Fundamental Analysis

This article is the first of a series of fundamental analysis material and its stock valuation. First of all, we have to note the advantages that fundamental analysis gives us. Security in the company that it is not threatening delisting (removal from stock trading).Security that it is developing and this can lead to a rise … Continue reading Fundamental Analysis


This article is the first of a series of fundamental analysis material and its stock valuation. First of all, we have to note the advantages that fundamental analysis gives us.

Security in the company that it is not threatening delisting (removal from stock trading).
Security that it is developing and this can lead to a rise in the prices of its shares.
Security that he is not a debtor.
That is, fundamental analysis is a kind of capital insurance that we have invested. When compiling an investment portfolio, we can clearly understand its prospects and why our portfolio may outperform the S & P 500 index. Generating a higher return than the index is called alpha generation.
What the fundamental analysis does not give us:
Understanding where the price will be in weeks or even months.
Understand how vulnerable it is to the fall of the S & P index
To conclude, without the fundamental analysis, investing is impossible because you put your capital at risk. However, a company that is a debtor may very quickly fall in the price of its shares in case it needs to attract new capital in the form of loans. A company that does not generate profits can open up with a deep gap gap after a financial statement.
For starters, we should note the resources that will help us to study the topic in question:
www.investopedia.com – finance encyclopedia, you can practically find all the information about the financial markets.
www.morningstar.com – an excellent site for fundamental analysis and reports we’ll be working on.
The value of the company is formed by 3 basic provisions / items /
Future profits
For example, if the company has no capital, it will not allow price growth until it picks up. If in the near future the company can incur debts that the company is not in a position to repay, it will lead to loans and they will negatively affect its reputation. If the company generates steady earnings, but in the coming two years it is expected to decline, it will cause many investors to sell their shares, which in turn will lead to a fall in the price of its shares.
In all three cases, we can get partial responses by tracking the following three reports.
Income Statement
Balance Sheet
Cash Flow
To look at them we will use Macy’s Inc (M)
Income Statement – this is a statement of income and expense. He can answer such questions as: what is the company’s profit, current margin, cost of production, net profit. That is, this statement is driven by Revenue (revenue and sales) and at every step the costs associated with the company’s business are deducted until finally the net return of one share (EPS) remains.
Balance sheet – this is a balance sheet. He will answer questions about the company’s debts. It will show us what assets (Assets) there is in the company, how many Liabilities there are, short and long-term. It will also show us the difference between assets and liabilities, in other words, we will see the equity of the company (Equity).
Cash Flow – Statement of Cash Flows. It discloses in full detail the cash flows that arise directly from the Operations Activities, Investments Activities and Flows arising from Financing Activities.

