102-11 Fundamental Analysis – Important Investing Principles

Fundamental analysis analyzes a company’s financial performance and prospects by examining its underlying factors, such as management, earnings, assets, and liabilities.

The goal of fundamental analysis is to identify a company’s true value and invest in it when it is selling at a discount.

This section looks at fundamental stock analysis and how it is done.

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Basics of fundamental analysis

How do you analyze a company’s financial performance? There are three basic steps to fundamental analysis:

1. Estimate a company’s intrinsic value

One way to estimate a company’s intrinsic value is to use a discounted cash flow (DCF) model. In a DCF model, you forecast the company’s future cash flows and then discount them back to the present using a risk-adjusted rate. The resulting figure is your estimate of the company’s intrinsic value.

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2. Compare the current price to the intrinsic value

When a company’s stock price is below its intrinsic value, it trades at a discount. When a company’s stock price is above its intrinsic value, it trades at a premium. Investors who use fundamental analysis try to buy and sell stocks at a discount when trading at a premium. This is called value investing.

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3. Decide to buy, sell, or hold

After you have estimated a company’s intrinsic value and compared it to the current stock price, you can decide whether to buy, sell, or hold the stock. If you think the stock is undervalued, you may want to buy it. If you think the stock is overvalued, you may want to sell it. And if you think the stock is fairly valued, you may want to hold onto it.

What affects a company’s intrinsic value?

1. Management

The quality of a company’s management team can greatly impact its long-term success. When evaluating management, look for experienced leaders with a good track record of growing the business and generating shareholder value.

2. Earnings

Earnings are the profits that a company generates from its business operations. When analyzing earnings, look for consistently profitable companies with a strong track record of earnings growth.

3. Assets

A company’s assets can be divided into two categories: physical assets and intangible assets. Physical assets include things like factories, land, and inventory. Intangible assets include things like patents, copyrights, and customer relationships. When evaluating a company’s assets, look for businesses with a diversified mix of physical and intangible assets.

4. Liabilities

Liabilities are the debts and other obligations that a company owes. When analyzing liabilities, look for companies with a strong balance sheet and low debt levels.

Many other factors can affect a company’s intrinsic value, but these are some of the most important ones to consider. By estimating a company’s intrinsic value and comparing it to the current stock price, you can make informed investment decisions about buying, selling, or holding the stock.

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What is fundamental analysis vs. technical analysis

Fundamental analysis analyzes a company’s financial performance and prospects by examining its underlying factors, such as management, earnings, assets, and liabilities. The goal of fundamental analysis is to identify a company’s true value and invest in it when it is selling at a discount.

On the other hand, technical analysis is a method of analyzing the financial markets by studying past market data, such as price charts and volume trends. The goal of technical analysis is to identify market patterns and use those patterns to predict future market movements.

Fundamental and technical analysis have strengths and weaknesses, and many investors use both methods to make investment decisions.

Next, we cover the three important documents you need to understand: the balance sheet, the income statement, and the cash flow statement.

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Combining Fundamental and Technical Analysis

There are a few different ways to combine fundamental and technical analysis. One way is to use fundamental analysis to identify good stocks and technical analysis to determine when to buy or sell those stocks. Another way is to use technical analysis to identify overvalued or undervalued stocks and then use fundamental analysis to determine if they are likely to return to their fair value.

Some investors use a combination of both fundamental and technical analysis when making investment decisions. They may use technical analysis to identify good entry and exit points and then use fundamental analysis to confirm that the stock is a good long-term investment.

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Summary

Regardless of your method, it is important to remember that no investment strategy is perfect. Investing will always involve some risk, and there is no guarantee that you will always make money. However, if you research and invest wisely, you can minimize your risks and maximize your chances of success.