What you'll learn:
➤ What Is Fundamental Analysis?
Fundamental analysis, or FA, is like a magnifying glass for stocks. It helps us figure out how much a company’s stock is really worth.
Instead of looking at what everyone else is doing, fundamental analysis looks at the nitty-gritty details of a company. It checks out things like:
- Economy: What’s happening in the big world of money and business?
- Industry: How’s the company’s own industry doing?
- Management: Are the people running the company doing a good job?
By looking at all these things, we try to figure out how much the company’s stock should be worth.
Here’s the deal: If the real value is more than what most people are paying, it’s a good buy. If it’s less, it might not be such a great deal.
In a Nutshell:
- FA checks a stock’s true value.
- It looks at how it’s doing in the big world and its own industry.
- If it’s worth more than its price, it’s a buy.
- If it’s worth less, it might be time to think twice.
On the flip side, we have technical analysis. These traders (or investors) just look at what the stock’s price has been up to lately.
|Highlight||Description||How to Apply|
|What is Fundamental Analysis?||It evaluates a security’s intrinsic value based on economic, financial factors, and company management.||Apply by studying a company’s financials, market trends, and management quality to assess its true value compared to its current stock price.|
|Types of Fundamental Analysis||Qualitative (focuses on quality) and Quantitative (utilizes numerical data).||Apply qualitative analysis by evaluating management quality, competitive advantage, and corporate governance. For quantitative analysis, use financial ratios and data for valuation.|
|3 Layers of Fundamental Analysis||Economic analysis, industry analysis, and company analysis.||Start by analyzing the broader economy, then delve into the industry and specific company details to make informed investment decisions.|
|Importance of Fundamental Analysis||Determines the market value of a company by assessing its financial performance.||Apply by examining financial statements, assessing profitability, and considering the overall health of the company in the context of its industry.|
|Tools for Fundamental Analysis||Financial reports, ratios, spreadsheets, charts, government reports, and market data.||Apply these tools to analyze a company’s financial data, profitability ratios, and industry reports to gauge its investment potential.|
|Objective of Fundamental Analysis||To identify if a stock is over- or undervalued by analyzing economic, market, industry, sector conditions, and financial performance.||Apply by comparing a stock’s intrinsic value, calculated through analysis, with its market price. Buy if undervalued and sell if overvalued.|
|Key Metrics||Financial ratios (e.g., P/E ratio, return on equity) and qualitative factors (e.g., management quality, competitive advantage).||Apply by using these metrics to assess a company’s financial health, growth potential, and competitive position in the market.|
➤ How to Do Fundamental Analysis
Okay, so how do we actually do this “fundamental analysis” thing? Well, it’s like peeling an onion – we go layer by layer.
1. Economy Check
First, we look at the big picture: the economy. Is it doing well, or is it a bit shaky?
2. Industry Scan
Next, we dive into the specific industry our company belongs to. How’s that industry doing overall? Is it growing or struggling?
3. Company’s Money Matters
Now, we zoom in on the company itself. We check its financial reports, like the 10-Q (quarterly) or 10-K (annual). These reports spill the beans on how the company’s been performing financially.
This three-step dance helps us figure out if a stock’s price is fair. We want to see if it’s a bargain or a bit overpriced.
Sources for Fundamental Analysis
Where do we get all this juicy info? Well, it’s all out in the open:
- Reports: Companies spill the beans in their reports. These are like report cards, but for businesses. You can find them on a company’s website, usually in the “Investor Relations” section.
- Financial Statements: These are like a company’s financial diary. They include stuff like how much money they’re making and spending.
- Market Info: We also peek at the bond market, interest rates, and other financial bits and bobs.
By putting all this together, we can figure out if a stock’s worth the price tag or not. It’s like being a financial detective!
Understanding Intrinsic Value
Alright, let’s tackle this “intrinsic value” thing.
1. What’s Intrinsic Value?
In stock talk, intrinsic value is like the hidden treasure of a company. It’s the real deal, the actual worth of a company based on its financial stuff.
2. Comparing Prices
Imagine a company’s stock is selling for $20. One smarty-pants analyst says it should be worth $24. Another brainy analyst says $26.
3. Finding the Average
Most folks would say, “Hey, let’s find the middle ground!” So, they figure the stock’s intrinsic value is around $25.
4. The Long Game
Here’s the kicker: Fundamental analysis believes that, in the long run, the stock market will realize this intrinsic value. But what’s “long run”? It could be a few days or many years.
5. The Big Picture
And remember, it’s not just about stocks. Fundamental analysis can be your sidekick when you’re checking out any investment, whether it’s stocks, bonds, or even those fancy things called derivatives.
So, when you’re looking at investments, think like a detective. Dig into the company’s secrets and figure out its real worth.
➤ Fundamental Analysis vs Technical Analysis
Now, let’s talk about two different ways to look at stocks: Fundamental Analysis and Technical Analysis.
Fundamental Analysis: This is like Sherlock Holmes stuff. It digs into the company’s financial secrets, like revenues and profits. Analysts use this data to figure out if a company’s stock is a good deal or overpriced.
