Fundamental Analysis: A Complete Step-by-Step Guide
Read Complete Article: Fundamental Analysis: A Complete Step-by-Step Guide
Otherwise, you might say, “Being a stock market investor is my biggest dream!” are you saying? Who knows, maybe yes, maybe no! However, since you have come to read this article, you are at least interested in stocks and trying to learn something about the subject.
Whether your goal is to wreak devastation on Wall Street or “I’m self-sufficient with a small portfolio, it’s more than enough for me.” say, you have come to the right address in every way
It would not be an exaggeration to say that fundamental analysis is the cornerstone of investing. Some experts even claim that those who do not understand fundamental analysis are ignorant of investing.
However, since what we call fundamental analysis is almost an ocean, it can be very difficult for many people to figure out where to start learning about the subject. After all, many investment strategies differ greatly from one another, but almost all of them make use of fundamental analysis.
Briefly, What is Fundamental Analysis?
Fundamental analysis is a technique that allows us to determine the values of various securities by examining a company’s activities and predicted future actions. Of course, the fundamental analysis that we have described as “the sea” above is not limited to companies only, in other words, you can use this technique on a sector or national economy on its own.
Fundamental analysis is an analysis method that relies on analyzing any financial element in a more comprehensive way, not just price movements
Through fundamental analysis, it is possible to answer the following questions:
Is the company’s revenue increasing?
Is the company making a profit?
Is it in a position to beat its rivals in the future
Is it in a position to pay its debts?
Does management cheat and falsify accounting records?
Of course, none of these questions are as simple as they seem. Moreover, you may need to ask many more questions like these to get to know the companies. But at its core, there is only one question that will unlock the door: Is it worth investing in this company? Fundamental analysis is a tool that will allow you to answer this question.
Qualitative and Quantitative Analysis
You can define fundamental analysis as “studying the fundamentals”, but if you don’t know what the fundamentals are, this definition won’t mean much to you.
As we mentioned in the introduction of our article, the biggest problem experienced in clarifying the basic elements is that the things we define as the basic elements are actually very comprehensive and therefore all kinds of economic activities of the companies fall within the scope of this definition.
Of course, concepts such as income and profit are always the main elements to be examined, but the work does not end with these, it is necessary to look at everything from the market share of the companies to the quality of management.
We can group the factors that need to be examined in basic analysis into two groups quantitative and qualitative. Let us immediately point out that there is no significant difference between the financial meanings of these concepts and their dictionary meanings.
Quantitative — elements that can be measured or expressed numerically
Qualitative — elements related to the quality or character of something but not its size or quantity.
For us, the meanings of these concepts are not very different. Quantitative elements in the stock market refer to the measurable aspects of a company or line of business. Our biggest sources of quantitative data are balance sheets.
After all, you can measure elements such as revenue, profit, and assets with complete accuracy.
Let’s come to the qualitative elements; these are factors that are more difficult to measure as opposed to quantitative factors. The quality of the company’s board members and managers, brand awareness, patents, and the technology used are among the quantitative factors.
How to deal with Qualitative and Quantitative Factors?
Both qualitative and quantitative analysis is required, and it is not possible to argue that either one is more useful than the other. According to most analysts, quantitative analysis, which allows us to obtain actual data, should always be supported by qualitative factors that include interpretation.
In this context, we can give the example of Coca-Cola Analysts can take into account the company’s annual dividends, earnings per share, price-to-earnings ratio, and many other quantitative factors when examining Coca-Cola’s stock. However, if the Coca-Cola brand awareness is not taken into account, the quantitative analysis is doomed to failure, no matter how comprehensive.
Almost anyone can start a sugar water company, but how many people can go out and create a brand that billions of people know? Nevertheless, it is not easy to estimate the value of the Coca-Cola brand.
However, no one can deny that brand awareness is one of the most important factors that make Coca-Cola successful, so it is essential to take this into account in the analysis
The Concept of Intrinsic Value
Before we go into the depths of our subject, we think that we should talk about the concept of intrinsic value. Fundamental analysis always assumes that stock prices in the stock market do not fully reflect the “true” value of a stock.
After all, if the prices of the stocks reflected the truth, we wouldn’t be sitting around and spending hours doing fundamental analysis, would we? This real value, which we also talk about in the language of finance, is called “intrinsic value”.
Let’s make things clear by giving an example right away: Let’s say a company’s shares are traded at $ 20. You do a thorough study of the company and determine that the shares in question are worth $25. In other words, you learn that the intrinsic value of the firm is $25.
Every investor buys undervalued stocks and tries to make a profit later on. When we look at it from here, we understand how important it is to correctly identify the intrinsic value, right