Learn Fundamental Analysis: Introduction, Qualitative & Quantitative Analysis
Fundamental Analysis (FA) is a comprehensive method for thoroughly assessing a company. If you want to invest for a few years, you need to understand the company well. You should ignore the everyday ups and downs in stock prices and focus on how the company is doing. If it’s doing great, the stock price usually goes up over time, making you money.
Just make sure to invest in a company that creates wealth rather than destroying wealth. Few common attributes separates investment grade companies and wealth destruction companies which are visible to an intelligent investor.
Overall, Fundamental Analysis is a technique that helps an investor to identify wealth-creating companies based on different attributes and provide conviction to invest for the long term without worrying about short-term market volatility.
To become a fundamental analyst there are three basic skills that one needs to obtain:
- Understand the financial statements (Balance Sheet, Cash Flow, Profit/Loss Statement)
- Understand business in relation to the industry in which it operates
- Basic arithmetic operations (add, subtract, multiply, division)
We will be focusing on the first two skills.
Fundamental analysis can be classified into two subheadings; Qualitative Analysis & Quantitative Analysis.
Qualitative Analysis
Qualitative Analysis involves understanding the non-numeric aspects of the business. This includes many factors like,
- Management’s Background: Who are they, Qualifications & Experiences, Education, Any criminal background, etc.
- Business Ethics: Any unfair business practices
- Corporate Governance: Organization Structure, Transparency, etc.
- Shareholders: Who are the significant shareholders
These are some of the factors which are included in the qualitative analysis. This list can go on as you continue to learn about the business further on a deeper level. Any red flag on the qualitative factors means an investor should be cautious before investing in such companies.
Qualitative analysis is not easy to uncover but a diligent investor can figure it out by paying attention to annual reports, management interviews, news reports, etc.
Quantitative Analysis
Quantitative Analysis involves understanding the numeric aspects of the business (financials). This includes different factors like,
- Profitability & its growth
- Earnings & its growth
- Pricing Power
- Dividend Payouts
- Cash flow from various activities
- Short-term & Long-term debt
- Asset Growth
- Financial Ratios
These are some of the factors which are included in the quantitative analysis. This list can go on based on the information you are trying to gather. Also, each sector has different metrics.
Next, we will look into the financial statements as financial statements provide all the numbers needed for crunching and analyzing the quantitative aspects.
Next Chapter: Reading The Annual Report