Technical Analysis: It’s more like a crystal ball. Instead of financial reports, it studies past stock prices and trading volumes to predict future prices. It’s all about patterns and trends, like the head and shoulders or triangles.
What’s the Difference?
Fundamental analysis is about numbers and data from the company itself, while technical analysis looks at price history and charts. Different strokes for different folks!
So, when it comes to stocks, you can be a number cruncher 📊 or a chart reader 📈. Your choice!
➤ Quantitative vs Qualitative Fundamental Analysis
Let’s break it down even further. When it comes to understanding a company’s health, there are two types of fundamental analysis: Quantitative and Qualitative.
Quantitative Analysis: This is the numbers game. It’s all about the cold, hard facts that can be counted or calculated. Think revenue, profit, and assets. These are the measurable things that give you a clear picture of a company’s financial health.
Qualitative Analysis: Now, this one’s a bit more abstract. It’s not about the numbers, but about the quality of things. For example, it’s about how good the company’s leaders are, how recognizable its brand is, or whether it has cool patents and tech.
The thing is, neither one is better than the other. They’re like a dynamic duo when used together. So, when you’re looking at a company, remember to check the numbers and feel the vibes.
When you’re getting into the nitty-gritty of understanding a company, you’ve got to dig into the qualitative stuff. These are the aspects that can’t always be boiled down to numbers.
Here are four key qualitative fundamentals that analysts always keep an eye on:
1. The Business Model: What’s the company all about? This might sound simple, but it can get pretty tricky. For example, if a company’s all about selling fast-food chicken, is that where it’s really making the big bucks, or is it just cashing in on royalties from others?
2. Competitive Advantage: This one’s a game-changer. A company’s long-term success often comes down to whether it can keep its competitive edge. Think of iconic brands like Coca-Cola or Microsoft—they’ve built strong fortresses around their businesses. When a company can do that, it usually means good news for its investors.
3. Management: Some say this is the make-or-break factor. You can have the best business plan, but if the folks at the top don’t execute it well, it’s all for naught. While you might not have coffee with the management team, you can still snoop around their backgrounds. Check their track record, see if they’ve been cashing out their stock shares, and get a feel for their style.
4. Corporate Governance: This is all about how a company runs itself. Is it fair, transparent, and ethical? Does it respect the rights and interests of its shareholders? Take a peek at the company’s policies and how it treats its stakeholders. If things seem shady, it might be a red flag.
5. Industry: Don’t forget to zoom out and look at the bigger picture. What’s happening in the industry? Who are the customers, and how does the company stack up against its rivals? Understanding the industry’s ins and outs can give you a deeper insight into a company’s financial health.
Quantitative Fundamentals (Financial Statements)
Alright, let’s dive into the numbers. When it comes to fundamental analysis, financial statements are your best friends.
These statements spill the beans on a company’s financial performance, and analysts gobble them up to make smart investment choices.
Here are the three heavy hitters:
1. The Balance Sheet: This is like a financial snapshot of the company at a particular moment in time. It lists everything the company owns (assets) and everything it owes (liabilities). Plus, it shows the money invested by shareholders (equity).
And here’s the math trick: Assets = Liabilities + Equity.
If this equation doesn’t balance, something’s fishy.
2. The Income Statement: Think of this as the highlight reel of a company’s financial performance over a specific period, usually a quarter or a year. It spills the beans on revenues, expenses, and profit. Essentially, it shows you if the company’s making or losing money from its regular operations.
3. The Statement of Cash Flows: Cash is king, and this statement tracks every dollar coming in and going out. It’s divided into three categories: cash from investments, cash from financing, and operating cash flow (the money made from regular business activities).
Investors love this one because it’s tough for a company to play tricks with its cash situation.
These financial statements are the bread and butter of fundamental analysis. They help analysts cook up all sorts of ratios and metrics to figure out a company’s real value and where it might be heading.
➤ Example of Fundamental Analysis (Coca-Cola)
Let’s get practical and take a sip of fundamental analysis with a real example: Coca-Cola. Here’s how analysts might gulp down a thorough analysis:
1. Economic Check: First, they’d peek at the broader economy. Think inflation (what is inflation?), GDP growth, exports, and more. It’s like checking the weather before a picnic; you need to know what’s brewing.
2. Industry Inspection: Next, they’d dive into the beverage industry. What’s the sector’s vibe, and how’s Coca-Cola’s competition doing? Think of this as spying on the other teams in the league.
3. Company Dive: Now, it’s time to open Coca-Cola’s treasure chest. They’d dig into Coca-Cola’s financial reports, which you can find on the SEC’s Edgar filings database. These reports spill the beans on everything from assets to liabilities.
