What are Fundamentally Strong Stocks? What Makes Them Fundamentally Strong?

Fundamentally Strong Stocks refer to stocks of companies that have low or no debt dependency. They majorly depend on their share capital and reserves to run their business operations. Low debt dependency makes these companies self-reliant and less risky. These companies keep their “Total Capital” higher than their “Total Expense Requirement.” They tend to generate consistent returns. Fundamentally Strong Shares offer consistent returns with low volatility.

Fundamentally Strong Companies have robust businesses. Even during market downturns, companies tend to perform well. While most shares are bleeding during a stock market correction, Fundamentally Strong Stocks stay tall throughout this tenure.


What makes Fundamentally Strong Stocks Strong?

There is not one but multiple fundamental factors that make Fundamentally Strong Stocks strong. Here is a list of some significant features that will give you meaningful insight into the significant aspects of Fundamental Strong Shares.


Profitability Status

Fundamentally Strong Companies are inherently run profitable businesses. Analyzing a company’s financial statements, such as cash flow statements, profit and loss statements, income and expenses statements and balance sheets, will help you understand a company’s financial health. Financially healthy companies have Fundamentally Strong Stocks.

With the help of profitability ratios such as Return on Equity Ratio (ROE), Earnings Before Interest, Taxes, Depreciation, and Amortization (EBIDITA Margin), and Net Profit Margin, you will be able to evaluate the company’s ability to generate income compared to its expenses. The EBDITA Margin helps you estimate a company’s operating income with respect to its total revenue.   The Net Profit Margin enables you to determine a company’s capability to generate profits from its sales. The high Net Profit Margin of a company indicates that the company is performing well.


Management Strength

The company’s management team must be rock solid to become a Fundamentally Strong Company with Fundamentally Strong Stocks. Only a management team with the right attitude and exemplary leadership skills can keep the company continuously stable on the operational and revenue front. An efficient management team with the appropriate risk management, problem-solving attributes and a growth mindset can weather all storms. However, if a company’s management is weak, even a company with a strong debt-equity ratio can never be labelled fundamentally strong.

With the help of some operating ratios, you can measure the operational efficiency of the management. Some such ratios are the Working Capital Turnover Ratio, Inventory Turnover Ratio, and Total Asset Turnover Ratio.

The Working Capital Turnover Ratio of a company helps you determine the effectiveness of a business in using its working capital to generate revenue. The Inventory Turnover Ratio helps you evaluate a company’s capability to turn inventory into sales. The Total Asset Turnover Ratio helps you analyze the company’s ability to generate revenue with its assets.


Debt Dependency

A significant feature of Fundamentally Strong Stocks is no or low dependency on debt. Debt is the money that companies borrow to fund their business operations and manage their long-term and short-term liabilities. These companies are required to repay the debt and its interest. Any form of debt overburdens a company. It eats the profits of the company and limits its growth of the company. However, debt funding for a company is not necessarily bad for a company if done the right way.


With the help of Leverage Ratios such as the Debt Equity Ratio and Interest Rate Coverage Ratio, you can measure the company’s capacity to meet its financial obligations adequately. The Debt Equity Ratio indicates a company’s debt position. A high Debt Equity Ratio is not good. A Debt Equity Ration less than 1 should be ideal, and Debt Equity Ratio above 2 is highly risky. The Interest Rate Coverage Ratio helps you understand the debt repayment capacity of a company. The higher the ratio, the better it is.

So Ideally, Fundamentally Strong Stocks would belong to companies with low Debt Equity Ratios and High-Interest Rate Coverage Ratios.

Capital Adequacy

Finance is the soul of every business. No business can seamlessly operate without adequate capital. Fundamentally Strong Stocks belong to companies with more than sufficient capital to meet their short-term and long-term liabilities, purchase essential assets, invest in fund expansion projects, fund capital expenditures, run daily business operations and compensate employees.


Liquidity Position

Fundamentally Strong Companies are sufficiently liquid. You can understand a company’s liquidity position with the help of liquidity ratios such as the Current Ratio, Quick Ratio and Cash Ratio. The Current Ratio or the Working Capital Ratio measures a company’s ability to pay off its obligations within twelve months. The Quick Ratio or the Acid Test Ratio can help you evaluate whether a company has enough liquid assets that can be instantly converted into cash to meet short-term dues. Higher liquidity ratios of a company indicate a good liquidity position. These stocks of these companies are Fundamentally Strong Stocks.

Future Prospects

While the company’s financial statements,  corporate governance, and financial ratios tell you a lot about its present and its past. However, to determine whether the stocks of a company are Fundamentally Strong Stocks or not, you must take a sneak peek into its future. Evaluating the future prospects will tell you whether the company will likely take advantage of good opportunities in the future and generate good returns. Aspects such as the company’s current industry standing and its expansion plans can tell you a lot about its future prospects. An in-depth growth rate analysis of its last 10-year revenue and returns can help you predict its future business capabilities.

Analyzing a company’s financial position, liquidity parameters, capital structure, debt dependency, and future prospects is a great way to filter out Fundamentally Strong Stocks. However, Eureka’s powerful stock screeners help you find and invest in Fundamentally Strong Companies quickly and easily.

You can contact our expert financial advisors now to learn more about some solid stock screeners to identify Fundamentally Strong Companies and invest in Fundamentally Strong Stocks.

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