A Perfect Guide to Fundamental Analysis

4.3

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Fundamental analysis of stocks, as you know now, helps you get to know the company better. But just what kind of information does it offer you? Or, in other words, what kind of information should you look for? Broadly speaking, you need to analyse the quantitative and the qualitative aspects of a company before deciding on whether it’s a good investment option. 

Let’s understand this better with an example we’ve already seen in the previous chapter. Remember we looked at a situation where you had to pick a destination for your vacation? Let’s classify the metrics that you considered in that scenario as quantitative or qualitative aspects.

Picking a destination for your vacation

Possible choice

Nature of the metric

What time of the year do you want to head out on your vacation?

3 months from now, when it’s summer

Quantitative

Do you want a beach vacation, a city vacation, or perhaps a trip to the mountains?

A beach vacation

Qualitative

How many days do you plan to take a vacation for?

7-10 days

Quantitative

What kind of weather do you want to enjoy?

Sunny, breezy weather

Qualitative

How many people will be accompanying you?

3 people

Quantitative

Is there any specific cuisine that you want to try?

Mediterranean, perhaps?

Qualitative

What is your budget for the flight prices?

Rs. 60,000 or so

Quantitative

Do you want a laid-back vacation or an adventurous, action-packed trip?

Adventurous and exciting

Qualitative

You see how you look at both quantitative and qualitative aspects when you plan your next vacation? Much like this, even when you’re analysing a company, you’ll need to weigh in both these kinds of factors. 

What are the quantitative and qualitative details that equity fundamental analysis reveals?

When you apply the techniques of fundamental analysis of shares to evaluate a company, you get to learn many details about the entity. Some of these are quantifiable, while others are more abstract. For instance, here are some of the metrics that equity fundamental analysis reveals.

Quantitative nuances

Qualitative nuances

What is the company’s revenue?

How efficient are the company’s operations?

How much profit has it made in the past year?

What is the quality of its key management personnel?

How much capital does it have?

How does the company’s brand value appear?

How is the company using its cash?

Does the company use any proprietary technology?

What does the company spend on?

What socially responsible initiatives is the company undertaking?

How much debt does it owe its creditors?

What is the company’s vision like for the future?

To gather all of these insights, fundamental analysis of stocks requires you to take a look at the financials of a company, its annual report, and various other analyst reports and filings. We’ll get into these details in the upcoming chapters in this module.

What about the company’s historical performance?

As you’ve seen, fundamental analysis of shares focuses a great deal on the present and the possible future of the company. What about the company’s historical performance then? Is that not relevant? If that’s what you’re wondering, then here’s your answer. 

Historical price and volume movements of a company’s shares can give you a lot of information about how the company may move in the future. In fact, there’s a separate technique that focuses primarily on analysing the historical trends in the price and the trading volume of the company’s shares. 

 

This is known as technical analysis.

And unlike reports and financials, technical analysis relies heavily on charts that record and reflect the movements in the price at which a company’s shares have traded in the past, and the volume of shares traded. 

Here’s a sample chart for you.

Source: dalalstreetwinners.com

See how this chart maps the price of the asset across various years. This is just one bit of what technical analysis involves.

What are the Basics of Fundamental Analysis?

There are certain basic factors that make up the foundation of fundamental analysis. Knowing what these factors are can help you understand fundamental analysis better. Here is a preview of some of these factors.

  • The structure of a company 
  • The revenue of a company
  • The profits the company makes in any given year
  • The profitability of a company over the previous years
  • The revenue of a company in any given year
  • The growth or fall in the company’s revenue over the years
  • The amount of debt a company has
  • The corporate governance aspects of a company
  • Any intangible assets that the company may own, such as patents and intellectual property rights

When you are performing the fundamental analysis of a company, you need to look at all of these factors.

How to Do Fundamental Analysis of a Stock?

Getting started with fundamental analysis may seem daunting. But if you focus on the steps involved one after the other, and break it down into simple tasks, you’ll see how easy it is. Here’s how you can perform fundamental analysis of a stock easily.

  1. Spend some time understanding the business of the company you are analysing.
  2. Read through the company’s financial statements.
  3. Check the important financial ratios to get a better understanding of the overall financial status of the company.
  4. Do a peer comparison to understand how the company fares when pitted against its competitors. 
  5. Look at the future prospects of the company to get a good idea of where it is headed over the long term.

Wrapping up

So, you know now that fundamental analysis of stocks looks at the quantitative and the qualitative aspects of a company, while technical analysis looks at historical price and volume movement using a variety of charts. Want to know more about how these two techniques differ from one another? That’s just what we’ll discuss in the next chapter. 

A quick recap 

  • When you apply the techniques of fundamental analysis to evaluate a company, you get to learn many details about the entity. Some of these are quantifiable, while others are more abstract.
  • Fundamental analysis helps you make sense of these quantitative and qualitative aspects.
  • The historical price and volume movements of a company’s shares can give you a lot of information about how the company may move in the future. The technique that focuses primarily on analysing the historical trends in the price and the trading volume of the company’s shares is known as technical analysis.
  • Unlike reports and financials, technical analysis relies heavily on charts that record and reflect the movements in the price at which a company’s shares have traded in the past, and the volume of shares traded.
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Comments (10)

RAJESH

22 Sep 2021, 02:31 PM

Nice

Replies (1)

Smart Money

28 Sep 2021, 08:32 PM

Dear user, thank you for your feedback. Happy Learning!

VAISHNAVI

17 Aug 2021, 09:41 PM

It's very knowledgeable

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Smart Money

30 Aug 2021, 06:05 PM

Thank you for your feedback. We are constantly working to improve the content and make it more interesting.

Pradeep Vishwakarma

08 Aug 2021, 09:28 PM

Useful knowledge

Replies (1)

Smart Money

30 Aug 2021, 05:24 PM

Dear user, thank you for your feedback. Happy Learning!

Pankaj Bhatwal

19 May 2021, 02:17 PM

vERY INFORMATIVE

Rahul Lomte

06 May 2021, 11:10 AM

Osammmm

Manish Rai

26 Apr 2021, 04:21 PM

Investor level ka certificate nai milaa

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Smart Money

07 May 2021, 06:54 PM

Give all the module quizzes to earn a badge and get the certificate. Please let us know if you are still facing any issue

Imran Shaikh

23 Jan 2021, 03:41 PM

Hii
Bahut achi tarikase samjaya hai..

JAWAHARLAL NANDA

22 Jan 2021, 08:51 PM

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JAWAHARLAL NANDA

22 Jan 2021, 08:49 PM

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Sunil Bhalla

17 Jan 2021, 08:06 PM

Great knowledge and information for new comers

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Smart Money

22 Jan 2021, 11:43 AM

Thanks Sunil. We will keep adding more courses on the website. Happy Learning.

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