example, in the 2008 recession almost all companies listed on the New York Stock Exchange were affected by that crisis, which caused many stocks to fall, i.e. they were not devalued because of poor performance on their part but because of the economic situation.
The news also affects what happens in the stock market on a daily basis, which is why it is important to be aware of what is happening in the global economy in general.