continuing with fundamental analysis articles, we will look at Macy’s Inc.’s statement of income. (M)
Let’s take a closer look at the company’s income statement.
To understand what information we can get from it, we need to understand what it says on each line. Let’s look at them:
Revenue – (revenue, sales) number of products multiplied by their price. That is, net sales revenue, with no deductions. You can often see it as Top Line as it is at the top of the report. Dynamics in Revenue is more indicative of net profit because it is more difficult to manipulate, but it also has its own nuances.
It is important to remember that the company may include in Revenue goods that have been paid but not delivered, and may also include delivered goods but not yet paid (deferred payment).
Revenue – consists of operating revenues and non-operating revenues (earnings from the company’s business and income from other activities). For example, proceeds from the sale of assets, unforeseen investments, or money generated as a result of forensic understanding will be considered non-operating revenue. Sometimes this can greatly change Revenue in one direction or another.
Naturally, Revenue should grow smoothly every year without showing a strong volatility.
Cost of Revenue “CoR” – includes all costs that are necessary for the production of a product. Includes marketing costs, delivery to users, labor cost, materials, overheads allocated to the product. The net cost, that is, only the cost of materials needed for production, is reflected in the other article called Cost of Goods Sold (COGS).
Gross Profit – in fact, this is Revenue minus CoR, that is, how much the company has earned if the primary costs are deducted from total revenue. In order to be measured most objectively, it should be measured in percentages each year. That is Gross profit / Revenue * 100. In our example, the dynamics is the following (starting in 2014) 40%, 40%, 39%, 39.4%, 39%. The company even tries to harmonize the CoR and keep Gross Profit at a level of about 40%, even in difficult times.
Operating Expenses – Abbreviated OPEX. Operating costs include rental costs, equipment, inventory, marketing, management salary, insurance, and development tools. We will go through each of these costs.
Selling, General & Administrative Expenses (SG & A) – Sales, administrative and general expenses. All direct and indirect costs associated with sales and administration. For example, we can mention salary management or warranty service costs. Often divided into direct (transport, delivery, sales support), indirect (advertising and marketing, telephone bills, travel expenses, salary of sales staff), administrative (including rent / mortgage, utilities, insurance, management salary).
Other operating expenses – include outsourcing costs, costs of raw materials and materials that can not be stored (such as electricity, etc.), repair and operating costs, insurance, research and development. That is, those costs that did not come from Cor or SG & A. Some companies sometimes export other operating expenses to other rows, so R & D (research and development) can be added to the operating expenses block, although other companies may find themselves in Other operating expenses.
Operating income – actually Rev minus CoR minus Total operating expenses. That is, revenue minus cost and administrative and operating costs. As in the case of Gross, we will be interested in the dynamics in absolute terms and a percentage change of 9.6%, 10%, 7.5%, 5.1%, 6.26%. It is calculated using the Operating income / Rev * 100 formula. Downward Rev and rising other operas. Expens. and the complexity of cutting administrative expense leads to the fact that Operating income falls double.
Interest expense – represents the percentage / interest payable – bonds, loans, credit lines, etc. Interest Expense in the Income Statement is accrued interest / rates over the period covering the financial reporting, rather than the amount paid for that period.
Other Income – refers to the difference in currency rates, bank charges and commissions and other income and expenses.
Income before income taxes – another interim indicator on the path to net profit. It is also recommended to further calculate in percent to better understand the impact of the percentages on the company’s profit. 8.1%, 8.5%, 6.1%, 3.6%, 6.1%. Profit before tax can be said to have dropped double to the penultimate year.
Provision for income taxes – the amount of taxes to be paid to the budget after the reporting period.
Minority interest – minority shareholders – these are shareholders who own less than 50% of the company. They are shareholders, but they are not key owners. In this line it is shown how much profit / loss belongs to the minority owners in subsidiaries. If the company has 80% in a subsidiary and its profit is 100,000, then 20%, that is, 20,000, will be referred to as loss to minority shareholders. In our case, there are 8 and 11 million, respectively, for 2017 and 2018 respectively.
Other income – any other income and expense that, according to the law, did not fall into the above rows.
Net income from continuing operations and net income – in fact, this is the same thing, their differences will be addressed in the sweeping papers, although the differences are insignificant. Net income – this is what is called Bottom Line, as it is at the bottom of the Income Statement. In our example, it is clear both for Revenue and the net profit that it has declined over the last 3 years. Let’s look at how this is expressed as a percentage. 5.3%, 5.5%, 3.9%, 2.4%, 6.2%. It can be noticed that in the previous three years there has been a serious drop of 5.5% to 2.4%, Net income dropped over 2 times for this period as well as Oper. Income and is approaching 0. To see a rise in the stock price, it is even necessary to have an increase in the indicator as well as in the last year (2018).
Earnings per share “EPS” – Net income divided by the number of shares outstanding. This indicator is most often mentioned in the news and the first lines of the reports. The difference between Basic and Diluted is worth looking at as well, since the EPS subspecies are more than two.
EBITDA (earnings before taxes, fees, interest and depreciation – operating profit). The formula is as follows: EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization. This is a relatively young benchmark and is often used for evaluations of companies that do not earn money, but if their projects are launched, then the price of those shares will fly out into the heavens. As a rule, this applies to pharmaceutical companies and technology companies. Because this indicator does not account for the most important costs, it is often used as a trick by the accountants to “order” the company’s profits and put it in a better light.

