Thread by @MrJGBanks

📚 Fundamental Analysis and Playing Options

- What is it and how to use it

- How to use @unusual_whales along with fundamental analysis (Pt. 2)

*This (Mega Thread) will be two threads and put out in two parts.

#UnusualWhales

Fundamental analysis is a method of measuring a security's intrinsic value by examining related economic and financial factors. Fundamental Analysts study anything that can affect the security's value.

Such as...

From macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.
This method of stock analysis is considered to be the opposite of technical analysis.

Fundamental analysis or (FA) plays out over a much longer timeframe than technical analysis. This is because FA is concerned with finding out the intrinsic (true) value of a company, and it often takes years for the market security to be priced accordingly to intrinsic value.

Fundamental analysis factors are divided into two types: quantitative and qualitative.

Quantitative – capable of being measured or expressed in numerical terms.

Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

Financial statements disclose company information concerning its financial performance. Followers of FA use quantitative info. from financial statements to form investment ideas.

The three most important financial statements are income statements, balance sheets, and cash flow.

1.The Balance Sheet

The balance sheet represents a record of a company's assets, liabilities and equity at a point in time. The balance sheet is named by the fact that a business's financial structure balances in the following manner:

Assets = Liabilities + Shareholders' Equity

Assets represent the resources that the business owns or controls at a given point in time. The other side of the equation represents the total value of the financing the company has used to acquire those assets. Financing comes as a result of liabilities or equity.

Liabilities represent debt (which of course must be paid back), while equity represents the total value of money that the owners have contributed to the business - including retained earnings, which is the profit made in previous years.

How to analyze

A balance sheet is telling you the company's
"net worth" at any point in time. It does this by providing its total cash, assets, and liabilities. When looking for growth stocks, Balance Sheets are important because it tells you how financially sound that company.

When looking at the Balance Sheet, you want to make sure that a company has the following:

a. Assets outweigh their liabilities by more than 30%
b. Total cash increasing on an annual basis (ideally, but not necessary)
2. Company's Income Statement

While the balance sheet takes a snapshot approach examining a business, the income statement measures a company's performance over a specific time frame. You could have a balance sheet for a month or even a day, but you'll only see public companies report quarterly and annually.

The income statement presents information about revenues, expenses and profit that was generated as a result of the business' operations for that period.

How to analyze:

In general, income statements are either prepared monthly, quarterly, or annually.

Look for "Profits." Here, you will see a bunch of metrics, but for a quick scan, you want to see positive net cash flow. How do we find this? Look at Gross profit and Total Revenue.

For a fundamentally sound company, you want to see Gross Profit as a positive number (this just means the company is making money despite their expenses).
You also want to find out their margins. To do this, compared their total revenue to gross profits.

There should be a substantial difference because companies carry a lot of costs, but you don't want to see a company have $1b in revenue and only $50m in gross profits- this would imply the company has poor margins.

Next, look at their Quarterly Profits for the last few years- is it in an increasing/decreasing trend? Do they generally have poor earnings for a specific quarter? In addition, is gross profit increasing while revenues are increasing? You want to see a company that:

A. Has substantial positive net cash flow (large gross profit)
B. Increasing Revenue and Gross Profit Quarterly/Annually
C. Company's Statement of Cash Flow

The statement of cash flows represents a record of a business' cash inflows and outflows over a period of time.

Typically, a statement of cash flows focuses on the following cash-related activities:

Cash from investing (CFI): Cash used for investing in assets, as well as the proceeds from the sale of other businesses, equipment or long-term assets

Cash from financing (CFF): Cash paid or received from the issuing and borrowing of funds
Operating Cash Flow (OCF): Cash generated from day-to-day business operations

The cash flow statement is important because it's very difficult for a business to manipulate its cash situation

There is plenty that aggressive accountants can do to manipulate earnings, but it's tough to fake cash in the bank. For this reason, some investors use the cash flow statement as a more conservative measure of a company's performance.

Check out part 2 for the rest! As always remember to follow the flow with @unusual_whales 🐳