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Introduction to Fundamental Analysis
Fundamental analysis is a method used by investors and analysts to evaluate a company’s financial health and intrinsic value. It involves studying financial statements, ratios, and economic indicators to assess whether a stock is overvalued or undervalued. This approach is grounded in the belief that a company's true worth can be determined by analyzing its assets, liabilities, revenues, expenses, and profitability.
Below are essential financial terms and metrics frequently used in fundamental analysis:
Key Financial Terms & Definitions
1. Current Assets
Definition:
Assets that are expected to be converted into cash or used up within one year.
Examples: Cash, accounts receivable, inventory.
Purpose: Indicates a company’s short-term financial health and liquidity.
Similar Terms Used in Disclosures:
- Short-Term Assets
- Liquid Assets
- Current Resources
- Operating Assets
- Assets Realizable Within One Year
2. Current Liabilities
Definition:
Obligations a company needs to pay within one year.
Examples: Accounts payable, short-term loans, accrued expenses.
Purpose: Helps assess how well the company can cover short-term debts with short-term assets.
Similar Terms Used in Disclosures:
- Short-Term Liabilities
- Current Obligations
- Payables Due Within One Year
- Operating Liabilities
- Near-Term Debts
3. Total Assets
Definition:
The sum of everything a company owns, both current and non-current.
Examples: Property, equipment, cash, inventory, investments.
Purpose: Measures the size and strength of a company’s asset base.
- Total Reported Assets
- Aggregate Assets
- Sum of Assets
- Consolidated Assets
- Gross Assets (sometimes used before deducting liabilities)
4. Total Liabilities
Definition:
The total amount of money a company owes to creditors, both short-term and long-term.
Purpose: Used to evaluate financial leverage and debt risk.
- Aggregate Liabilities
- Consolidated Liabilities
- Total Debt and Liabilities
- Total Obligations
- Total Liabilities and Provisions (IFRS context)
6. Gross Revenue
Definition:
The total sales or revenue generated before any costs or expenses are deducted.
Purpose: A top-line indicator of the company’s ability to generate sales.
Similar Terms Used in Disclosures:
- Total Revenue
- Sales Revenue
- Turnover (common in UK/IFRS)
- Operating Revenue
- Top-Line Revenue
- Revenue from Contracts with Customers (IFRS 15)
7. Gross Expense
Definition:
Total operating costs before taxes and interest, including cost of goods sold, wages, rent, etc.
Purpose: Helps in identifying cost management efficiency.
Similar Terms Used in Disclosures:
- Total Operating ExpensesOperating Costs
- Total Expenses Incurred
- Direct Costs + Operating Expenses
- Cost of Revenue + SG&A
- Total Outflows (less commonly)
8. Income/(Loss) Before Tax
Definition:
Earnings before tax expenses are applied.
Also known as: EBT (Earnings Before Taxes).
Purpose: Indicates a company’s profitability from operations before government obligations.
Similar Terms Used in Disclosures:
- Earnings Before Tax (EBT)
- Profit Before Tax (PBT)
- Pre-Tax Income
- Income Before Provision for Income Taxes
- Operating Profit Before Tax (if operating income context)
9. Net Income/(Loss) After Tax
Definition:
The bottom-line profit or loss after all taxes and expenses have been deducted from revenue.
Purpose: Measures a company’s overall profitability. This is what ultimately contributes to retained earnings or dividends.
Similar Terms Used in Disclosures:
- Profit After Tax (PAT)
- Net Earnings
- Bottom Line
- Comprehensive Income (if including OCI items)
- Net Results
10. Earnings Per Share (EPS)
Definition:
The portion of a company’s profit allocated to each outstanding share of stock.
Formula:
Purpose: A critical indicator of company profitability and a key input for valuation ratios like P/E.
11. Price-to-Earnings Ratio (P/E)
Definition:
A valuation ratio that compares a company’s current share price to its earnings per share.
Formula:
Purpose: Indicates how much investors are willing to pay for each dollar of earnings. High P/E may suggest growth expectations; low P/E might imply undervaluation or low growth.
12. Price/Earnings to Growth (PEG) Ratio
Definition:
An enhanced version of the P/E ratio that also considers the company’s earnings growth rate.
Formula:
Purpose: Helps determine if a stock is overvalued or undervalued relative to its growth potential.
12. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA is a financial metric that measures a company's operating performance by focusing on the earnings generated from core business operations, excluding the effects of financing decisions, tax environments, and accounting practices related to depreciation and amortization.
It provides a clearer view of a company’s profitability from operations by removing non-operational and non-cash expenses.
Formula:
Or alternatively:
Conclusion
Understanding these key financial terms is essential for conducting solid fundamental analysis. Whether you're a value investor, a swing trader, or a long-term holder, evaluating metrics like EPS, P/E, and BVPS helps reveal the true financial standing of a business. These indicators, when used collectively, give a clearer picture of a company’s performance, risk, and potential for future growth.
