What is Fundamental Analysis?

Fundamental analysis is a method of evaluating a company’s value. It analyzes the company’s fundamentals based on its financial data, operating model, industry, and overall economic environment to determine the company’s intrinsic value and compare it with the current stock price , thereby providing investors with appropriate investment advice. Fundamental analysis is an important foundation for value investing .

For example, when a company’s intrinsic value is higher than its stock price, the stock price is undervalued and can be bought. Conversely, if the company’s intrinsic value is lower than the current stock price, the stock price is overvalued and should be sold.

When analyzing company fundamentals, you often need to analyze the company’s financial statements, management discussion and analysis reports, industry research, competitor analysis, market trends, etc. Fundamental analysis is widely used in investment decisions, especially value investing.

Therefore, the fundamental analysis of a company needs to combine multiple data, and professionals need to go through a long period of study before they can accurately find the required data from the financial statements and analyze and summarize the macroeconomic environment to obtain the most reasonable analysis results for the target company.

When conducting a fundamental analysis of a company, you can use a bottom-up or top-down approach, combining qualitative analysis with quantitative analysis to give a more fair analysis result.

In particular, TradeUP Securities (the US brand of Tiger Brokers) provides detailed financial data of listed companies, as well as news about individual stocks and the entire macro-economy, accurately grasps the fundamentals, and helps your investment. Currently, if you open an account with TradeUP, you can get a chance to draw free US stocks, with the maximum possible value of up to $1,570 in US stocks.

What is fundamental analysis?

The fundamental analysis of a company includes macro factors and micro factors. Taking both macro factors and micro factors into consideration can more comprehensively assess the company’s intrinsic value and future development potential.

Macroeconomic factors refer to factors that affect the entire economic environment, such as national policies, macroeconomic environment, market trends, etc. These factors may affect the company’s business environment and future development, so when conducting fundamental analysis, it is necessary to consider the impact of macroeconomic factors on the company.

Micro factors refer to factors that affect the company’s internal operations and performance, such as the company’s financial status, business strategy, market share, product competitiveness, etc. These factors can be evaluated through financial analysis, industry analysis, and competitor analysis.

When conducting fundamental analysis, you need to have sufficient understanding of accounting, finance, and economics in order to accurately assess the current overall economic environment and industry development trends, and when conducting micro analysis, quickly find the required data from the financial reports released by the company.

Therefore, when conducting a fundamental analysis of a company, it is necessary to:

• Macroeconomic Analysis
• Industry Analysis
• Company Analysis

Economic Analysis

When conducting fundamental analysis, economic analysis is a very important part because the macroeconomic environment has a great impact on the company’s business and profitability. The content of economic analysis includes:

GDP growth rate: Gross domestic product (GDP) is a measure of the total economic activity of a country. The GDP growth rate reflects the growth rate of a country’s economic activity. The industry in which a company operates is usually affected by the GDP growth rate.

Inflation rate: The inflation rate reflects the rate of change in the price level. When the inflation rate increases, the purchasing power of money decreases and the company’s costs may increase.

Unemployment rate: The unemployment rate refers to the proportion of unemployed people in the labor market to the total labor force. The level of unemployment rate may affect consumer purchasing power and company sales revenue.

Interest Rates: Interest rates are the cost of borrowing capital, and companies can be affected by changes in interest rates, especially those that need to borrow money for investments or capital expenditures.

Exchange rate: The exchange rate is the ratio of one currency to another. If a company is involved in international trade, fluctuations in exchange rates may affect its profitability.

Through analysis of the macroeconomic environment, fundamental analysis can more comprehensively assess a company’s intrinsic value and future development potential.

Industry Analysis

Industry analysis of fundamental analysis refers to the analysis and research of the industry in which a company is located in order to understand the current status, trends and competitive environment of the industry, as well as to evaluate the company’s competitiveness and future development potential in the industry.

The content of industry analysis includes:

Industry market size: Industry market size refers to the sales revenue and market share of the entire industry. By understanding the industry market size, you can determine the industry’s competitive environment and market potential.

Industry growth rate: Industry growth rate refers to the annual sales revenue growth rate of the industry. Understanding the industry growth rate can predict the future development trend of the industry.

Industry structure: Industry structure includes the main players in the industry, the industry’s supply chain and value chain, the main products and services in the industry, etc. By understanding the industry structure, you can understand the company’s competitors, suppliers, and customers, etc.

Industry trends: Understanding the future development trends of the industry, such as technological innovation, regulatory changes, changes in consumer demand, etc., can help evaluate the company’s future development potential in the industry.

Competitor analysis: Understanding a company’s competitors, including their market share, business strategies, and financial status, can help assess a company’s competitiveness in the industry.

By analyzing the industry, we can better understand the company’s business environment and competitive environment to evaluate the company’s intrinsic value and future development potential.

Company Analysis

Fundamental analysis of a company refers to the analysis and research of the company’s own financial status, business strategy and future development in order to assess the company’s intrinsic value and future development potential.

When analyzing a company, financial data is used to calculate a variety of financial ratios, such as the following:

Earnings Per Share (EPS) : This is one of the most commonly used financial ratios and can be calculated by dividing a company’s net income by the number of shares outstanding. EPS allows analysts to understand how much of the company’s operating profit is distributed per share.