4. Data Debrief: They might also use data from a firm like CSIMarket for a deeper dive. This tool helps them assess Coca-Cola’s assets, income, debts, and more. They’d compare Coca-Cola’s numbers to the broader beverage industry. For example:
|Y/Y Revenue Growth||13.48%||10.86%||16.18%|
|Price to Free Cash Flow||24||7.45||4.23|
|Debt to Equity (TTM)||1.57||0.14||0.11|
|Quick Ratio (TTM)||0.16||0.24||0.2|
|Return on Equity (TTM)||13.14%||30.21%||23.16%|
|Return on Assets (TTM)||11.5%||8.69%||7.91%|
|Return on Investment (TTM)||13.14%||19.76%||15.84%|
|Revenue per Employee (TTM)||$111,578||$55,015||$66,896|
5. The Company’s Story: It’s not all about numbers. Coca-Cola’s been around since 1892, surviving wars, crises, and pandemics. Its brand is like gold in the beverage world.
6. Brand Power: A strong brand adds serious value. Coca-Cola’s global recognition is worth a lot.
7. The Cherry on Top: With all this info, analysts mix brand strength, longevity, above-average growth, and financial stats into their analysis. Sure, Coca-Cola has more debt than equity, but it also works its assets harder than competitors. Cash-wise, it’s not the most liquid, but it’s got wiggle room.
8. Secret Sauce: Lastly, they’d look at the revenue per employee. Here, Coca-Cola’s employees are cashing in big time. That’s worth investigating – maybe it’s technology, efficiency, or just a darn good sales team.
And that’s how fundamental analysis goes down. It’s like peeling layers off an onion to find the juicy stuff inside. 🧅
➤ Fundamental Analysis FAQ
What’s Fundamental Analysis and its goal?
Fundamental analysis scrutinizes publicly available financial info and reports to gauge whether a stock and its company are valued correctly by the market. Its aim? To uncover the true value behind the numbers.
What are the 2 types of Fundamental Analysis?
- Qualitative: Evaluates the quality, nature, and standards of data.
- Quantitative: Focuses on measurable figures, like ratios and formulas.
What are the 3 layers of Fundamental Analysis?
When you dive into fundamental analysis, you peel through 3 layers:
- Economic Analysis: Checking the overall economic health.
- Industry Analysis: Delving into the specific industry’s state.
- Company Analysis: Examining the target company’s financials and performance.
Why use Fundamental Analysis?
It reveals what a company’s market value should be. Beyond stock prices, it’s about understanding the company’s financial health. After all, a stock is only as good as the company behind it.
What is the difference between qualitative and quantitative fundamental analysis?
Quantitative fundamental analysis evaluates an investment based on easily measurable factors like a company’s earnings or assets.
In contrast, qualitative analysis examines less tangible aspects such as the quality of a company’s management or the strength of its brand.
It’s important to note that these categories aren’t rigid, and some factors may fall into both.
What is the difference between fundamental analysis and technical analysis?
Fundamental analysis assesses whether an investment is undervalued or overvalued by considering underlying economic conditions, along with the financial health of the company or organization issuing a stock or bond.
On the other hand, technical analysis focuses on identifying patterns in an investment’s price to predict its future movements.
Why do investors read financial statements when doing fundamental analysis?
Investors turn to financial statements during fundamental analysis because these statements contain crucial metrics for determining if a company is undervalued or overpriced.
Financial statements reveal a company’s profitability, the composition of its assets, and the rate of growth in its sales and profits over time. These metrics are essential for assessing a company’s true value.
What is a good PE ratio for a stock?
There’s no one-size-fits-all answer to this question because different companies naturally have varying PE ratios.
For instance, mature companies in stable industries often have low PE ratios, while early-stage companies or those in rapidly growing sectors may have much higher ones.
To effectively use the PE ratio as a measure of company value, it’s important to compare it with similar companies in the same industry and analyze the same company’s historical PE ratios.
What is the (Strength, Weakness, Opportunity, and Threat) (SWOT) Analysis?
SWOT analysis is a qualitative analytical method employed to evaluate a company’s competitive position. It is designed to identify how a company can best leverage opportunities within its market while addressing its strengths and weaknesses
What tools can I use for Fundamental Analysis?
Analysts rely on a toolkit that includes:
- Financial Reports: Official records of a company’s finances.
- Ratios: Calculated numbers from reports.
- Spreadsheets: For organized data.
- Charts & Graphs: Visual aids.
- Infographics: Summarized data in visual form.
- Government Reports: Insights into industries and the economy.
- Market Reports: Current market insights.
Fundamental analysis is about digging beneath the surface to understand a stock’s true worth.
➤ Final thoughts
Fundamental analysis serves as a crucial tool for stock analysts.
To uncover whether a stock is riding high or low in the eyes of the market. It takes into account a company’s economic landscape, industry climate, and financial performance.
Analysts employ financial ratios generated from financial and government reports.
However, not all analysts wield the same tools or see stocks through the same lens. What truly matters is that your analysis aligns with your value criteria and guides your investment decisions.
- Securities and Exchange Commission (EDGAR Filings)
- CSIMarket – Coca-Cola Co (KO) Management Effectiveness
- Coca-Cola Company History
- CSIMarket – Coca Cola Co’s Net Cash Flow Margin