Blog #2: Fundamental Analysis: Your Guide to Evaluating a Company's Financial Health

Fundamental Analysis: Your Guide to Evaluating a Company's Financial Health

Introduction

Fundamental Analysis is used to evaluate a company's intrinsic value. This means finding out how much a particular company worth in the current market. In contrast to technical analysis where we track the price movement, but here we check and track the company's financial health by looking at various financial statements by using key ratios. Fundamental analysis consists of Quantitative & Qualitative analysis. This analysis will help you to make long-term investing decisions.

What is Fundamental Analysis

Fundamental analysis is a method of assessing the intrinsic value of a publicly listed company just to see the underlying factors that drive a company's performance. Unlike technical analysis, it involves reviewing much broader aspects like financial statements, external influences, industry trends, and national and geographical events. This analysis consumes a lot of time and effort but the thing to remember is intrinsic value of a company or a stock doesn't change overnight.

Analyzing Financial Statements using Ratios(Quantitative analysis)

Fundamental Analysis relies heavily on quantitative data. This includes analyzing the company's financial reports and applying key ratios to get a better picture of a company's financial performance.

1. financial statements: Analyst start their analysis by reviewing the company's financial statements like income statements, balance sheets, and cash flow statements for the last 3 years or 5 years. This will give them a rough idea of the company's profitability, liquidity, debt level, and overall financial health.

2. Valuation Rations: Analyzing various valuation ratios like Price-to-Earning ratio (P/E), Price-to-Book ratio(P/B),  Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA), Price-to-Sales ratio(P/S), etc. Analyzing this will help you to determine whether the company is undervalued or overvalued.

3. Dividend Yield: A focused investor who's looking to invest for the long term will analyze this metric. This measures the total dividend distributed compared to the company's stock price.

Analyzing qualitative variables

1. Management: Analyzing top-level management will depict the competence and integrity of a company's management team which plays a vital role will making material decisions within the company. To analyze this one can see AGM speeches, news, and listen to call conferences.

2. Business Model: You need to identify the company's business model to check whether the company operates sustainably and at the same time generates profit or does company has its edge over the competitor. It also includes the company's product or services, whether they are in demand or not. 

3. Industry Trend: Analyzing the broader industry in which the company happens to be is also important. Investors analyze trends, room for growth, government policies, import/export regulations, etc. This potential information will give an idea about the company's future performance.

4. Macroeconomics: It includes many things like Global demand and conditions, currency exchange rates, country's economic output, inflation rates, interest, the balance of payment(BOP), etc. Having knowledge about this will help you to make more accurate decisions.

Conclusion

Fundamental analysis is very important to make informed investment decisions. One of the biggest investors of the century Mr. Warren Buffett relies heavily on fundamental analysis for his investment decisions and to build a high-return portfolio. Remember, successful investing requires patience, heavy research, and a keen eye for details. Start analyzing, stay informed, and see your investment growth over time.