Fundamental Analysis

Introduction 

When it comes to stock analysis, there are two main schools of thought: Fundamental analysis and technical analysis.

Fundamental analysis is a process analysing and studying a company's fundamental financial level. The analysis examines key ratios of a business to determine a company's financial health, business environment and gives you an idea of the value of its stock. 

This type of analysis examines key ratios of a business to determine its financial health and gives you an idea of the value its stock.

Often, people regard investors who are keen to fundamental analysis as fundamentalist or value investor.

Notable valueinvestors are Benjamin Graham, Warren Buffet, John Templeton, Jo​hn Neff, Jesse Livermore and Peter Lynch to name a few. 

There is no hard and fast rule on how one should analyse a company's financial standing. Nonetheless, some key points to look at when it comes to fundamental analysis are as follows:

  • Business Plan

  • Quality of the Management

  • Financial Analysis - this includes all the key ratios like price/earnings, earnings growth, current ratio, and earnings per share, to name a few

In addition, take note of the news reported with regard to the company we are interested in, BUT be very very selective. Mr. Market tend to buy on rumors and sell on news! 

How and where to start?

Read, read and read then a thorough analysis of a company's Annual Report will be a good start. 

You will find three principal financial statements in the Annual Report: income statementbalance sheet, and statement of cash flows.

  • The income statement - subtracts expenses from revenue to get the company's income or profit.

  • The balance sheet - compares a company's assets against its liabilities and stockholders' equity

  • The statement of cash flows - breaks down money utilised for operating, financing, or investing activities.

What to look for
Strengths and Weaknesses 
  • Good for long-term investments based on very long-term trends provided that all fundamental is intact (economic, demographic, technological,consumer trends)

  • Spots Value in a company - uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power

  • Business Acumen - ability to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-oriented (high yield)

  • Knowing who's who - similar to business acumen, ability to identify certain companies in certain group

  • Time Constraints - excellent insights, but it can be extraordinarily time-consuming

  • Specific valuation method - different technique and model is required for different industries and different companies

  • Subjectivity - Any changes to multiplier assumptions can greatly alter the ultimate valuation value. There are cases where companies are attractive but price keeps on falling due to sentiments. In addition, there is no uniformity in terms of finding a fair value of a company

  • Bias - reports prepared by sell-side analyst may be biased if the analyst or the institution is involved in underwriting the security. In contrast, a buy-side analyst is analyzing the company purely from an investment standpoint for a portfolio manager