Price -to-Earnings Ratio (P/E Ratio) : It is also one of the most commonly used financial ratios, obtained by dividing the company’s actual stock price by its earnings per share. Generally speaking, if the P/E ratio is greater than 1, it means that the actual stock price is greater than the earnings per share, and the stock price is overvalued. On the contrary, if the P/E ratio is less than 1, it means that the earnings per share are greater than the actual stock price, that is, the stock price is undervalued.

Price-to-Sales Ratio (P/S Ratio) : The price-to-sales ratio is calculated by dividing a company’s total market value by its sales, and is sometimes referred to as the sales multiple. The higher the price- to -sales ratio, the higher the company’s current market value relative to its sales revenue, which means that the stock price is high and it is not a good time to invest. On the contrary, the lower the price-to-sales ratio, the lower the company’s current market value relative to its sales revenue, which means that it has good room for growth and is a good time to buy and invest.

Price-to-Book Ratio (P/B) : The price -to- book ratio is calculated by dividing the company’s market value by its book value, where the market value is calculated by multiplying the stock price by the number of shares outstanding, and the book value is calculated by subtracting the company’s total assets from its total liabilities and then from its preferred equity in its financial statements. The calculation of the price-to-book ratio is intended to assess the relationship between a company’s current stock price and its book value. The higher the price-to-book ratio, the higher the stock price relative to its book value, and the lower the investment value. On the contrary, the lower the price-to-book ratio, the lower the stock price relative to its book value, and the higher the investment value.

Dividend Payout Ratio : Also known as the dividend distribution ratio, it is a percentage value obtained by comparing the dividends distributed by the company with the profits. This value can indicate how much of the profits the company distributes to shareholders as dividends. The lower the value, the less dividends shareholders receive from the company’s profits. On the contrary, the higher the value, the more returns shareholders can get from the company’s profits.

Dividend Yield : This ratio is a percentage value obtained by dividing the company’s dividend per share by the stock price. The dividend yield value shows the proportion of dividends that shareholders can receive for each unit of investment. The dividend yield combined with the capital gain rate obtained from the stock price constitutes the total return of investors during the investment process. A higher dividend yield indicates that the company’s stock price is growing slowly, and most of the benefits shareholders get from their investment come from dividends rather than stock price increases.

Return on Equity : This ratio is a percentage value obtained by dividing a company’s net income by total shareholders’ equity, representing the company’s ability to make a profit using shareholders’ investment. The higher the return on equity, the higher the company’s ability to make a profit using its equity, and investors are more willing to invest.

Projected Earnings Growth : Projected earnings growth is calculated by analysts using a specific formula and different financial data to predict the target company’s stock earnings growth rate in the future, usually one year. Investors will use this value to estimate their possible return on investment.

When conducting specific fundamental analysis, you can follow two research directions: top-down or bottom-up.

Top-down approach: In this approach, analysts start with macroeconomic analysis, such as interest rates, inflation rates, and GDP change rates, and then analyze the development level, prospects, and potential development opportunities of the industry in which the company is located. Finally, a specific micro-analysis is conducted on the company, including the calculation of various financial indicators. Fundamental analysis is conducted in a macro-to-micro order.

Bottom-up method: The bottom-up analysis method starts with the company’s micro data, first calculating the company’s various financial indicators, and combining the company’s stock price to analyze the company’s operating capabilities and the investment significance of the current stock price. Then start to study the company’s positioning and development prospects in the industry, and finally combine the overall economic environment to analyze the company’s development positioning in the current environment.

The bottom-up approach focuses on the research and stock selection of individual stocks and is more suitable for short-term trading or active investors;

The top-down research direction focuses more on the research and analysis of macroeconomics and industry trends, and is suitable for long-term investors.

In actual investment, the two research directions can also be used in combination to obtain a more comprehensive investment analysis. The differences between the two are as follows:

The starting points of the research are different: the starting point of the bottom-up research direction is to analyze the financial and operating conditions of individual companies in order to find stocks with investment value; while the starting point of the top-down research direction is to analyze the economic, political and social conditions of the world, countries and regions in order to predict economic cycles and market trends.

Different research focuses: The bottom-up research direction focuses on analyzing the company’s own financial and operating conditions in order to predict its future development potential and then select individual stocks with investment value; while the top-down research direction focuses on the research and analysis of the industry and macroeconomic environment in order to understand market trends and industry trends and then select stocks with good performance.

Different risk control: Bottom-up research usually focuses on the risk control of a single company, such as assessing the company’s financial stability and operating risks; while top-down research focuses more on the macro environment and market risks, such as the impact of economic cycles, policy changes and other factors on the market.

What are the fundamental analysis methods?

When analysts conduct fundamental analysis on a company, they mainly conduct two types of analysis:

• Qualitative Analysis
• Quantitative Analysis

Qualitative Analysis

Qualitative analysis of fundamental analysis refers to non-digital analysis of companies and industries, including the evaluation of factors such as the company’s brand, product quality, market position, brand reputation, etc. These factors are usually difficult to quantify and require analysis based on experience, expertise and intuition.

