The Series 7 Fundamental Analysis section can be relatively confusing for those of you that have never taken an accounting course. While this section may not be a large part of the overall exam, knowing enough of it can certainly add a few extra points to your score.
In today’s post we explore a few key areas of fundamental analysis that can help.
Series 7 Fundamental Analysis: What is It?
This section of the exam includes a small portion of accounting, but importantly highlights the difference between fundamental and technical analysts. Fundamental analysts use fundamental analysis when evaluating an investment. You will see that the fundamental analysis approach to investing is very specific. It focuses on a company’s profit margin‘s, debt levels, and other income statement and balance sheet measures and ratios. Several ratios are where most people get tripped up in the Series 7 Exam.
Fundamental Analysis Ratios
If you are new to accounting, don’t worry too much. Although the Series 7 top-off difficulty level is already high enough, this section can be sufficiently conquered without going into too much detail. Some accounting knowledge will certainly help, but it is not a necessity. If you can make yourself familiar with the income statement and balance sheet, that is an excellent first step.
The best way to do this, is to go back to learning like a fifth grader. Take out a sheet of paper and write out income statement and balance sheet examples given to you in a textbook at least five times each. Repeat this every day for five days, and it should help stick.
Some of the Ratios
The income statement and balance sheet are what the alphabet is to words. If it wasn’t already clear, in this case, the “words” are the accounting ratios. You need to know the different line items from the different financial statements in order to know how to create the different ratios.
Here are a few key ratios that matter:
Current ratio
P/E ratio
Debt-to-equity ratio
EPS
Dividend Payout Ratio
While there are many more than the above ratios, you’ll see that the income statement and balance sheet are important. There are core areas that will likely get tested, and the above ratios are a good place to start.
Overall, there are a few key areas that you need to know in the fundamental analysis section. If you lack the accounting background, check out our video course for some quick tips and tricks around the section, or feel free to reach out if you need some tutoring. Good luck!