Zebu blog

Tag: Investment Decision

  • How to Use Fundamental Analysis to Evaluate a Company’s Stock Potential

    Fundamental analysis is a key tool for investors who are looking to evaluate the potential of a company’s stock. It involves analyzing the underlying financial and economic factors that can impact a company’s stock price, with the goal of identifying stocks that are likely to perform well in the long term.

    There are several key steps that investors can take when using fundamental analysis to evaluate a company’s stock potential:

    Review the company’s financial statements: One of the first things to do when conducting fundamental analysis is to review the company’s financial statements. This means analysing information such as balance sheets, income statements, and cash flow statements. By analyzing these documents, you can gain insight into the company’s profitability, debt levels, and other key indicators of financial stability.

    Evaluate the company’s management team and business model: In addition to its financials, it is also important to assess a company’s management team and business model. This can involve evaluating the experience and track record of the management team, as well as the company’s competitive advantage and growth potential.

    Consider the industry and market conditions: It is also important to consider the industry and market conditions in which a company operates. This can involve evaluating the overall health of the industry, as well as any potential risks or opportunities that may impact the company’s future performance.

    Look for red flags: While conducting your analysis, be on the lookout for red flags that may indicate potential problems with the company. This can include things like declining revenue, increasing debt levels, or a management team that has a history of making poor decisions.

    Compare the company to its peers: In order to get a more complete picture of a company’s stock potential, it is helpful to compare it to its peers in the industry. This can give you a sense of how the company is performing relative to its competitors, and help you to identify any potential strengths or weaknesses.

    Assess the company’s valuation: Once you have completed your analysis, it is important to assess the company’s valuation. This involves comparing the company’s stock price to its fundamental metrics, such as earnings per share and price-to-earnings ratio, in order to determine whether the stock is overvalued, undervalued, or fairly valued.

    In conclusion, fundamental analysis is a powerful tool for investors who are looking to evaluate the potential of a company’s stock. By analyzing the underlying financial and economic factors that can impact a company’s stock price, investors can make informed decisions about which stocks to include in their portfolio and how to diversify their holdings to reduce risk. By following these steps, investors can increase their chances of long-term success and achieve their investment goals.



  • What is Acid Test Ratio And How Can You Use It While Investing?

    The acid test ratio, which is also called the quick ratio, is a financial measure of how quickly a company can pay off its current debts. Current obligations are debts that have to be paid back within a year. For example, a credit card balance is a current obligation.

    The ratio shows how well the business is doing financially right now.

    If a company’s acid test ratio is less than one, it usually means that its current assets are not enough to pay off its short-term debts and liabilities. A very high ratio suggests that money has been saved up and is just sitting there, not being put to good use.

    It’s important to know that when figuring out the ratio, the company doesn’t count current assets that are hard to sell quickly.

    How to find the acid test ratio

    The acid-test ratio is calculated by dividing current liabilities by (cash + accounts receivable + short-term investments). Cash and assets that can be used as cash must be included. There must also be marketable securities and other assets that can be used quickly. Accounts receivable are usually covered, but not in every business. If assets on a balance sheet, like loans to suppliers, prepayments, and deferred tax assets, can’t pay off liabilities in the near future, they must be taken off. The denominator should include all current liabilities, which are debts and commitments due within a year.

    The limits of the Ratio

    If the company’s financial data is inaccurate, it will have accounts receivable that require longer than usual to be collected.

    Also, it gives a false picture of the current liabilities that are due but won’t be paid for a while.

    A low acid test ratio doesn’t always mean that a business strategy that depends on stock is in bad financial shape.

    The acid test ratio is different from the current ratio

    The current ratio, also called the working capital ratio, shows how quickly a company can make enough cash to pay off all its debts if they all come due at once.

    On the other hand, the acid test ratio is a more cautious measurement.
    While the current ratio includes assets that can be converted to cash within a year, the acid-test ratio only includes assets that can be done so within 90 days or less.