The 3 simple phases of fundamental analysis
We'll learn about the 3 phases of fundamental analysis in this blog. But before we get to that, let me explain how to do fundamental analysis in a simplified way.
With fundamental analysis, you can figure out an overall company's worth. Imagine you want to buy a shop that sells fruits. You would want to know how much money the shop makes, how much fruit it sells in a certain period, and how much it costs to run the shop. You might also want to know the location of a fruit shop and how much fruit usually costs there.
Fundamental analysis is kind of like that, but instead of a fruit shop, consider it now for a business like Apple or Titan. Things like computers, mobile phones, and watches are there instead of fruits. You don't just look at one shop; you look at all the stores that sell computers, mobile phones, and watches.
Fundamental analysis looks at things like how much money a company makes, how much it costs to make the things it sells, and how much money it owes to other people. It also looks at how popular the company's products are, what other companies make similar things, and what laws and rules might affect the company.
By looking at all of these things, you can figure out if a company is worth a lot of money. You might want to buy some of its stock so that you can make money if the company does well.
Let’s understand the steps included and how to do fundamental analysis for better investing.
There are 3 phases of fundamental analysis explained below:
- Economic analysis
- Industry analysis
- Company analysis
Economic analysis
This might sound complex, but let me explain in simple language. This top level of fundamental analysis is usually called macro-level analysis. In this, we mainly focus on the bigger picture, like economic, social, and political factors that affect the overall market and the asset's specific industry. At the macro level, the overall economic climate, interest rates, inflation, government policies, and global events that could affect the value of the asset are looked at.
Is it clear now?
No...
Okay, let me give you an example.
Take an example, if an investor wants to buy a certain stock, the macro-level analysis will look at economic indicators like GDP, inflation rate, interest rates, and the state of the country's economy as a whole. It will also look at how stable the country's government is, how well it gets along with other countries, and if any outside events could hurt the economy. It will also look at factors that are unique to the industry, such as demand, supply, competition, and technological advances. By thinking about these things, investors can learn more about the market and make better investment decisions.
Industry analysis
This is the second level of fundamental analysis. Few people also call it sector analysis, so don't be confused. It means looking at the industry in which the asset works. This includes looking at the trends and dynamics of the industry, the competitive landscape, regulatory and legal factors, and supply and demand conditions.
For example, if an investor wants to invest in a certain company in the healthcare sector, the industry-level analysis will look at trends in the healthcare sector, such as government regulations, technological advances, and the demand for healthcare services. It will also look at the competitive landscape, including the market share of major players, the number of new players, and the ability of buyers and sellers to make deals. By thinking about these things, investors can learn more about the industry and make smart choices about their investments.
Don't get bored; we are now moving on to the final analysis.
Company analysis
The third and final level of fundamental analysis is the company-level analysis, which is also called "bottom-up analysis." It means looking at how well the company that owns the asset is doing financially. This means looking at the company's financial statements, such as the income statement, balance sheet, and cash flow statement. It also means looking at the company's management team, business model, and competitive advantage.
For example, if an investor wants to invest in a certain company, the company-level analysis will look at the company's financial performance, such as its revenue growth, profitability, debt levels, and cash flows. It will also look at the people in charge, their experience, and how well they have done in the past. Also, it will look at the company's competitive advantage, such as its brand, intellectual property, or unique products or services. By thinking about these things, investors can get a better idea of the company's financial health and make decisions about their investments that are based on accurate information.
Conclusion
Hope you understood how to do fundamental analysis. It is a key tool for investors to use to make smart decisions about their investments. The three phases of fundamental analysis—macro-level analysis, industry-level analysis, and company-level analysis—give investors a full picture of the market and the specific asset they want to buy. By looking at these things, investors can figure out what an asset is worth and decide whether or not to invest in it.
If you reached this point, I am sure you liked this blog, and you may want to learn more about the stock market. If so, you can take a look at some more trending blogs.
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