5 key steps of Fundamental Analysis
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Here are the 5 key steps of fundamental analysis:
Step 1: Financial Statement Analysis
1. Review income
statements (revenue, expenses, net income, Turnover)
2. Analyze balance
sheets (assets, liabilities, equity)
3. Examine cash flow
statements (operating, investing, financing)
4. Calculate
financial ratios (e.g., profit margin, return on equity)
Step 2: Industry and Market Analysis
1. Identify industry
trends and outlook
2. Evaluate market
size, growth rate, and competition
3. calculate the whole Market capitalization of this particular sector’s
4. Assess market
share and positioning
5. Research
regulatory environment and potential risks
Step 3: Management and Corporate Governance Evaluation
1. Assess management
team's experience and track record (key Management Analysis)
2. Evaluate corporate
governance structure and policies
3. Review executive
compensation and ownership
4. Consider board
composition and independence
Step 4: Competitive Advantage and Moat Analysis
1. Identify
sustainable competitive advantages (e.g., brand value, patents)
2. Evaluate barriers
to entry for new competitors
3. Assess ability to
maintain market share
4. Research development efforts
Step 5: Intrinsic Value Estimation
1. Use valuation
models (e.g., DCF, comparable company analysis)
2. Estimate future
cash flows and growth rates
3. Calculate
intrinsic value per share
4. Compare to the current
market price to determine investment potential
Additional tools and techniques used in fundamental analysis include:
- Ratio analysis (P/E Ratio ,D/E Ratio)
- Charting and
technical analysis
- Sensitivity
analysis
- Scenario planning
(Next 5-10 Years)
- Industry
comparisons (to the Big players)
Our Opinions:
*By following these 5
steps, investors and analysts can gain a comprehensive understanding of a
company's financial health, competitive position, and growth prospects.
Also explore: What is the ideology of an investor when he buys a stock
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