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.

Read more: The Basics of Fundamental Analysis

🛡️ The 10 Most Important Risk Factors Impacting Your Investment Portfolio

Investment risks pose a direct threat to portfolio returns by potentially disrupting future cash flows or even reducing the initial capital. Market risks, or more severe risks such as default (bankruptcy), can lead to devastating losses. Therefore, it is crucial to understand, monitor, and control these risks through careful analysis and measurement, followed by the application of appropriate countermeasures to safeguard the longevity of your investment portfolio.

📌 There are two general categories of investment risk: systematic and non-systematic risk

📌 There are ten distinct investment risks: Business Risk, Market Risk, Credit Risk, Liquidity Risk, Interest Rate Risk, Financial Risk, Inflation Risk, Currency Risk, Political Risk, and Systemic Risk

🗃️ Classification of Portfolio Risks by Their Fundamental Characteristics

To effectively manage investment risk, we must first identify its source. In this context, risk is classified into two general categories: systematic and non-systematic. 

➡️ Systematic risk

Systematic risk is inherently unpredictable and therefore cannot be accurately identified or managed. This category includes risks arising from broad macroeconomic events. Extreme examples include war or the nationalization of local companies through state intervention.

➡️ Non-Systematic risk

Conversely, non-systematic risk can be anticipated and managed through the application of various risk diversification strategies. This type of risk is primarily addressed through a process known as risk diversification. The core idea is best summarized by the phrase "Don’t put all your eggs in one basket." Diversification procedures are critical to every investment portfolio—particularly those heavily exposed to financial securities such as corporate bonds and equities.

👉 Note: Systemic risk and systematic risk are often considered the same, but they refer to completely different concepts.

Read more: Investment Risks

The Six Essential Investment Valuation Methods

Valuation methods refer to the approaches and techniques used to assess the intrinsic value or fair price of an investment. These methods help analysts and investors estimate the true worth of an asset beyond its market price.

Being able to evaluate a company's true value is essential for making profitable stock market investment decisions. In this article, we examine the most important evaluation methods. Here are the six key methods:

1. Revenue Valuation (P/S and Market Share)

2. Earnings Valuation (P/E and P/E/G)

3. Cash Flows (EBITDA and the DCF Method)

4. Dividend Discount Model (DDM)

5. Equity Valuation (P/Bv and ROE)

6. Empirical-Based Valuation

(1) Revenue-Based Valuations & Market Share

🔒 Reliability: 4/10

In general, a company’s total revenue is generated by selling goods and services. High revenue indicates a strong competitive position. To compare a company’s revenue to its market value, you can use the Price/Sales ratio.

🧮 P/S Ratio = Share Price / Sales per Share (annual sales)

Depending on the industry and the company’s growth rate, the Price/Sales ratio can range from 0.2 to 10, or even 50. A Price/Sales ratio of 0.2 is common for technology stocks that invest heavily in research, while a ratio of 50 is typical for industries with very low growth rates and historically low net profit margins. This evaluation method is mainly useful for newcomers in high-growth industries.

Market Share

Market share refers to the percentage of sales earned by a specific company within a particular market over a period of time. It is considered an indicator of corporate competitiveness, which is why the stocks of "market leaders" often trade at a premium compared to other stocks in the same market.

🧮 Market Share = (Company's Sales / Total Market Sales) × 100

Read more: Investment Valuation Methods