Fundamental analysis is an approach in stock investment to assess the management effectiveness and financial strength that affects the company's growth prospects.
One of the steps of fundamental analysis is to review the income statement and balance sheet from period to period.
So, what are the components of the income statement and balance sheet that can help investors measure the management effectiveness and financial strength of a company?
Income Statement | Balance Sheet |
Total Revenues: Gain from all sales before deducting expenses and business costs. | Total Assets: Any resource that is owned or controlled by the company, has economic value, and can be converted into cash. |
Gross Profit: Total sales after deducting cost of goods sold (COGS). | Total Current Liabilities: Debt that must be paid in the short term, which is less than one year. |
Operating Income: Gross profit after deducting operating expenses. | Total Equity: Capital or wealth calculated from total assets minus liabilities. |
Net Income: Profit is earned after total revenue is deducted from production costs, operational and non-operational expenses, and taxes. |
Measures Ratio of Management Effectiveness & Financial Strength
The numbers on the income statement and balance sheet may provide a glimpse into the company's financial performance. But for a deeper insight, investors can use the following ratios:
Ratio | Formula | Remarks |
Return on Equity (RoE) | Net Income ÷ Total Equity | The greater the RoE shows good performance in utilizing investor capital. |
Return on Assets (RoA) | Net Income ÷ Total Assets | The greater the RoA shows good performance in utilizing existing assets. |
Quick Ratio | (Current Assets - Inventory) ÷ Current Liabilities | The ideal ratio is ≥1, which means the company has enough assets to pay short-term debt. |
Current Ratio | Current Assets ÷ Current Liabilities | The ideal ratio is ≥1, which means the company has enough assets to pay short-term debt. |
Debt to Equity Ratio (DER) | Total Liabilities ÷ Total Equity | The ratio should ideally be ≤1, which means the company has the equity to cover its debt. |
Disclaimer: The content is made for educational purposes, not a recommendation to buy or sell a particular stock. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (OJK).
Comments