Fundamental analysis is a method to calculate the value of an asset and analyze what elements or factors could influence its price in the future, through the evaluation of the company’s financial statements, the management team, the influence of external events. Regulation, competition, and market trends.
The objective of this methodology used in investment is to detect quality companies, companies that have a high potential for long-term growth to incorporate them into the portfolios of investment funds.
In the analysis of companies, fundamental analysis is one of the main methods used, along with technical analysis, focused on obtaining information based on the evolution of the price of the asset itself. Both types of analysis can be combined so that the various advantages offered by each of them are exploited to make the most appropriate investment decision-making.
The Fundamental Analysis Includes Various Techniques. Among Them, The Main Ones Are:
Bottom-Up Analysis
This fundamental analysis method starts with the analysis of a specific value and it is extended until considering in the analysis all the elements that have an impact on its price, beyond the income statement and the balance sheet.
Top-Down Analysis
For its part, this type of fundamental analysis begins with the analysis of the market as a whole, and then focuses on the analysis of a sector and then advances towards the analysis of a specific company.
Fundamental analysis allows evaluating the price of all asset classes. Most commonly, it applies to stock valuation, but can also apply to forex valuation, for example.
However, depending on the type of asset to be evaluated, this analysis will use some tools or others. For example, to evaluate the value of some shares, it will attend to the study of the financial statements of the company. Also known as quantitative analysis, the fundamental analysis applied to the stock market involves the study of the income, expenses, assets, liabilities, and other financial aspects of a company – also the most intangible and difficult to measure aspects. All this, to obtain a perspective on what can be expected to be the performance of a company in the future.
Likewise, when resorting to the fundamental analysis, regardless of the type of asset on which it is applied, the effect that different indicators and relevant political and economic events may have on the value of the asset under analysis must be taken into account. Not only at the macroeconomic level, but also at the sectoral level. Check if it is a heavily regulated market if it has a lot of competition if it is consolidated or growing.
From here, it will seek to detect the competitive advantages that the company that is the object of the fundamental analysis may have, whether for technology, for a product or service, for human capital, or the trajectory of the management team.
Advantages Of Fundamental Analysis In The Configuration Of Investment Funds
Investment fund managers resort to fundamental analysis as it is a useful formula to collect the appropriate information to help them make decisions to configure their investment portfolios. This type of analysis contributes to rational decision-making since, based on financial data, it allows little scope for subjective interpretations.
Using this type of analysis, investment fund managers can obtain a more long-term view of the market, given that this type of analysis seeks to understand the intrinsic value of an asset.
Once the manager has determined the value of the asset – a numerical value – he can compare it to the current market price, allowing him to assess whether the asset is undervalued or overvalued. In this way, if the price of a company is below estimates, invest, and wait for time to recognize the true value of that company, thus obtaining a long-term return on investment.
As well as aware of the benefits of fundamental analysis and applies it when managing our equity investment funds, to try to obtain consistent returns over the long term.
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