Fundamental Analysis For Dummies Cheat Sheet

Gathering the key documents for fundamental analysis

Companies create plenty of financial documents, so you need to know which ones are most important to fundamental analysis.

The following list helps you determine which documents can help you the most with fundamental analysis:

• Earnings press release: Curious how a company’s just-completed quarter went? That’s exactly what a company must spell out in a press release it provides investors, called the earnings report. These reports are pored over by investors and the media, as they trickle out during earnings season. Key financial measures such as revenue, expenses, and profit are often first presented to investors in the earnings press release, making them a critical document for fundamental analysis.
• Quarterly financial report (10-Q): Weeks after the earnings press release is given to investors, companies provide an official version called the quarterly report or 10-Q. In these documents, companies spell out the finalized numbers for the quarter. The 10-Q contains much of the same information as in the earnings press release, but usually to a much greater level of detail. For instance, many companies leave a statement of cash flows out of their earnings press release, but must include it in their 10-Q.
• Annual financial report (10-K): The annual report, formally known as the 10-K, is the most important and complete document fundamental analysts receive. The 10-K spells out in detail all the relevant developments at the company and full-year financial statements. Some companies also produce a more colorful version called the annual report to shareholders.
• Income statement: Want to know how much a company is making? Then the income statement is for you. This document shows you how much business the company is bringing in, revenue, and how much it keeps in profit after paying all its costs.
• Balance sheet: The balance sheet is the corporate version of an individual’s net worth statement. It shows what the company owes and what it owns.
• Statement of cash flows: There’s nothing more valuable than cold hard cash in business. A company may report huge profits on its income statement, but it is the cash that’s coming in the doors that matters most to fundamental analysts. While many investors start their fundamental analysis with the income statement and balance sheet, the statement of cash flows is critical because it is subject to fewer distortions from accounting rules.

6 things in an annual report necessary for fundamental analysis

After a huge annual report arrives in the mail, you may not know where to begin. So here are six things you should always consider when you get an annual report to make sure you are picking up the key elements needed in fundamental analysis:

• Compare this year’s annual report with last year’s annual report. The best way to read this year’s annual report is side-by-side with last year’s. Make sure the company achieved the goals it set for itself. If the company missed its goals, that’s a good place to start using your fundamental analysis skills to figure out why management fell short and whether it’s a reason to be concerned about the company’s future.

• See how cash flow compares with net income. Accounting rules give companies a fair amount of leeway in how they report profits. Cash, however, is cash, and this line item is particularly important in fundamental analysis to assess when making investing decisions. You want to make sure that the company is bringing in roughly the same amount of cash as it reports as profit.

• Consider operating and gross margins. Too many investors get overly consumed with a company’s bottom line. However, the amount of profit a company generates should be considered in comparison with its revenue. Operating and gross margins, two financial measures fundamental analysts pay close attention to, let you do this analysis.

• Look for any deterioration. If you’re investing in a company because you think it has great growth prospects, make sure it’s actually growing. A basic analysis of a company’s fundamentals, including revenue and earnings, will show you how to do this pretty quickly.

• Take a look at the CEO’s paycheck. Most annual reports come packaged with a so-called proxy statement. These statements typically tell you how much the top executives are paid. Sometimes this information is found in the annual report. You want to be mindful that excessive compensation could be a sign that top management is out for itself, not you. Paying attention to executive pay is a way to look beyond financial statements to perform a complete analysis of a company.

• Sleuth for potential conflicts of interest. The proxy statement also allows investors to vote on key matters. Don’t just rubber-stamp directors the company recommends for the board. Check the proxy to see if those people have any business dealings with the company. If so, you might withhold your vote for them. Voting for members of a company’s board of directors is a way to use fundamental analysis to safeguard your interest in the company.

Top sources for fundamental analysis data online

You don’t have to subscribe to costly online services to get the data you need for fundamental analysis. Much of the fundamental analysis data you need is available from high-quality sites including:

• U.S. Securities and Exchange Commission (SEC): If there’s one site you, as a fundamental analyst, need to know about, it’s this one. SEC.gov is a massive repository of financial information provided by the regulator, the Securities and Exchange Commission. The top function you’ll want is the ability to download all companies’ financial statements.

• Nasdaq: Nasdaq is best known for being a leading stock market exchange, a forum where traders buy and sell shares of certain stocks. But Nasdaq has built out a respectable Web site, containing loads of information for fundamental analysts. You’ll find summaries of companies’ financial statements, trading information, and stock quotes.

• Investor’s Business Daily: If you’re looking for business news, Investor’s Business Daily contains everything from business trends to economic reports. The site also contains a sophisticated stock charting feature that will tell you what a stock’s price was in the past. There’s also a Stock Checkup, which tells you how a stock measures up on a number of technical and fundamental gauges.

• MSN Money: If you’re trying to find stocks that meet certain fundamental criteria, moneycentral.msn.com has a powerful screening tool. You can tell the system what traits you’re looking for, and it returns a list of all the stocks and companies that meet your criteria.

• Morningstar: Morningstar is best known as being a research firm that tracks mutual funds. But Morningstar.com contains quite a bit of information on stocks, including fundamental data. It’s also interesting to look up mutual funds and see which stocks they own, especially if the funds have skilled fundamental analysts.