Fundamental Analysis Tutorials – Introducing the Financial Report

• What are you attempting to learn about a company?

Prior to diving into the calculations behind fundamental analysis there are several basic questions you should consider:

1) What is driving growth within the company?
2) If there is growth, how is it being achieved, through acquisition or organically?
3) Is the company keeping pace with its sector and its competitors?
4) Is the profit margin growing? Where is it in relation to competitors’ profit margins? If profit margin is too high than new competition could enter on price reducing margins. Low profit margin might suggest that control of the cost base has been lost or variables out of the company’s control are squeezing margins.
5) Are profits likely to be sustainable over a long period of time? To what degree are profits one-time events?
6) Just because debt funding has increased doesn’t mean the fundamentals are bad, this may be a positive move if the funds produce new productive assets. Remember, companies are multidimensional.

We are now ready to get into some serious fundamental share market training, we will be discussing financial reports, these are the statements that produce the numbers used to analyze companies in the Australian share market. We will also introduce the concept of ratio analysis and some of the more commonly quoted financial statement ratios such as earnings per share (EPS), Price Earnings Ratio (PE), and dividend yield. No doubt you have heard these terms being thrown around by all the so called stock market gurus on T.V. and on the internet. Now you will finally know what they are talking about. Without further delay let’s dive into some solid fundamental stock market education:

• What is the key information source for fundamental analysis?

The primary information source for all financial analysts when calculating the ratios utilized in fundamental analysis is the company’s annual report. A company’s annual report is an in-depth document that conveys details on the company’s activities over the past year as well as its plans for the future. Some of the significant parts to an annual report are the following: Chairman’s report, Director’s report, and financial statements.

Annual reports are typically released at the same time every year during the “reporting season”; shareholders of a company are mailed an annual report each year. Annual reports are typically made available to the public on the company’s website for those non-shareholders that would like a report.

A company’s annual report is where you will find its balance sheet. The purpose of the balance sheet is to supply information regarding the financial performance, financial position, and cash flows of a financial entity. Results of management performance are also shown on a company’s financial report, this data has a large number of users, as such, a standard method is outlined by the Australian Accounting Standards Board on how financial reports should be displayed.

Financial reports supply information about a company’s: Assets, (what the company owns), Liabilities, (what the company owes), Equity, Income and expenses (this includes gains and losses), Cash flows, and other changes in equity. This information, combined with other data in the notes, helps users of financial reports in predicting a company’s future cash flows, and more specifically the timing and certainty of these cash flows.

Please see the next lesson in this fundamental analysis tutorial in which we will dive deeper into a company’s shares financial report.