By continuing to examine the financial statements, we switch to the Balance Sheet.
In our business we will use Morningstar’s resources.
Unlike the Income Statement, which tells us the incomes and costs of companies, Balance Sheet will reveal such concepts as assets, liabilities, equity and debts.
In order to get to the bottom of each article, we need to understand what the companies are.
a group of people collect the initial capital at their own expense borrowed money and put their company shares. The shares in question are equity. In fact, this is the organizers’ money.
Then, the shares issued or the bank credit received, the shareholders create an obligation that is divided into current (to be settled in the current year) and long-term (to be repaid for more than a year).
By using borrowed money and equity, the company begins to buy those assets that are needed to do an efficient job. We can say that the Assets – Debt = Equity. Assets = Debt + SK. Debts = Assets – SK.
Thus, if there is a shortage of current assets in the company, in order to repay the company’s current indebtedness, it will have to use the reserves of equity. If long-term debt exceeds equity in the company, this means that the company will have to work more efficiently because if it can not get the necessary amount, then it will have to refinance its debts, which in turn will affect negative to the company and its reputation.
it can be noted that after its main activity: debt management, asset purchase, production realization, payment of expenses and dividends (if any), the company can dispose of the rest with the following means:
Money can be directed to repay the bulk of debt to reduce interest on outstanding payments.
Finally, the company can redeem its shares from the market (buyback) if it believes the share price is lowered and will be able to sell its shares to investors at higher prices in the future.
Now that we understand that the assets – these are derivatives of SC (equity), liabilities, the immediate activity of the company, and SK – that is the difference between assets and debt, then we can move on to each article in the balance sheet.
We start with Assets. Current Assets Block (current assets – that is, a year or less of their conversion):
Cash and cash equivalents – in addition to cash, more bank accounts, securities, short-term government bonds, that is, what can be converted into cash in less than three months, are taken into account here. Market securities are considered to be cash equivalents because they are convertible and are not subject to material fluctuations in terms of their value. If a company works with different currencies, the specific line in the balance sheet will be presented as one currency.
Receivables – Receivables due to the Company. They occur when the company sells a product for which it expects payment. The important thing to remember is that even the chance to repay the debt is extremely low, yet in the Income Statement, Revenue will increase by the amount of indebtedness. Since Revenue even reflects the funds that have not been received. It is important to observe the dynamics of this indicator. There are many options, but the easiest for quick analysis is by tracking the dynamics of indebtedness in the Revenue indicator. Revenue / Receivables. Build the dynamics for Macy’s 74.6, 63.7, 66.28, 48.52, 49.38. The sharp fall in the indicator points to the fact that the amount of issued debts has risen sharply against the output, which in turn may have a negative impact in the future as part of the debts may prove irreversible. It’s good to balance around one level.
Inventories – these are raw materials, ready-made products and finished goods that are considered part of the business assets that are ready or ready for sale. Inventories represents one of the most important assets of the business and a major source of income and the subsequent profits from it to the investors of the company. It’s important to know that tracking for Inventories is pointless if the company does not get a profit from every sale. Inside the specific article (block, line) are divided into raw materials, unfinished products and finished products. The observation of the particular article is most easily done through Revenue / Inventories. 5.21, 5.02, 5.09, 4.91, 4.77. Decrease refers to falling speeds in Inventories.

Prepaid expenses – for example, insurance – is a prepaid cost. The purpose of the insurance is to protect ourselves from coming troubles in case something happens and an insurance event occurs. Although it is a cost, it benefits. Also the prepayment for the equipment.

Block Non-current assets – assets that will take more than a year to convert into cash. Sub-Property, Plant & Equipment “PP & E” (core assets) include in themselves land, buildings and vehicles.

Fixtures and equipment – tables, chairs, computers, cabinets, shelves. Automotive equipment. All the equipment the company uses for regular business.

Other properties – for one reason or another, is not listed in the upper blocks.

Property and equipment, at cost – includes buildings and basic equipment, various machines for production, packaging and others.

Accumulated Depreciation – in fact, it is depreciation, but in Western corporations it is divided into two, depreciation and depreciation.

Intangible assets – Intangible assets are assets that are not physical in nature, such as corporate intellectual property, including patents, copyrights, business methods.

Other long-term assets (other long-term assets) – other assets that are not mentioned in the above rows.

This completes the overview of assets and moves to liabilities and equity.

Short-term debt – Short-term debt, also known as short-term liabilities, which are mainly payable in respect of financial liabilities that are subject to repayment during the financial year or within 12 months. These are mainly bank loans and obligations to suppliers. The importance of ST Debt is very important in determining the company’s performance. If ST Debt is more than the CCE of the company, it means that it may be in poor financial condition and does not have enough cash to repay its short-term debt. In this case, we see that the SSE is several times higher than ST Debt.

Capital leases – a concept that has separated the FASB into a separate article in 2016. This is a lease with a final acquisition of the asset. The balance sheet is reflected in the “Assets” column.

Accounts payable – payables to suppliers. It is often difficult to find a difference between suppliers in ST Debt and AP suppliers.

Deferred income taxes – the Tax Service Code (IRS) and generally accepted GAAP (General Accounting Principles) have differences. These differences are just published in this article.

