Fundamental Analysis - Investment Decision

Fundamental Analysis is about accessing the company's key indicators which includes Sentiments, Liquidity, Porter's 5 Force Analysis, SWOT Analysis, Income Statement, Balance Sheet and Cash Flow Statement.

As an Investor, you should do fundamental analysis of the company in which you want to invest your chips. Further, for a value investor who is willing to give a good amount of time to capitalize the return, can easily assess the indicators of fundamental analysis.

1. There are sentiments in the market which helps in giving a move to the share. It is difficult to asses those sentiments as you cannot measure sentiments based on the past rather these sentiments are situational and vary from company to company. For instance, During the COVID-19, FMCG companies are doing good as the demand of products is more or less stable which gives a sentiment in complete FMCG Sector and hence this helps to move a share up. An expectation of heavy Monsoon Rain is also helps to build positive or negative sentiments across different sectors. Therefore, you should be very steady and logical w.r.t. Political and Geographical environment which could build a sentiment in the market for the company you have selected.
2. Liquidity in a share can be affected with the Volume traded. If there are sufficient number of buyers and sellers available in the market then you have good chance to sell your share whenever required during the trading hours. If there are very less buyers or sellers for a company then it would be difficult to execute the trade and hence it will lead you to wait for the share to reach desired level or adequate buyer or supplier.
3. Porter's 5 Force Model will give you an analysis of the company's strength and weakness which is really helpful to take calculated decisions. This approach will help you to access the Bargaining power of the company and it's supplier which can impact it's supply and sale. It will also give you the advantage or disadvantage to company w.r.t rivalry and competition. Read the complete article on Porter's 5 Force Model.
4. SWOT Analysis will help you as an investor to identify the Strength and Weakness of the company which are internal to the company. It will also give the overview on the Opportunities and Threat available to the company which is external. Read the complete article on SWOT Analysis.
5. Income Statement which is Companies Profit and Loss account will give you the profitability of the company. You can assess the Margins, Operating profit, EBIT and key factors with Profit and Loss Account for the comparative periods such as Year on Year (YoY), Quarter on Quarter (QoQ). As an intelligent investor, you should devote a significant amount of time on analyzing the Profit and Loss Account of the company before investing. This is one of the most important document to be use for doing a good fundamental analysis.
6. Balance Sheet is the sheet of Balances which represents the status of Assets, Liabilities and Shareholders Fund of an Organization. A good analysis of Balance sheet will give you the actual health of the company. You can assess the position of Assets standing to the company, Liabilities which company need to met, Borrowed capital which can impact the company due to fixed interest cost, Shareholders fund which includes Retained earning to meet future contingencies. These are very sensitive information of the company which should definitely be considered while taking investing decision. You can also use Ratio analysis using Balance Sheet and Profit & Loss Account which will help you take best decision for your investments.
7. Cash Flow Statement is nearly impossible to manipulate. A good understanding of Cash Flow statement can give you a good overview on the financial health of an organization. Cash Flow Statement will give you the position of Cash inflow and outflow in an organization in different segments such as Operation, Investment and Finance from the company's point of view.

These are the 7 things one should do before taking any Investment decision. Although, Fundamental Analysis has more vast scope which includes Business Model (Revenue Model) of the Company, Management of the company who operate the business and involved in Decision Making, Economy and Calculation of Intrinsic Value of Share.

Lets as discuss a bit more about Intrinsic Value which will help an investor to assess whether the security is Undervalued or Overvalued or at Par. Without going deep into calculation of intrinsic value, let us understand how a security is overvalued, undervalue or at par.

Lets assume, a share is trading at  Rs. 50 (Fair Market Price - FMP) in the stock market, when it's intrinsic value is-

1. Less than Rs. 50, then it is valued as Overvalued and recommended to Sell such security.
2. More than Rs. 50, then it is valued as Undervalued and recommended to Buy such Security.
3. Equal to Rs. 50, then it is valued at Par and recommended to take decision on the basis of Other Fundamental factors.

Majority of the investors across the globe are taking their investment decisions on the basis of Fundamental Analysis rather going for Technical Analysis. Invest you money wisely and after doing fundamental analysis.

Happy Learning !!!