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Monday, February 16, 2015

Fundamentally Strong Stocks - a guide

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(17/2/2015 Stockinvestingtips - stocks basics series) : People who are new to stock market Investing would hear a stock market term 'fundamentally strong stock' very often. Majority of the newbies of stock markets understanding of fundamentally strong stocks is often limited to lieral meaning of the term itself. However there are various characteristics for a
fundamentally strong stock. In this post I would provide detailed explanation about fundamentally strong stocks and what are characteristics of such stock. This information would help enormously while shortlisting a fundamentally strong stock before making any money investment into it. There are different metrics which define a fundamentally strong stock, Analysing all these metrics can help in making informed decisions before investing and would help in choosing the best company for investments. Such fundamental analysis of a company before investing any money help in minimising the risk of a failure.

Fundamentally Strong stocks - Introduction: Fundamentally strong companies are the ones who have very strong foundations and these stocks represent a company which (in all probabilities) would continue to do good business during the worse market scenarios. These companies have high capital inflows which act as insurance during the bad times. Balance sheets of fundamentally strong company is very strong and displays surplus cash reserves at almost all times. Such companies boasts of very strong and efficient management, who are very familiar to all the practical economic conditions and hence can take company out of any trouble during tough times quickly by making strategic decisions. Share holders of such companies have strong faith in the management. Majority of the blue chips across the globe are fundamentally strong stocks.

Traits of a Fundamentally strong company:

A) Zero debt Company: Blue chips or fundamentally strong companies are zero debt companies. They are also cash surplus companies which give dividends quite often and increase the value of stakeholders. many of such companies have huge amounts of cash, or cash equivalents which can be used during tough times. Some of the companies have cash reserves which can run company for multiple years even if there is no source of income anymore. In order to know if company is a zero debt company one can apply following formula before putting in his money into it:
Expenses < (cash reserve + assets(liquid) + share capital + tangible assets)
The more strong right side of the equation, more fundamentally strong is the company and hence more safer is your investment.

B)Awesome cash flows in balance sheet: One should remember that the most important thing for running a company is cash and if the company has strong cash flows, It would obviously be much safer investment option. If a company earns strong cash inflows everyday, then it can be used for growth of the company because 'CASH IS KING' is one globally true quote.

C) Healthy Debt-Equity ratio: Fundamentally strong companies often have a managable debt in it's balance sheets. It helps in increasing leverage. Debt-equity ratio of 0.5% is good and represent a fundamentally strong stock. Anything higher then 0.5 is somewhat dangerous for shortlisting a company.

D) High Growth Company: 'Sales' figure of a company is most important metric which shows if a company is well accespted in market. Increased sales and increase in profit from last 5 years displays that company is on path of growth and it should provide good returns to stakeholders in coming years, provided all the other metrics are also promising for the company.

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