🛌🏿 🥟 🕦 Analysis: what is fundamental analysis 🎑 🕜 🎹

Fundamental Analysis (FA) is a method of measuring the intrinsic value of a security by examining interrelated economic and financial factors. A fundamental analysis examines everything that can affect the value of securities: macroeconomic factors (the state of the economy and the state of a particular industry) microeconomic factors (company management efficiency).

The ultimate goal of the investor is to find out the value that he can compare with the current value of the security. So the investor will see if the security is undervalued or overvalued. Subsequently, he decides on her purchase / sale.

This method is the opposite of technical analysis. In a technical analysis, a price vector is predicted based on historical market data (price and volume). Recently, the Investopedia portal published an interesting article on what fundamental analysis is and how to apply it. We have prepared for you an adapted version of this material.

What is fundamental analysis based on?

The main objective of fundamental analysis is to determine whether a security is being valued correctly in the market. A fundamental analysis is carried out, taking into account macro and micro factors. This identifies securities that were incorrectly (unfairly) priced in the market.

To understand the fair market value of stocks, analysts study the general state of the economy, and then a specific industry. Only after that they move on to the performance of specific companies.

Fundamental analysis uses data to value stocks or other securities. For example, an investor can conduct a fundamental analysis of the value of bonds, considering economic factors: interest rates and the general state of the economy, and then examine information about the issuer of bonds (for example, about possible changes in its credit rating).

To study stocks, fundamental analysis takes into account:

income;
profit;
potential growth;
equity;
profit margins.

and other data to determine the underlying value of the company and its potential for future growth. All these data can be found in the financial statements of the company.

Most often, fundamental analysis is used for stocks. But it is also useful for other financial instruments: from bonds to derivatives.

Investing and fundamental analysis

If the intrinsic value of a stock is higher than the current market price, the stock is considered undervalued. It is recommended to buy it. If the intrinsic value of a share is below the market price, it is deemed to be revalued. It is recommended to sell.

Investors can play upward (buying with the expectation that stocks will rise in price from strong companies) and downward (selling stocks that will fall in price with the expectation of their buyback at a lower price from weak companies).

This method is contrasted with technical analysis, which predicts the direction of prices by analyzing historical market data (price and volume).

Quantitative and qualitative fundamental analysis

Fundamental analysis data can cover everything related to the economic well-being of a company. This may include revenue, profit, as well as the company's market share and quality of management.

Fundamental factors fall into two categories: quantitative and qualitative. The financial meaning of these terms is not much different from their standard definitions.

Quantitative fundamentals are hard numbers. These are measurable business indicators. The largest source of quantitative data is financial reporting. In it, you can find out exactly about income, profit, assets and much more.
Qualitative fundamentals include the competence of company executives, brand recognition, and patented technologies.

Analysts consider all of these factors together.

Quality characteristics

When analyzing a company, four main indicators are always taken into account:

Business model : what exactly is the company doing? Example: a business model of a company is based on the sale of instant chicken. Does the company make money on this? Or does the bulk of revenue still come from royalties and deductibles?
Competitiveness : The long-term success of a company means the ability to maintain and maintain a competitive advantage. In this case, the shareholders of the company can receive decent dividends for decades.
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Financial statements are a document in which a company discloses information about its financial results. Adherents of fundamental analysis use quantitative information from financial statements to make investment decisions. The most important financial statements: profit and loss statement, balance sheet, cash flow statement.

Balance sheet

The balance sheet is a report on the assets, liabilities and equity of the company at a certain point in time. The balance sheet is called the fact that the financial structure of the company is balanced as follows:

Assets = Liabilities + Equity

Assets are resources that the company owns or controls at a given point in time: cash, inventory, cars and buildings. On the other hand, the equations are the total cost of financing for ownership of these assets. Financing is provided from liabilities or from equity. Liabilities are the company's debt, equity is the total value of all the assets that the owners contributed to the business, including retained earnings (profit earned in previous years).

Cash flow statement

A cash flow statement is a statement of cash flows of an enterprise for a specific period of time. Typically, a cash flow statement is based on the following indicators:

Cash from investing (CFI): cash used to invest in assets, as well as income from the sale of equipment or long-term assets.

Cash from financing (CFF): cash paid or received as a result of issuing and borrowing funds.

Operating Cash Flow (OCF): Cash received from daily business operations.

Conclusion

The main objective of the fundamental analysis is to determine whether the price in the stock market reflects the real (fair) value of shares.

Suppose a company stock traded at $ 20. After a fundamental analysis, the investor determined that the stock actually costs $ 25.

This is the essence of fundamental analysis. By focusing on a specific business, an investor can evaluate the intrinsic value of a firm and find discounted purchase opportunities. Investments will pay off when the market catches up with fundamental indicators. By the way, the most famous and successful fundamental analyst is Warren Buffett, nicknamed "The Omaha Oracle."

Useful links on the topic of investment and stock trading:

, Telegram- ITI Capital

Analysis: what is fundamental analysis