Fundamental Analysis For Beginners 2019 [Free Guide]
Fundamental analysis is used to rank companies based on hard facts. Fundamental analysis plays a very important role in value investing, since every investment in value investing should be derived through fundamental analysis. Fundamental analysis is based on the assumption that a company has an intrinsic value.
An intrinsic value is determined among other things by a fundamental analysis and thus sets a potential purchase price for the value investor. But a fundamental analysis not only determines the intrinsic value, it also makes a statement about the quality of the company and the industry.
This article is intended as an overview of fundamental analysis. The individual points are described in more detail in separate articles.
Fundamental analysis definition
Wikipedia defines fundamental analysis thus: Fundamental analysis seeks to determine the fair or reasonable price of securities (“intrinsic value”). In contrast to chart analysis it is not based on a consideration of stock market prices or past chart patterns, but on business data and the economic environment of a company, the so-called fundamental data.
What constitutes fundamental analysis?
Again and again people ask what constitutes fundamental analysis? There is no simple answer to that. Every investor has to decide for himself how much effort he wants to make in fundamental analysis and what he considers especially important. But these three categories may be taken into account in a fundamental analysis:
Global analysis is used in fundamental analysis to provide an estimate of what the business environment for a business looks like. For a global analysis a variety of issues are taken into account. For example it should be asked whether the company is influenced by economic developments.
Global monetary policy also plays a role in global analysis. The more money circulated by the central banks, the stronger the influence of the central banks on the world economy. Furthermore, interest rates and the rate of inflation for companies play a role in fundamental analysis.
In addition, exchange rate effects and specific developments in different countries play a role in the global analysis. For example it could be seen how a change in the American presidency has affected different countries and sectors. Political changes are therefore crucial for global analysis.
Another factor in a global analysis may be commodity prices. The development of oil prices, for example, have a considerable impact on how companies are doing in this industry. Global developments can significantly influence commodity prices. This point has to be examined in a global analysis.
How to conduct a global analysis?
For example, a so-called SWOT analysis can be created for every stock analysis. This SWOT analysis also takes into account global developments.
The core of value investing is risk management. Only those who know their risks can reduce them and thus create a measure of security. Therefore, fundamental analysis is an important part of the puzzle in value investing.
In addition to the overall situation that is covered by the global analysis, the specific industry environment is very important, and to this effect, an industry analysis can be created. This considers the entire industry and the overall conditions and developments that apply.
Many sectors are characterized by a particularly high dependence on the economy or commodity prices. The goal of an industry analysis is to identify these dependencies in order to be able to identify potential risks as well as opportunities.
For example, cyclical companies are hit particularly hard during periods of economic downturn. This situation can be seen as a great opportunity when the economy recovers after crises.
The impact of regulations can also be a factor in industry analysis. Certain industries, for example, are extremely heavily regulated. This results in many opportunities but also in some risks.
The industry analysis should also aim to give an insight into the evolution of the industry as a whole.
How to handle the industry analysis?
SWOT analysis can be applied for the industry analysis, too. In addition to the global factors, the sector and company specific features are highlighted.
In addition, one might also make a so-called peer group comparison. In such a comparison one takes a look at the competitors and decides which companies have a particularly good or bad standing.
The company analysis is the very core of our fundamental analysis. In company analysis we focus on the company itself.
If a company performs well in your company analysis, you should do the industry analysis and the global analysis before making an actual purchase. Fundamental analysis is therefore a structured tool.
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Conclusion fundamental analysis
Fundamental analysis is the core of value investing. As value investors we want to know exactly where the opportunities and risks lie with a company. To this end we can use fundamental analysis to create a basis that supports our decision.
Here it is important that we refer to a uniform standard so that we can discern and take into account quality differences.
A fundamental analysis should therefore always take into account:
- “How high is the quality is the company?”
- “Which price would be appropriate?”