Taxes payable – Taxes to be paid in the current year.

Other current liabilities – those liabilities which, for one reason or another, are not included in the above-mentioned sections.

Long-term debt – the same as ST Debt, but with a term over one year. The specific article is divided into financial obligations and operational obligations. Financial liabilities relate to debts to investors or shareholders, they include financial instruments for debt issuance, such as bonds and others. Operational obligations relate to rents, unregulated payments, and more. can be said to refer to the rented construction sites and equipment to the employees’ pension plans in the company.

Common stock – in our case, these are 4M. This means that when the company was prepared, it was a nominal price (often the lowest) price. The stock multiplied by the issued shares gives us that capital. This is so minimal in this case.

Additional paid-in capital – This article appears after the company has gone through IPO (Initial Public Offering). The difference between the nominal value and the IPO price – is the company’s profit. It is recorded right here. Just as the nominal value is “from the sky”, and first of all, the IPO income is a net profit for the company (so listing the company through IPO is like cheap money for many people). They may decrease, as in our example at the expense of redemption, dividend payments or mergers.

Retained earnings – the final profit, what is left after all reinvestment operations, repayment of the company’s principal debt. Calculated as: Previous accumulated RE + Net income – Dividends.

Treasury stock – as a rule, these are shares that are not available to foreign investors. Most importantly, these are the shares of the controlling package. They are not included in the shares that are in circulation and are traded. Their amount can be increased by redemption and reduced by bidding.
Accumulated Other comprehensive income – includes unrealized gains and losses on certain types of investments as well as income and losses on pension funds as well as from foreign currency transactions. OCI is excluded from net income because transactions are unusual and are not generated through the company’s usual activities. In addition to investments and retirement plans, OCI includes hedging operations to limit its losses. By separating OCI transactions from operating income, we may have much more clear information about the source of income.
As a conclusion we can say that Total liabilities and stockholder’s equity are equal to Total assets. Exactly what we considered at the beginning. Assets = Liabilities. This completes the review of the Balance Sheet.
Recommendation: this text should not be taught! You’ll easily get used to it and you can use it without a problem if you can analyze at least 20 companies a day for two weeks. Remember that zuvorbration will not help you.

Earlier, we realized that the Income Statement revealed to us that the company had a profit and what was the main cost. Balance Sheet revealed the company’s assets, liabilities and equity structure. Cash Flow will show us how much the company’s core profits are generated, how effective its business is. Does the company re-invest in itself, whether it extinguishes its obligations and remains free of cess after all these operations. We continue to study Macy’s Inc.

Block Cash Flow from Operational Activities. Here we will look at all the cash flows that are directly related to the core business of the company.
Net Income – NI is calculated by the method of deducting expenses from income, expenses related to the business, such as depreciation, interest, taxes, etc. As a rule, exactly this block (article) is used in the calculation of EPS.
Depreciation & Depreciation – Depreciation & Depreciation – Depreciation & Depreciation – Depreciation & Amortization – Depreciation & Depreciation Amortization – this is the repayment of the debt in the form of regular payments over a certain period. Such payments are mortgage, car leasing and more. It operates on intangible assets as depreciation of material. To describe the amortization of intangible assets, I will give the following example: XYZ BioTech spends $ 30 million on a patent that has a lifetime of 15 years. Theoretically, XYZ BioTech will report $ 2 million for each year as an expense for the 15-year period.
Amortization of debt discount / premium and issuance costs – here are the costs of issuing debt, for example, bonds of the company.
Investment / asset impairment charges – the assets of the company where the market price is lower than the amount that is stated in the company’s balance sheet. After the adjustment in the balance sheet, the loss of the impaired asset is reflected in the statement. Depreciation should be recorded only in cases where the expected cash flows are not recoverable. Even if the market value of the asset returns to its original level. Generally Accepted Accounting Principles (GAAP) say that the impaired asset should remain registered under the adjusted dollar amount. Profit will only be recognized at the time of sale.
Stock based compensation – this is a method by which corporations use stock options to reward their associates. For example, a worker is given the right to receive 2000 shares at a price of $ 20 per share for 5 years. The right can be exercised after 3 years.
Inventory – stocks in stock that do not report future receipts as well as future shipments.
Prepaid expenses – this is a type of asset that occurs on the balance sheet as a result of payments to the business for products and services that will be delivered in the near future.
Accounts payable – lent or borrowed debt.
Income taxes payable – this is the tax owed to the government over a year. Income tax is calculated in accordance with the applicable tax legislation in the country of origin of the company.
Other working capital – these are current assets minus current liabilities. In other words, equity. In the Cash Flow section, it reflects the change for the current period, excluding any future accruals or write-offs.
Other non-cash items – these are changes in profit / loss, which are only accounts and not actual movements of cash. That is, balance sheet / report features.
Net cash provided by operating activities – Summary article for all operational activities. It basically replaces Revenue as a more accurate balance sheet item. Revenue reports the future, while Operating activities refers only to completed operations.
Cash flows from Investing Activities – includes such items as reinvestment, purchase of other companies and companies.
Investments in property, plant and equipment (IPPE) – investment in real estate, plant and equipment. As we looked at a few lines a year ago, the company’s main funds are undermined by depreciation. As the depreciation of the tax rate has decreased, the company has to permanently replace its equipment with a new one, as the basic means when it reaches the minimum will not be depreciation and no more tax deduction will be charged. The specific article reflects how much the company invests in upgrading its core assets. It is desirable that the articles depreciation & amortization and IPPE be close to sums.
Property, plant, and equipment reductions – in fact, this is the sale of the company’s core assets. Since each sale carries an extra cache, this article is often positive.

