Regarding stock picking in the United Kingdom, Fundamental Analysis (FA) is widely used and popular. Many professional investors utilise FA when deciding what stocks to buy and sell, as it can provide valuable insights into any UK company’s financial health and prospects.
What is Fundamental Analysis?
Fundamental analysis is a form of financial analysis that looks at a company’s fundamental indicators to assess its overall financial health and prospects. This technical analysis goes beyond a company’s share price performance and factors such as earnings, revenue, expenses, cash flow, and debt levels. Investors can better understand a company’s overall financial health and make more informed investment decisions from this information.
Why is Fundamental Analysis Important?
There are many reasons why fundamental analysis is essential for investors. Perhaps the most important reason is that it can help you to identify companies that are undervalued by the market.
Another reason fundamental analysis is essential is that it can help you identify companies likely to experience financial difficulties in the future. By looking at a company’s financial indicators, you can understand its overall financial health.
This information is essential because financial difficulties can lead to share price falls, and you may want to sell your UK shares before this happens. Conversely, if a company appears to be in good financial health, it may be worth holding onto your shares or buying more.
How to conduct fundamental analysis on UK stocks?
There are several steps involved in conducting a fundamental analysis of UK stocks. These steps are outlined below:
Choose the right indicators
The first step to conducting a fundamental analysis is to choose the right indicators. Traders can use many indicators for fundamental analysis, but not all will be relevant for every company.
It’s essential to choose appropriate indicators for the company you’re analysing, and that will give you insights into its financial health. Typical indicators used for fundamental analysis include earnings per share (EPS), the price-to-earnings ratio (P/E ratio), dividend yield, revenue, expenses, cash flow, and debt levels.
Once you’ve selected the right indicators, the next step is to gather data. This data can be obtained from a company’s financial statements, usually on its website.
If you’re unsure how to read a company’s financial statements, plenty of online resources can help. Alternatively, you could speak to an accountant or financial advisor.
The next step is to calculate ratios using the data you’ve gathered. Ratios can help you better understand a company’s financial health and performance. They can also help compare a company with its peers.
Many different ratios can be calculated for fundamental analysis purposes. The most common ratios are the EPS, P/E ratio, dividend yield, revenue growth rate, operating margin, and return on equity (ROE).
Analyse the data
Once you’ve gathered and calculated all the relevant data, it’s time to start your analysis. This part is where you need to use your judgment to assess a company’s financial health and prospects.
There is no specific set of trading rules for how to do this, as every investor will have their methodology. However, some crucial things to look for include strong earnings growth, a healthy balance sheet, and a reasonable valuation.
Make your investment decision
After completing your analysis, you should understand a company’s financial health well. This understanding will help you to make an informed investment decision.
You may decide to buy shares in a company that you believe is undervalued by the market. Alternatively, you may get rid of your shares in a company that you think is overvalued or likely to experience financial difficulties in the future.
Fundamental analysis is an essential tool for any investor. By taking the time to understand a company’s financial health, you can make better investment decisions and improve your chances of success. New investors should use a reputable, reliable, experienced online broker like Saxo Bank and trade on a Saxo Capital Markets demo account before investing real money.