What You Should Know About Corporate Fundamentals Before Investing
“Analyzing corporate fundamentals can help an investor interpret the health and potential performance of a company. Fundamental analysis combined with some understanding of valuation should provide a basis to determine if a company is a stable investment,” explains Timothy Reilly of Hilton Capital Management, an investment firm in NY.
But, with a wealth of information and investing choices to consider, where should the average investor start?
Many Data Points to Understand
Individuals who are interested in investing have thousands of data points to understand and mull over, which can lead to overwhelm by the potential strategies available for storing and using their money.
A smart place to begin is to focus on fundamentals to guide their investments. An investment strategy based on fundamentals will provide a good framework for creating a portfolio or expanding an existing one.
What are fundamentals?
Fundamentals are the aspects of a business that show their general operations and financials.
Fundamentals include a wide variety of regularly released metrics, such as price-to-earnings ratios, profits, dividends, and monthly expenses. These fundamentals become known to the public through regular earnings reports, and press releases.
They can be traced over time to note the health and success of a company.
In addition to financial fundamentals, there are also more intangible fundamentals that can be used to understand a company. Intangible fundamentals may include news stories about a particular product or a shifting cultural trend. This information is considered in tandem with financial fundamentals as a jumping off point for many investment strategies.
How Do I Know if a Company Has Solid Fundamentals?
Timothy Reilly offers this advice for evaluating fundamentals:
- Solid financial underpinnings. This includes a balance sheet free of excessive debt. An operating model that generates decent margins and cash flow. Obviously this varies by industry, but solid companies will have margins that are inline or better than peers. Cash generation will vary with the type of industry and where a company is in its life cycle.
- An attractive industry environment. This can mean a secularly growing industry or one where changes are occurring that good companies can take advantage of. If it is a cyclical industry is the backdrop supportive (in an upcycle.) Investments in secularly declining industries can be very dodgy.
- A proven management team with a clearly enunciated strategy. Do the managers have a track record (there or at another company), do they lay out a clear strategy with milestones to check ?
- Evidence of improvement. Is there evidence the company is improving it its fundamentals? Have they shown growth acceleration, margin improvement or increased cash generation?”
Evaluating the fundamentals of a potential investment help an individual receive the best information and make the best decision possible about their investments.