The fundamentals of fundamental analysis
When it comes down to a choice between technicals and fundamentals, technicals usually win out. Perhaps the main reason for this is because technicals are often easier to understand. Moreover, technical indicators are applicable to any traded asset, as long as there is price and volume information, and the interpretation is always the same. A moving average cross over is interpreted in the same way for oil or for a listed IT company.
Contrast this with fundamentals. No two companies on the planet are exactly the same, so even though business types, accounting principles and reporting styles may be similar for any two stocks, the interpretation of the data will depend on many other intangible and qualitative factors. The art with fundamental analysis is about contextualizing the data, and being able to make effective comparisons between different assets.
Beyond this, investors also have to be comfortable with a broad lexicon of specialist terms as well as a raft of accounting concepts and principles. Last but not least, fundamental analysis has traditionally required a lot more work, and this can act to put a lot of people off.
This is unfortunate, as those investors who ignore the fundamentals will always miss out on a true understanding of the investment quality of a potential asset. As such, we will address the basics of fundamental analysis and show you how you can gain a wealth of valuable investment knowledge quickly and easily using one of the most powerful analysis tools available.
To begin with, we need to remind ourselves of what a listed company is. In essence, it’s just a business like any other. There are overheads to pay, debts to service, staff to manage, competitors to deal with, and revenue to manage. So while there are differences of scale, a large multinational conglomerate is in many ways similar to your local hamburger shop.
If you were to purchase a local business, what would you like to know? Obviously things such as earnings history, margins, competitive environment, product/service quality and costs would be must have information. And that’s exactly the same if we are dealing with a local business or the largest listed company in the world. So in terms of the type of information we want, it is relatively intuitive.
The next hurdle is knowing where to look for the information, and knowing how to interpret it. In this regard, an application such as ValueGain is extremely valuable. All the useful data is found at the click of a button, moreover the more relevant fundamental items are presented in ratio format.
Ratios are extremely useful as they allow us to understand the relationship between different fundamental aspects of a business. Take the Price Earnings ratio as an example. Knowing the earnings of a company doesn’t really tell us much, but knowing the relationship between earnings and share price is a different matter all together. All of a sudden we can compare a wide range of companies, regardless of their value.
So don’t unnecessarily complicate the picture. Listed companies are just businesses and face the same challenges that any business faces. Focus on the key areas of earnings, debt and cash flow, and you will be in a much better position to understand the true nature of the company. To ignore these things is to invite disaster, to incorporate them into your analysis is to improve your odds for success.
