Fundamental analysis techniques

 

Fundamental Analysis (FA) is a method used to evaluate a stock's intrinsic value by analyzing financial, economic, and qualitative factors. It helps investors determine whether a stock is overvalued or undervalued based on the company’s true worth—not just its market price.

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🧠 Core Objective of Fundamental Analysis

To answer:
👉 "Is the stock worth its current price?"

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🧾 Types of Fundamental Analysis

1. Quantitative Analysis

Involves numerical evaluation of financial statements.

2. Qualitative Analysis

Focuses on non-numerical aspects like management quality, brand value, and industry dynamics.

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📊 Fundamental Analysis Techniques

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🧮 1. Analysis of Financial Statements

a. Income Statement (Profit & Loss)

• Revenue growth

• Net profit margin

• Earnings per share (EPS)

b. Balance Sheet

• Assets vs Liabilities

• Debt-to-equity ratio

• Book value per share

c. Cash Flow Statement

• Operating cash flow

• Free cash flow

• CapEx trends

📌 Purpose: Understand profitability, liquidity, and solvency.

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📈 2. Financial Ratios Analysis

Ratio Type	Key Ratios	What They Show
Profitability	ROE, ROA, Net margin	How efficiently the company generates profit
Liquidity	Current ratio, Quick ratio	Ability to meet short-term obligations
Solvency	Debt-to-equity, Interest coverage	Long-term financial health
Valuation	P/E, P/B, EV/EBITDA, PEG	Is the stock cheap or expensive?
Efficiency	Inventory turnover, Asset turnover	Operational efficiency

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🏭 3. Industry & Sector Analysis

• Industry growth trends

• Regulatory environment

• Position of company in industry

• Cyclical vs defensive nature

📌 Goal: Ensure the company operates in a growing and sustainable industry.

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🧬 4. Company-Specific (Qualitative) Analysis

Element	Considerations
Management quality	Experience, past performance, integrity
Corporate governance	Transparency, board independence
Brand strength	Market share, brand loyalty
Competitive advantage	Moat, patents, supply chain, network effects
Expansion potential	Global markets, new products, M&A

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🌏 5. Macroeconomic Analysis

• Interest rates

• Inflation

• GDP growth

• Currency stability

• Fiscal & monetary policy

📌 These factors impact business costs, profits, and investor sentiment.

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📐 Intrinsic Valuation Techniques

Method	Description	Best For
Discounted Cash Flow (DCF)	Projects future cash flows and discounts to present	Stable cash-generating firms
Dividend Discount Model (DDM)	Values based on expected dividends	Dividend-paying firms
Relative Valuation	Compares with industry peers (P/E, P/B, etc.)	Growth/tech stocks
Asset-based Valuation	Based on book value of assets	Asset-heavy firms

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📌 Step-by-Step Fundamental Analysis Approach

1. Understand the business – what does the company do?

2. Study the industry – trends, competition, regulations.

3. Read financial statements – last 5 years ideally.

4. Assess key ratios – compare with peers and history.

5. Evaluate management – check for consistent vision and ethics.

6. Value the company – using DCF or multiples.

7. Check macro conditions – timing and risk assessment.

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🛠️ Tools for Fundamental Analysis

• Websites: Screener.in, TIKR, Yahoo Finance, Morningstar

• Software: Excel, Moneycontrol Pro, Investing.com

• Reports: Annual Reports, Investor Presentations, Brokerage Reports

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⚠️ Common Mistakes to Avoid

Mistake	Why it Hurts
Blindly trusting ratios	Must understand context and comparables
Ignoring debt levels	Overleveraged companies are risky
Short-term focus	FA is a long-term strategy
Overvaluing “cheap” stocks	Low P/E doesn’t always mean value
Disregarding management quality	Key to consistent performance

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✅ Summary Table

Element	Value Investing Style	Growth Investing Style
Revenue/Profit Stability	Required	Not always
Valuation Matters Most	Yes	Secondary
Cash Flow Analysis	Essential	Often ignored early
Business Moat	Essential	Optional
Intrinsic Value	Must < Market Price	Will > Market Price