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Fundamental Analysis

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  • Investment Strategies
Fundamental Analysis

Fundamental analysis, also known as basic analysis, refers to the method of assessing the intrinsic value and price movement trends of an asset by examining various factors related to the economic, financial, and market environment, using both qualitative and quantitative approaches.

What is Fundamental Analysis?

Fundamental Analysis, also known as basic analysis, refers to the method of assessing the intrinsic value and price trends of assets by analyzing relevant economic, financial, and market environment factors using both qualitative and quantitative approaches. Fundamental analysis mainly focuses on economic, financial, and industry factors related to the asset, as well as other quantitative and qualitative factors affecting the asset's value.

Fundamental analysis has two primary tasks: assessing the intrinsic value of securities and conducting factor analysis. Assessing intrinsic value helps establish a reference standard for judging asset prices. Factor analysis involves exploring the underlying causes of asset price changes through analysis of various factors logically related to asset prices, providing a basis for forecasting asset price trends.

Types of Fundamental Analysis

Fundamental analysis involves various asset types. According to the asset category and research field, fundamental analysis can be categorized into the following main types:

  1. Financial Analysis: By analyzing financial data such as income, profit, balance sheets, and cash flow statements, one can assess profitability, debt-paying ability, growth potential, and financial stability.
  2. Economic Analysis: By analyzing macroeconomic data such as GDP, inflation rates, interest rates, and employment data, the health and trends of the economy can be gauged, assessing related asset performance.
  3. Industry Analysis: Through analysis and assessment of basic industry factors like market size, growth trends, competitive environment, and supply-demand relationships, the performance and prospects of different companies within an industry are evaluated.
  4. Management Evaluation: This involves assessing the ability, experience, and decision-making process of the company's management. The quality and decision-making ability of the management can significantly impact the company's long-term development and performance.
  5. Financial Ratio Analysis: This involves calculating and analyzing ratios and metrics in a company's financial data, such as profitability ratios, solvency ratios, and liquidity ratios. These ratios provide indicators to assess a company's financial status and performance.
  6. Qualitative Analysis: In addition to numeric data analysis, fundamental analysis also includes evaluating qualitative factors such as company brand value, market position, innovation capability, and competitive advantage, which are crucial in affecting a company's intrinsic value.

Characteristics of Fundamental Analysis

As one of the commonly used methods in financial analysis, fundamental analysis has the following characteristics:

  1. Long-term Orientation: It emphasizes the study of long-term factors and trends, focusing on the true value of assets and determining whether assets are undervalued or overvalued over a longer period.
  2. Comprehensive Analysis: It considers multiple factors affecting asset value, covering economic factors, company financial data, industry analysis, management evaluation, and more. By integrating these factors, fundamental analysis attempts to evaluate the value and prospects of assets comprehensively.
  3. Long-term Investment Decisions: It is generally used for long-term investment decisions, helping investors decide whether it is worth holding an asset for a long period and finding investment opportunities where there are discrepancies between true value and market price.
  4. Based on Financial Data and Quantitative Factors: It relies on financial data and other quantifiable factors. By researching and analyzing financial statements, metrics, and ratios, it evaluates profitability, financial status, and valuation, among other fundamental information.
  5. Information Acquisition and Interpretation: It requires obtaining and interpreting various information sources. This involves collecting and analyzing financial reports, news, industry research reports, company interviews, and market surveys to ensure accurate and reliable data.
  6. Long-term Investment Value: Its goal is to determine the long-term investment value of assets, emphasizing that investors should focus on the fundamental economic value of assets rather than short-term market fluctuations to obtain long-term holding value.

Role of Fundamental Analysis

Fundamental analysis can help investors better understand the basics of assets and markets and make more informed investment decisions. Here are the main roles of fundamental analysis in investment decisions:

  1. Asset Value Assessment: By studying and analyzing economic, financial, and industry factors related to assets, it helps investors determine whether there are valuation anomalies and related investment opportunities.
  2. Identifying Investment Opportunities: By comprehensively analyzing economic data, company financial data, and industry situations, it discovers potential investment opportunities in companies or industries with good growth potential and financial stability.
  3. Risk Management: By assessing the financial status, profitability, and debt-paying ability of companies, it identifies potential risks and avoids assets with poor financial status or high risk.
  4. Long-term Investment Decisions: Focusing on the fundamental economic value and potential growth of assets, it helps investors better plan and execute long-term investment strategies, suitable for those seeking long-term investment returns.
  5. Value Investing and Long-term Holding: By finding undervalued assets, investors can purchase and hold such assets long-term, expecting their true value to gradually be recognized by the market for investment returns.
  6. Market Assessment and Forecast: By comprehensively analyzing economic data, industry trends, and company financial data, it forms a fundamental view on market trends and price performance, providing an assessment and forecast of the overall market situation.

Advantages and Disadvantages of Fundamental Analysis

As a method for assessing asset value, fundamental analysis has the following advantages and disadvantages:

Advantages

  1. Long-term Perspective: It focuses on the long-term value of assets and considers the impact of economic, financial, and industry factors on assets, making it more suitable for long-term investment decisions and helping investors discover long-term opportunities.
  2. Fundamental Economic Factors: By focusing on economic factors related to assets, such as national economic indicators and industry growth trends, the analysis results are closer to the actual economic fundamentals, better grasping the true value of assets.
  3. Quantitative and Qualitative Analysis: By combining quantitative analysis based on financial data and metrics with qualitative analysis based on competitive advantage, industry position, and more, it can provide a more comprehensive analysis of a type of asset.
  4. Risk Management: By evaluating financial status, profitability, and risk factors, investors can avoid assets with high investment risk, thus reducing investment risk.
  5. Long-term Investment Strategy: By seeking undervalued or overvalued assets, investors can buy or sell such assets with corresponding strategies, gaining investment profits as asset values return to equilibrium.

Disadvantages

  1. Time and Resource Requirements: Fundamental analysis requires a significant investment of time and resources in data collection, analysis, and interpretation, necessitating appropriate professional knowledge and skills, and substantial time and effort.
  2. Difficulty in Predicting Market Prices Accurately: Market prices can be influenced by multiple factors such as market sentiment, technical indicators, and market expectations, making it difficult for fundamental analysis to predict short-term price fluctuations accurately.
  3. Incomplete or Inaccurate Information: The inability to obtain complete, accurate, and timely information may lead to significant deviations in the analysis results.
  4. Neglect of Short-term Market Fluctuations: Mainly focusing on the long-term value of assets, it neglects short-term market fluctuations and speculative factors, indicating that fundamental analysis may not accurately predict short-term price changes.
  5. Subjectivity and Interpretation Differences: Differences in interpretation, evaluation, and analysis of information by investors may result in significantly different analysis outcomes.

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