Qualitative analysis is an analysis of a company’s business model, competitive advantages, management status, and corporate governance capabilities.

Business Model : Mainly analyzes the company’s operating objectives, whether the overall operating model can achieve sufficient profitability, etc.

Competitive Advantage : Measure the company’s competitive advantage in the industry based on the various industry advantages it has developed to date, and evaluate whether this competitive advantage can be maintained for a long time.

Management : Analyze the company’s leaders or management to assess whether they have the ability to continue to lead the company to healthy development, etc.

Corporate Governance : By analyzing the internal structure of a company, we can understand the responsibilities and collaboration between management levels, and find out whether the company can provide a transparent and easy-to-understand governance model to make it easier for investors to understand the company’s operating status.

Quantitative Analysis

Quantitative analysis is usually based on a company’s financial data and statistics, and is calculated and predicted through mathematical and statistical models to assess the company’s intrinsic value and future development potential.

Quantitative analysis can include the calculation and comparison of various financial indicators, such as rate of return, price-to-earnings ratio, price-to-book ratio, return on assets, etc., as well as forecasting through financial models, such as cash flow forecasts, stock valuation models, etc.

Quantitative analysis is to use various financial values ​​to conduct quantitative analysis of the company and measure the investment value of the company by calculating various financial ratios. The following are some common quantitative analysis contents:

Financial analysis: includes analysis of financial statements such as the income statement, balance sheet and cash flow statement, as well as calculation and comparison of various financial indicators, such as rate of return , price-earnings ratio , price-to-book ratio , return on assets , etc.

Profitability analysis : Evaluate the company’s profitability, including analysis and comparison of indicators such as gross profit margin, net profit margin, and revenue growth rate.

Financial stability analysis : Evaluate the company’s financial stability, including analysis and comparison of indicators such as debt ratio, current ratio , and cash ratio .

Financial leverage analysis : Evaluate a company’s financial leverage, including analysis and comparison of indicators such as financial leverage ratio and return on equity.

Industry comparative analysis : Compare the company’s financial indicators with other companies in the same industry to understand the company’s performance and competitiveness in the industry.

Stock valuation model : Analyze and predict the company’s financial data and market data through mathematical and statistical models, such as cash flow forecasts, stock valuation models, etc.

Through quantitative analysis, the intrinsic value and future development potential of a company can be evaluated more objectively and accurately. At the same time, quantitative analysis can also help investors understand the potential risks and uncertainties of companies and industries to make more accurate investment decisions.

How to use TradeUP for fundamental analysis?

You can use the TradeUP Web version or the TradeUP App to perform fundamental analysis. Here we will take the TradeUP mobile app as an example.

Note: In the explanation, we use Apple stock AAPL as a demonstration. This stock is only used as a demonstration content, not to guide you to buy this stock. Remember: the stock market is risky and investment should be cautious.

You can use visual graphics to most intuitively understand the strength of listed companies in all aspects, including profitability, cash flow, growth, solvency, and the company’s operational capabilities.

Through the colored curve chart in the figure below, you can intuitively understand the current stock price range. The red area represents that the company’s stock price is overvalued, the yellow area indicates the reasonable price range, and the green area indicates the area where the stock price is undervalued.

What is the difference between fundamental analysis and technical analysis?

Fundamental Analysis and Technical Analysis are both methods of investment analysis, but their analysis objects and methods are different. The specific differences and connections are as follows :

• Different analysis objects : Fundamental analysis focuses on fundamental factors such as the company’s financial and operating conditions, industry and macroeconomic factors, in order to evaluate the company’s intrinsic value and investment potential; while technical analysis focuses on the trend changes of technical indicators such as market prices and trading volumes, in order to study market behavior.
• Different analysis methods : Fundamental analysis mainly uses financial statement analysis, macroeconomic analysis, industry analysis and other methods to evaluate a company’s intrinsic value and future development potential; while technical analysis mainly uses chart analysis of data such as stock prices and trading volumes to find price trends and predict price trends.
• Different analysis time : Fundamental analysis is usually a long-term, future-oriented analysis method, focusing on analyzing a company’s financial situation and future development potential; while technical analysis is usually a short-term, current market-oriented analysis method, focusing on analyzing market price movements and trends.

Fundamental analysis and technical analysis complement each other in investment analysis. Fundamental analysis can help investors evaluate the intrinsic value and future development potential of a company, while technical analysis can help investors better grasp market price trends and buying and selling opportunities. Therefore, in actual investment, investors can combine fundamental analysis and technical analysis to formulate a more comprehensive investment strategy.

Item	Fundamental Analysis	Technical Analysis
Analyze content	From micro-company data to macroeconomic environment	Company’s short-term trend chart
Purpose of Use	By analyzing various factors that may affect the company’s development, we can determine the company’s investment value and help determine the timing of investment.	Analyze stock price trends through short-term charts to determine investment opportunities
Factors affecting the evaluation results	Various objective factors including company operations and national economic environment	Mainly driven by market investment psychology
Target customers	Suitable for both long-term and short-term investors	More suitable for short-term investors.