Fundamental analysis: spine of stock selection, How to do fundamental analysis of company?

Fundamental analysis as spine of stock selection

Fundamental analysis is something which helps you to understand the true value of the company. Something called as intrinsic value is the true value of the company, which intellectual people, investors and financial advisors decide on their fundamental analysis of the company.


You can define fundamental analysis in as many as you can like I am going to tell you:

  • It is the way of understanding company’s financial statements through various fundamental indicators like top line, bottom line, financial ratios, etc.
  • The way of noting a company as undervalued or overvalued.
  • Knowing the intrinsic value of the company.
  • Way of confirming the result obtained from doing the technical analysis of the company.

The two term on which fundamental analysis revolve round are:

  • Top line growth (total revenue/gross sale)
  • Bottom line (total income)

In the layman term you can say that top line and bottom line are the one on which your 50% fundamental analysis will depend.

Where to find the fundamental analysis report?

Your brokerage house, your brokerage house will maintain both the financial and fundamental reports for the investors as well as the traders. It is the responsibility of the brokerage firm that they are going to prepare the reports.

Clearly you can go to site of the brokerage house, and after selecting the company you can find 5-10 pages long pdf stating about the financial health of the company.

Technical analysis v/s Fundamental analysis

Fundamental analysis is the study of company’s corporate actions and economic data to analyse, how a company will be going to perform in coming years.

On the other hand, technical analysis is the study price and volume exchange of a company, it has nothing to do with corporate actions, economic data, and financial statements. But yes, their decision may collide like according to history of technical analysis if a company has good fundamental then its pattern must be reflecting on its charts and figures.

Technical analysis uses Bollinger bands, MACD, Fibonacci sequence and golden ratio and stuff like that to determine that the company is undervalued or overvalued.

And at last, there is a biggest misconception in the mind of the investors that they must choose only one between the two types of analysis, both the path is going to select a stock, you can select your stock from any one method in which you are good at and then you can re-check your selected stock.

First step of fundamental analysis

Top-down v/s Bottom-down approach

You can do your fundamental analysis either by top-down approach or by bottom down analysis, top-down approach breaks down economy into sectors into industry and then into company.

For example, take the very current case going on: In corona virus pandemic there is a strict need of vaccine which can help us overcome this disease, now clearly here we can breakdown economy into pharma sector because it is the sector which is going to benefit the most.

Now breakdown the sector into the industry, here drug industry is winner, now suppose INDIA is making the vaccine, so their most of the drug raw material import is from China, so the company whose subsidiary listed on the Indian stock exchanges will going to benefit the most from this top-down approach of fundamental analysis.

Bottom down approach

Instead of considering your approach you must reverse in you order like if you are selecting your choices on the economy, now select the company from the company basis:

  • Economy
  • Sector
  • Industry
  • Individual company

Here we can the example of Jubilant foodworks responsible for making Dominoes in North India, so suppose you have the choices of the company like you have Pizza hut, dominoes, burger king etc,

Suppose you hit the dominoes seeing the advantages the dominoes have by its name, select the range you want to target through this company, like you want to target a range of 18-60 so this is the range who is enthusiastic in their action.

Now you are looking through your economy what big is going to happen in the Indian economy, and then there is a season of IPL is coming, and everyone knows on every big occasion like IPL it has its name famous, that is why looking through bottom down approach also gives you the same result as from the top down.

Qualitative v/s Quantitative analysis

After selecting a stock now, you must do main analysis on the stock,

Fundamental analysis is of two types i.e.

  • ·        Qualitative analysis
  • ·        Quantitative analysis

Qualitative analysis talks about management nature, management approach, strategies, and objectives of the business. While on the other hand,

Quantitative analysis talks more about figures or the information available from the previous data of the company.

Qualitative analysis

Qualitative analysis generally studies about the human nature, growth opportunity or in the simple terms you can say that it is everything which affect the growth of the company without the use of number, figure, and previous data of the company.

Management is one of the most important psychological factors, do you know almost 75% start-ups get the funding based on the good management, while saying good management it means the management of the company should be educated from the top college of the country, or he might have some achievement in education or in some other fields. For example, Byju’s have the very best management.

Like you can see, in today times influencer marketing is on the rise, why it is? It is because people trust is with that person whom he is seeing on the internet with positive intent.

Business model must evolve around the problem, which is unique and have not been solved yet, or they will be satisfying the production for the masses.

Economic moat, it is something which one company have that other cannot have, it is the one advantage that one company having over it is peers, or it might be of the form that to copy that technique its competitor needs years and massive capital.

Good political relation, it is strongly needed whenever the company is limited to its native country, because initially what a growing company needs is strong corporate policy support, fast solution to problems and stuff like that.

Quantitative analysis

Qualitative analysis is all about the figures and data of top line and bottom line, discussed previously in this article.

Qualitative analysis contains three types of statements:

  • ·        Balance sheet statements
  • ·        Profit and loss statements
  • ·        Cash n cash flow statements

These three types of statements will contain 90% of the qualitative analysis.

Balance sheet statements

Balance sheet statements contain the information about assets, liabilities, and shareholder’s equity. See there is an equation which will be satisfied for all these terms i.e.

Assets = shareholder’s equity + Liabilities

Based on this equation, you can draw some points:

  • Assets will always be equal to shareholder’s equity and to the liabilities that the company have taken into its account.
  • Liabilities are the debt obligations; they may be of the type of short term and long term.
  • Shareholder’s equity is the term combining retail shareholder’s, preferred shareholder is, and the holding of DII, FII also.
  • Balance sheet statements are always in the revised form, they are not fresh statements, it is denoted as “balance sheet statements dated till 31 March 2021”

Income statements

  • ·        They are also known as profit and loss statements.
  • ·        Income statements or the P&L statements talks about the bottom line and top line growth of the company, where the revenue, Profit before tax, PAT are the important feature to compare among the different peers.
  • ·        Income statements are revised over the different period, like they are freshly issued over the certain period like on quarterly basis, 6 month or necessarily after every 1 year.

Cash n cash flow statements

  • ·        Cash n cash flow statements track the flow of cash, like cash can either go out or come into the business, so it is the statements which helps the investors to track what the company is doing with invested money.
  • ·        Cash can be used in three varieties: invested or financed or in operations
  • ·        Invested, cash can be used to invest in some start-ups or to invest in new technologies which in turn is beneficial for the company itself.
  • ·        Financed, if the cash is used to transfer the funds for the daily expenses of land, electricity, or stuff like that, then it is going fell under this category.
  • ·        In operation, if company is lending its technology, then it is generating cash flow from that source, and it may take the while for the cash to be transferred to company’s account. This type of cash flow comes under this category.

Does fundamental analysis better than technical analysis

There is nothing like good or bad, for the novice investor it is highly important to understand that fundamental analysis not going to work always, it is just for the short term or the current time reality check on the company and your one-time analysis is not going to work next 10 years.

Like how you can stabilise the human mindset, we have covered one topic named management in qualitative analysis of the stock selection, so how can you trust a single analysis on management for next 10 years. If somehow the management, then your method of stock selection also fails.

Always select a stock which satisfies multiple aspects of fundamental analysis, and at last the bottom-line is that both technical analysis and fundamental analysis are strongly valuable in their own term and if both analyses are performed in co-ordination, then the best results can be obtained.

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