Apply Fundamental Analysis to Stocks

Bentriple10

Hi there,
I wonder if anyone could help me. I want to invest in shares using fundamental analysis, and there are a few things are need advice on.
I want to invest in small cap shares for maximum growth potential. I have been looking at the PLUS Markets group for this purpose. I have been looking at some companies and can't really decide whether to give further analysis or not. What should I look for that is superficial that would indicate good potential for growth, and therefore further analysis?

However, most of the companies in this group are making a loss. How do I determine that the company still has growth potential even with very small capitalisation index? What weight do I put on each fundamental, such as profit and cash flow, etc? To me, liquidity is the most important asset I value in a company, but all the books I have read put more emphasis on profitability. Yet most cheap small caps don't seem to have any profit potential at all, with losses from £100,000-£1,000,000.

Also, how would you weight the ratios (profitability ratios, liquidity ratios and efficiency ratios). For example, I like the acid test ratio, but would a negative result from this overpower a positive result from, say, the total asset turnover ratio?

Secondly, apart from the fundamentals, I am not really sure where to start in regards to researching a company's net worth. Its the industry I am most struggling with. I want to invest in the technology sector, so thats a start, but what kind of products in this sector? No idea.

Sorry that its a long post.
Thanks

MoneySaverLog

Simple checks would be...

Calculate the earnings per share by dividing the earnings by the number of shares on the market

Then take this figure and divide it by the share price. The higher this percentage the better.


Other fundamentals such as Profits, Management, brand, competition and long term prospects of the business are all things to consider.

The reason why so many tech firms went bust overnight was because they were overvalued and had no real value.

Thrugelmir

Bentriple10 wrote: »

Secondly, apart from the fundamentals, I am not really sure where to start in regards to researching a company's net worth. Its the industry I am most struggling with. I want to invest in the technology sector, so thats a start, but what kind of products in this sector? No idea.

Small Cap technology companies are renowned for devouring investors cash and losing money. Growth and profitabilty do not directly go hand in hand. As the product development and company infrastructure have to be put in place first. This costs money. The developed product ultimately needs scalabilty to generate high growth potential.

Organic growth can be very slow in the early years of a Company's life. The best hope is that a larger fish will see the potential and offer a premium to acquire the IP.

Bentriple10

Thrugelmir wrote: »

Small Cap technology companies are renowned for devouring investors cash and losing money. Growth and profitabilty do not directly go hand in hand. As the product development and company infrastructure have to be put in place first. This costs money. The developed product ultimately needs scalabilty to generate high growth potential.

Organic growth can be very slow in the early years of a Company's life. The best hope is that a larger fish will see the potential and offer a premium to acquire the IP.

Yes, I understand. But if I want to invest, and have little past year performances to go on, how I know the company will grow or continue growing?

Looking at the P&L/balance sheet account, what would you study or calculate first, and how would you compare them? For example, Intangible assets have gone way up in 2011, but the tangible assets (the most liquid) have gone down. How do I weigh this up as a positive or negative result.
Edit: I can't fix the formatting, the forum just changes it back the was. The figure on the left is 2011, and on the right is 2010.

Consolidated profit and loss account

for the year ended 31 March 2011

2011 2010

GBP GBP

Turnover 812,027 751,480

Cost of sales (123,833) (99,628)

Gross profit 688,194 651,852

Net operating expenses (576,983) (638,635)

Operating profit before depreciation and amortisation 157,317 61,662

Depreciation (20,980) (23,195)

Amortisation of intangible assets (25,126) (25,250)

Operating profit 111,211 13,217

Interest receivable and similar income 674 2,913

Interest payable and similar charges - (465)

Profit on ordinary activities before taxation 111,885 15,665

Tax on profit on ordinary activities (18,500) (5,500)

Profit for the year 93,385 10,165

Profit per ordinary share expressed in pence per 0.192 0.021
share - basic

Profit per ordinary share expressed in pence per 0.180 0.020
share - diluted

Consolidated balance sheet

at 31 March 2011

2011 2010

GBP GBP

Fixed assets

Intangible 50,000 25,126

Tangible 65,864 83,921

115,864 109,047

Current assets

Stocks 3,343 3,343

Debtors 332,715 290,267

Cash at bank and in hand 257,530 183,915

593,588 477,525

Creditors: amounts falling due within one year (212,313) (179,318)

Net current assets 381,275 298,207

Total assets less current liabilities 497,139 407,254

Provisions for liabilities and charges (11,500) (15,000)

Net assets 485,639 392,254

Capital and reserves

Share capital 487,464 487,464

Share premium account 209,857 209,857

Profit and loss account (211,682) (305,067)

Equity shareholders' funds 485,639 392,254