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Fundamental analysis for investors

Fundamental analysis in practice

The fundamental analysis aims to help the investor answer the question "Is a company's stock a good investment? The final effect is to determine the real value of a security, the so-called "security". the intrinsic value.

Fundamental analysis assumes an analysis of the overall economic and political situation as well as quantitative and qualitative values in the company - preferably all factors that may influence the valuation of the securities in question.

Although generally used to determine the value of shares, it can also be used for the valuation of other securities, such as bonds or currencies, as well as economies or sectors as a whole. This type of analysis is intended primarily for long term investors, since in the short term the value of the assets may differ from their real value.

Unfortunately, it is never known how much time will pass before the stock exchange value corresponds to the calculations from the analysis - this may take a very short time (for example, a few days), but this process may also extend over many years.

While the technical analysis mainly refers to the analysis of charts, the fundamental analysis is mainly related to the depth in the financial statements (for example, profit and loss account, balance sheet) of an issuer of securities.

Therefore, based on historical data (periodical reports) we aim to determine the present value of stocks in a given company and its future prospects. However, there is more than just analysing figures when analysing a company and its stocks.

The game includes a qualitative analysis, i. e. the evaluation of intangible and difficult to measure aspects, such as the quality of the company's management staff. Omission of quality data may lead to erroneous calculations, especially in industries where brand value or quality of personnel significantly affects the performance of enterprises.

Comparing the value of stocks determined on the basis of a fundamental analysis with its current market price, the investor can determine whether the stocks of a given company are underestimated or overvalued. In the long term, the value of a company's stocks should be aimed at real value, so when it is undervalued it is advisable to buy it, and when it is overvalued it should be sold.


Company A stocks are listed on the stock exchange at USD 50 each. based on the analysis, the investor estimated that the Company's stocks are worth USD 60. In other words, it estimated that the intrinsic value of the stocks was USD 60. The investor therefore considered that company's A stocks were underestimated and would be interested in purchasing them, as their market value is now well below their intrinsic value.

In carrying out the fundamental analysis, the investor should answer such questions as:

Does the company make a profit?
Is the company able to pay its debts?
Is the position of the company in the market advantageous in relation to its competitors?
Is the company's income growing and at what pace?
Does the company not falsify reports? (This activity is, however, severely limited by the analysis of reports by auditors)

Of course, these are just some examples of questions from many others to which the investor should know the answer during the analysis. However, the most important issue remains the profitability of investment in stocks of a given company, and the fundamental analysis tools must be treated as an aid in obtaining an answer.

In order to precisely determine the value of the stocks, it is necessary to perform a few stages of the analysis:

1. Analysis of the macroeconomic situation
2. Sectoral analysis
3. Situation analysis of the enterprise
4. Financial analysis of the company
5. Valuation of stocks.

Fundamental analysis: analysis of the macroeconomic situation

An analysis of the macroeconomic situation is necessary because companies operate in a certain economic environment and remain dependent on it. It covers both the analysis of typical macroeconomic data - GDP growth rates, inflation rates, interest rates, but also elements such as the demographic situation, trade union activity or socio-cultural habits. This type of analysis leads to the determination of the attractiveness of investing in a given investment. market.

Fundamental analysis: sectoral analysis 

Sectoral analysis makes it possible to determine the profitability of investments in a given sector. It is based on an analysis of how well companies from a given sector will perform as a whole. Companies in a given sector are subject to similar trends because similar economic factors influence their activity and performance.

Fundamental analysis: analysis of a particular enterprise

Then proceed to the analysis of a particular company. By analyzing the situation of a company, we check its position against the whole sector and compare it with its competitors. It is also possible to carry out so-called. SWOT analysis, i. e. to examine strengths and weaknesses of the enterprise, as well as opportunities and threats resulting from the environment in which the enterprise operates.

At this stage, it is also important to take into account the non-financial aspects - the quality of human resources and management, products or services offered by the company - in the analysis.

The part concerning the financial analysis of the company is entirely based on financial data. The investor may find them in periodic reports of listed companies that are regularly published (for example, on the company's website).

Based on financial data, we examine, among others profitability, solvency, liquidity and financial stability, usually using indicative analysis. The final result of the whole analysis is the valuation of stocks.

The process of fundamental analysis requires time and knowledge from the investor, therefore it is also possible to use analyses carried out by financial analysts. However, it should be remembered that the valuation of the company's stocks is based on certain assumptions (for example, with regard to future growth of revenues) made by analysts, so it is never fully accurate.

Although fundamental analysis is sometimes criticised, for example by investors using technical analysis, it is worth considering it when making decisions on entry or exit.

Investors may be encouraged to invest in the assets of major investors, such as Warren Buffet or Peter Lynch, who based their investment decisions on fundamental analysis. The first of the richest people in the world, believes that it is necessary to invest in companies whose business is fully understood. For this reason, Warren Buffet rarely decided to invest in a technology sector whose business model is not particularly close to him.


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