Finnovationz - December-19-2018
Basically, there are two types of analysis: Technical analysis & Fundamental analysis. Technical analysis is used by traders to track the price movement, whereas fundamental analysis is used by investors. Today, we will start with fundamental analysis.
Fundamental analysis investigates the financial health of the company. It investigates it in two ways, quantitatively as well as qualitatively. It is up to investor how much weightage he/she gives to qualitative & quantitative analysis.
Basically, fundamental analysis involves examination of financial data, management, business track record, competition, earnings, growth etc. Some part of the analysis is tangible (measurable) & some part is intangible. Analysis of tangible constituents such as earnings, debt, price etc. is known as quantitative analysis & analysis of intangible constituents such as quality of product & management, Research & Development (R&D) etc. is known as qualitative analysis.
Fundamental analysis includes an analysis at three different levels:
We will cover all these three analyses in our video lecture series. Basically their name suggests their meaning. I don't think so, I would have to go into so much details. But, don't worry, we will try to cover each and every aspect of fundamental analysis including value and growth investing.
Fundamental analysis consists of
1) Quantitative Analysis
Quantitative Analysis draws the conclusion based on numerical data, measurement & mathematical research. Investors or analysts use economic data to assess the present and future growth of the economy. The quantitative analysis consists of the study of income statements, balance sheets, cash flow statement, ratios & other quantifiable data. We have already covered basics of fundamental analysis with 8 most important ratios in our video series. So, in this Beginner's guide series we will start with those ratios which we have not covered in videos such as PEG, EV/EBITDA, Return On Assets etc.
The amount of debt a company possesses is also a major consideration in determining its health & is quickly assessed by using the debt-to-equity ratio. The stock is undervalued or overvalued is determined by using P/E ratio & price to book value ratio. What I want to say here is, all these small ratios play an important role in fundamental analysis & should be calculated with care.
The only problem with the quantitative analysis is the data can be manipulated. As Mark Twain said, "there are lies, damn lies, and statistics." Lots of scams were happening in the recent time by manipulating the balance sheet. For e.g. Enron scam, Satyam scam etc. It doesn't mean that every data is manipulated.
Link of video:
2) Qualitative Analysis
A company is more than just numbers and figures. You also need to look at qualitative factors that affect a company's performance. The qualitative analysis can include the capability of the company's management, research and development (R&D), products and services, competition etc. It is used to gain insight into a company and an edge over investors/analysts who only use quantitative measures.
The core of every business is its people i.e, management. These people play an important role in the growth of the company & they are sometimes responsible for the destruction of the company. Hence, to check out the quality of management is one of the most important part of the qualitative analysis.
Make sure that you are using qualitative analysis in conjunction with quantitative analysis. We all have personal biases, and every analyst has some sort of bias. Hence using same data two people may come up with different conclusions.
The Proper fundamental analysis offers excellent insights, but it can be time-consuming & require a lot of data, that's why many individual investors avoid it, which is absolutely wrong. You must devote some time for analysis & stop gambling, as the stock market is not a gamble. Financial institutions perform fundamental analysis with ease because of availability of analysts and fund & as a result, they receive a good return on investment(ROI) compared to retail investors.
Value investors or fundamental analysts do not take the advice of the random walkers. They perform their own deep analysis & take the decision based on it. Fundamentals of the company reflect in the share price in the long run.
Two types of investment strategies are performed using fundamental analysis
1) Value investing &
2) Growth investing