Introduction to Fundamental Analysis

Fundamental analysis is a highly reliable method for investing across all financial asset classes. Fundamental analysts focus on information and macroeconomic factors that affect the true value of a financial security. This information may include both internal and external factors, as outlined below.

 

 The Goals of Fundamental Analysis

The main goal of a fundamental analyst is to identify and trade financial securities that are priced below their fair market value. Fundamental analysis focuses on estimating the fair value of the targeted security. Another key task is to identify and assess the potential risk of each investment decision. Risk identification is essential for managing your portfolio efficiently and effectively. The primary goals of fundamental analysis are:

(1) Determine the fair value of the security (estimating profit potential)

(2) Identify and measure the risks involved (estimating loss potential)

Fundamentals are based on internal and external factors that influence an investment. For example, if you buy a US stock, you must understand the company’s balance sheet as well as US economic data, especially figures relevant to the company’s industry.

 

⚙️ Building a Fundamental Analysis Framework

The following provides an overview of the internal and external factors that influence fundamental analysis:

 

🏢 Internal Fundamental Factors

Internal factors include the company’s financial condition and operational performance, encompassing metrics like earnings, expected growth, dividend policies, debt structure, cash flow status, management quality, and long-term strategic initiatives.

These are key variables that provide data and insights about a specific company.

1. Earnings per Share (EPS)

2. Projected Earnings Growth (PEG)

3. Dividends Paid

4. Sales per Share

5. Shareholders’ Equity

6. Debt Exposure Analysis

7. Cash Flow Analysis

8. Management Experience and Effectiveness (measured by Return on Equity (ROE) and Return on Investment (ROI) ratios)

9. Strategic Analysis of New Investment Projects

10. Estimates of Future Demand and Supply for the company’s products or services

 

🔗 More: » More information regarding investment valuation

 

🌍 External Fundamental Factors

External factors involve the broader economic environment and industry landscape, including elements such as interest rate trends, inflation levels, market liquidity, exchange rate movements, political stability, industry growth prospects, supply and demand dynamics, and competitive pressures.

These are external variables that provide information about the wider economy—both global and local—as well as insights specific to the relevant industry.

(a) Macroeconomic Factors:

1. Level of interest rates

2. Market liquidity and inflation

3. Industrial production

4. Currency exchange rates

5. Political stability and strategic environment

(b) Industry Factors:

6. Projected industry growth rate

7. Projected demand and supply dynamics

8. Current and planned investment projects

9. SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)

10. Strategic analysis using frameworks such as Michael Porter’s Five Forces model

🔗 More: » Economic & Business Cycles

 

 Technical Analysis vs Fundamental Analysis

Technical and fundamental analysis together form a comprehensive framework for trading in financial markets. The key difference between these approaches lies in the time horizon they focus on. Technical analysis is generally more effective for short-term trading decisions, relying on price patterns and market behavior. In contrast, fundamental analysis is more important over the long term, as it evaluates the intrinsic value of an asset based on economic and company-specific data.

Typically, traders who rely on technical analysis pay less attention to fundamentals, while fundamental analysts may disregard technical signals. However, the most successful investors and traders often combine both approaches to enhance decision-making.

👉 Tip: Fundamental analysis tells you what to buy, while technical analysis shows when to buy it and at what price.

 

■ The Basics of Fundamental Analysis

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