In this post I will present a simple 8 step fundamental analysis template which can be used to analyze if a a stock is investment-worthy or not.
For any stock to merit investment, the most important thing is the financial stability of the business. It is important that a company has manageable debt levels and generates enough operating profits to easily pay interest on its loans and has sufficient cash for day to day operations while delivering decent growth in revenues and profits.
I use the first four ratios described below to assess the financial stability of a company when i consider investing in its stock.
- Long term Debt/Equity Ratio –
Debt/Equity Ratio is a debt ratio used to measure a company’s financial leverage, calculated by dividing a company’s total liabilities by its stockholders’ equity.
Companies (excluding financial institutions) with D/E of less than 1 to be stable and can easily cope with short term downturns as they have higher reserves than what they have borrowed.
D/E= Sum of non current debts/Shareholder Funds.