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FUNDAMENTAL ANALYSIS

Fundamental analysts examine the company's financial statements and financial ratios to ascertain the company's overall financial performance. The analyst will use the following to determine a value for the company's stock:

• The balance sheet

• The income statement

• Financial ratios

• Liquidity ratios

• Valuation ratios

THE BALANCE SHEET

The balance sheet will show an investor everything that the corporation owns, or its assets, and everything that the corporation owes, or its liabilities, at the time the balance sheet was prepared. A balance sheet is a snapshot of the company's financial health on the day it was created. The difference between the corporation's assets and its liabilities is its net worth. The corporation's net worth is the shareholders' equity. Remember that the shareholders own the corporation. The basic balance sheet equation is:

assets - liabilities = net worth

The balance sheet equation may also be presented as: assets = liabilities + shareholder's equity

The two columns on the balance sheet contain the company's assets on the left and its liabilities and shareholders' equity on the right. The total dollar amount of both sides must be equal, or balance. The entries on a balance sheet look as follows:

Assets

Liabilities

Current assets

Current liabilities

Fixed assets

Long-term liabilities

Other assets

Equity/net worth

Preferred stock par value

Common stock par value

Additional paid in surplus

Treasury stock

Retained earnings

The assets are listed in order of liquidity. Current assets include cash and assets that can be converted into cash within 12 months. Current assets include:

• Money market instruments

• Marketable securities

• Accounts receivable net of any delinquent accounts

• Inventory, including work in progress

• Prepaid expenses

Fixed assets are assets that have a long useful life and are used by the company in the operation of its business. Fixed assets include:

• Plant and equipment

• Property and real estate

Other assets are intangible assets that belong to the company. Other assets include:

• Goodwill

• Trademarks

• Patents

• Contract rights

The liabilities of the corporation are listed in the order in which they become due. Current liabilities are obligations that must be paid within 12 months. Current liabilities include:

• Wages payable, including salaries and commissions owed to employees.

• Accounts payable to vendors and suppliers.

• Current portion of long-term debt; that is, any portion of the company's long-term debt due within 12 months.

• Taxes due within 12 months.

• Short-term notes due within 12 months.

Long-term liabilities are debts that will become due after 12 months. Long-term liabilities include:

• Bonds

• Mortgages

• Notes

TAKENOTE!

The corporation's debt, which comes due in five years or more, is known as funded debt.

Stockholders' equity is the net worth of the company. Stockholders' equity is broken up into the following categories:

Capital stock at par: The aggregate par for both common and preferred stock.

Additional paid in surplus: Any sum paid over par by investors when the shares were issued by the company.

Retained earnings: Profits that have been kept by the corporation, sometimes called earned surplus.

 
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