Do you want to earn extra income with your idle funds? Do you want to learn about investment and financial management? When it comes to investment and financial management, many people will think of stocks, but what do you need to know to get started with stock investment? This article will take you to understand the basic knowledge of stock investment and how to read stocks. You must understand this if you are new to the stock market.
Why do you need to learn the fundamentals?
When we need data to prove whether a judgment is correct, financial statements are one of the important channels. From them, we can observe the company’s business model, sales market segmentation and the company’s future prospects. If you have clearly read a company’s financial statements, you can build a certain understanding of the company’s overall operating conditions and qualifications. In addition to “quantitative” analysis, fundamentals also include other “qualitative” analysis, such as: whether the company’s operators are capable of leading the company, whether they have the ability to innovate, or whether the development of the entire industry is in line with future trends, etc. These are basic stock knowledge, and stock novices are recommended to fully understand the analysis of fundamentals.
Income Statement Stock Basics: 4 Points to Judge a Company’s Profitability
If a company’s revenue continues to rise, its stock price will also rise. Therefore, stock novices need to understand the company’s profitability from the income statement, which includes indicators such as revenue performance and cost control.
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“Revenue” and “Annual Revenue Growth Rate” Revenue refers to the income obtained by a company through a business behavior model within a certain period of time. Revenue refers to revenue alone, excluding costs, expenses, taxes and other expenses. It can also be called turnover. Since revenue information is announced every month, revenue is usually called monthly revenue. Revenue growth rate understands the company’s operating results by comparing the difference in revenue between the current and specific periods of operation, such as: Year on Year (YoY), quarterly revenue growth rate (QoQ) and month-on-month revenue growth rate (MoM).
Gross Margin What is gross margin? The formula for gross margin is (operating income – operating costs) / operating income, which represents the ratio of gross profit to total revenue. An increase in gross margin means that the company’s profitability is increasing; conversely, a decrease in gross margin means a decrease in profitability. A decrease in gross margin may be due to a decrease in cost control capabilities or a decrease in competitiveness, and the operating model may need to be adjusted.
Operating Margin Operating profit = gross profit – operating expenses. Operating expenses include new product development and research expenses, sales and management expenses. Operating profit margin = operating profit / operating income. The higher the operating profit margin, the more likely the company is to be able to reduce costs and have a certain scale and reputation. When selling products, it does not need to spend a lot of money on marketing to get consumers to buy the products.
Net profit margin: When “gross profit” deducts “operating expenses”, we get “operating net profit”: net profit before tax. After deducting taxes from operating net profit, we get a company’s “net profit”: net profit after tax. Net profit margin refers to the percentage of net profit after tax to operating income, and is an indicator to measure a company’s profitability.
Balance Sheet Stock Basics: 3 Keys to Maintaining Stable Operations
Changes in Current Assets (Current Assets) are an indispensable part of corporate assets. They refer to assets that can be converted into cash or used flexibly within an operating cycle of one year or more. There must be sufficient amount of money in the account to respond to crises encountered by the company.
Changes in Accounts Receivable (Accounts Receivable) Accounts receivable is a debt arising from the company’s sales activities. The company has provided services or physical goods, but has not yet received payment. This may be to provide customers with a grace period, but there may be a risk that the accounts receivable will become bad debts.
Change in Debt Ratio (Debt Ratio) The debt ratio (DBR) is a ratio that indicates how much debt a company has, showing the relationship between a company’s assets and liabilities. This is one of the important bases for whether a bank approves a loan. The debt ratio and the loan amount are closely related.
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Cash Flow Statement (Cash Flow Statement) Stock Basics: 4 Points to Understand Profit Flow
When a company makes a quick profit, the cash flow statement helps investors identify the ultimate destination of the profit. Therefore, stock novices also need to use this statement to determine whether the profit is useful in improving the company’s operations.
Operating Cash Flow: “The income earned by a company through its main business”, the value of cash inflows and outflows brought by a company through production and operation. Operating cash flow includes annual operating net profit, annual depreciation, etc. to examine the cash flow of a company, and can confirm that the company’s revenue is indeed flowing in in the form of cash. If it is found to be proportional to revenue and profit after comparison, it shows that the company has a certain competitiveness. On the contrary, if it is found that the revenue is high but the operating cash flow is relatively insufficient after comparison with revenue, then we should worry about whether the financial report has been beautified.
Cash Flows From Investing refers to the cash outflows from the company’s purchase of plant equipment, real estate, investment in subsidiaries, etc. Although this type of cash outflow may often appear as a negative value on the cash flow statement, it is a necessary expenditure for the company’s future growth as long as it is not excessive investment. This is because current investment creates future income.
Cash flow from Financing The cash flow from financing activities generated by the enterprise’s demand for funds. There are two sources of corporate financing: 1. Borrowing from creditors. 2. Raising funds from the market and shareholders. Financing cash flow records the cash flow data of the above sources of financing.
Free Cash Flow refers to the cash inflow from a company’s operations, which is the remaining funds after deducting investment funds. The company can freely allocate it, often used to pay dividends or play other greater value. If the free cash flow is less than 0 for a long time, it means that the operating profit is not enough to pay for the investment needs. At this time, the only way to supplement this fund is to use financing cash flow, but it will cause the company’s financial pressure to become increasingly heavy.
