The Daily Breakdown is back with another boot camp, this time tackling fundamental analysis. Let’s kick it off with a quick intro.
For those interested in other parts of the Fundamental Analysis Boot Camp, consider the following links:
- Boot Camp Day 2: Most Important Financial Terms
- Boot Camp Day 3: Key Ratios to Know
- Boot Camp Day 4: Fundamental Investment “Vibes”
- Boot Camp Day 5: Value Investing vs. Growth Investing
Quick TLDR
- Not all fundamentals are created equal
- Qualitative vs. Quantitative analysis
What’s Happening?
When investors approach investment analysis, they typically approach it from under one of two different umbrellas: Technical analysis and fundamental analysis.
Technical analysis relies on price action, while fundamental analysis relies on evaluating the business or industry while focusing on things like growth, valuation, and profitability. While investors are free to blend these two analyses together, for the sake of this week’s Boot Camp, we’re only going to focus on the fundamentals.
Why Does Fundamental Analysis Matter?
Investors who use fundamental analysis study key financial statements (like the income statement, balance sheet, and cash flow statement) and evaluate important metrics such as earnings and revenue growth, profit margins, and return on equity. The goal is to invest in strong, well-managed companies with solid fundamentals, ideally purchasing shares when the stock is undervalued.
By focusing on the underlying business rather than short-term market noise, fundamental investors aim to build wealth steadily over time, benefiting from both capital appreciation and, in some cases, dividends. It’s the approach favored by legendary investors like Warren Buffett, who famously described it as buying a good company at a fair price and holding it for the long haul.
Fundamental analysis involves evaluating a company’s financial health, business model, and market position to determine its value. However, there are different ways to make this assessment.
Quantitative Analysis
This relies on numerical data to assess a company’s performance. In other words, measuring key financial metrics, like earnings per share (EPS), profit margins, and revenue growth. From there, many investors use key ratios — like the P/E ratio, debt-to-equity, ROE, and current ratio — to determine the company’s worth or value.
Qualitative Analysis
This involves non-numeric factors affecting a company’s performance. That can be a measure of management quality — like experience, track record, and governance. It could be the company’s business model and strategy, measuring its competitive advantage and innovation. It can also mean looking at other factors, like brand value, reputation, and regulatory or geopolitical risks.
The Bottom Line: We’ll get into all of these quantitative and qualitative factors throughout the week. But this should serve as a quick overview for those looking to level-up their investment-analysis game in the coming days!
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.