Acquisitions, net (acquisitions) – usually this is the takeover or partial purchase of another company. Vertical or horizontal expansion of the business. As a rule, after ingestion / acquisition, it takes time and extra costs to complete integration and set up a joint venture. For this and often after such acquisitions, the dynamics of indicators is directed in a negative direction.
Other investment charges (other investment charges and costs) – here may be any other investment losses / income that are not found in the above balance sheet items. As a rule, for every industry, the specific article keeps different sources of formation.
Investing activities – most often this block is negative because investments are always costs. If these investments bring income, then they will move to operational activity.
Cash Flows from Financing Activities – as a rule, reflects everything related to new liabilities and repayments on the old principal.
Short-term borrowing – in fact, these are short-term loans that are received or paid for the reporting period.
Long-term debt issuance – generally, has a positive impact because it attracts fresh financial returns to the development company. Usually they are bonds and credits.
Long-term debt repayment – repayment of the principal of the debt. Often, companies are trying to repay the principal early, in order to reduce interest payments on the principal.
Common stock issued – offering of its own shares. Often, the company offers additional stock packages to get a grant. The specific type of funding is available to companies with a positive dynamics and a growing business, otherwise the large sales flow can bring the price to much lower levels than the fundamental meanings in the event that the stock does not have enough buyers.
Repurchases of treasury stock – the very structure of the bond is so arranged that the company undertakes to return the issued debt through the bonds it has issued for a specified time with an additional percentage. We will not look at coupon bonds. In its classical form, the company attracts $ 1 million, and after X years it redeems the $ 1 million + additional agreed-upon bond.
Cash dividends paid – an amount that was intended to pay out dividends for the reporting period. Often, the particular article in the report has a negative impact, although the company does not pay a dividend for ordinary shares. It should not be forgotten that companies often have preference shares that are not available for purchase by external investors.
Other financing activities – those that for one reason or another did not fit into the listed articles.
Financing Activities – In conclusion, we can say that negative or positive, this article tells us important things.
The following items on the balance sheet are not always present. In this case, this is optional on MorningStar, but these are really important indicators. In fact, they are indicators of free cash flow and should not be circumvented.
Net change in cash – Has the company taken cash for its stock activity or the reporting period has been favorable that stock inventory has increased. The difference between cash at beginning and cash at end.
Cash at beginning of period – beginning of the relevant period.
Cash at the end of the period.
Free Cash Flow (FCF) – free cash flow. These are cash that the company can use to generate the necessary support or expand the asset base. The FCF is important as long as it allows the company to use its ability to increase its shareholder value. The absence of FCF is a complexity for further development as the company will not have the means to invest in itself, to repay the principal, to develop innovations and to pay dividends.
Operating cash flow – same as net cash provided by operating activities
Capital spending – “CapEX” – many people have heard about them, but few understand them. These are funds used by the company to acquire or modernize physical assets such as property, industrial buildings, equipment. They are often used for new projects or investments by the company. This type of expense is also produced by companies to maintain or increase the volume of operations. These costs can include everything: repair of the roof of the building, purchase of the necessary part, construction of a new plant. Capital expenditures are intended for an entity to carry out future operating activities and retain potential for the future.


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