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Last updated: July 2020

Young Investors

Introduction of Fundamental Analysis

Wednesday, 29 January 2014

Fundamental Analysis / Value Analysis

Fundamental analysis is sometime refers to as "value analysis". It is a fairly complex and "multidimensional" analysis of a list company to derive the value of a share. If the price of the share is below its value (undervalued), one will buy the share. If the price of the share is higher than the value (overvalued), one will sell the share.

Price does not equal to value

For example: A Smart Phone.

  • For businessmen, a Smart Phone can him to be more efficient and-therefore save him time and money.
  • Conversely, for average person who use the smart phone for call and messaging.
  • Both bought the Smart Phone at the same price but the value is different.
Price is what you pay and value is what you get - Warren Buffett

Theory of Fundamental Analysis

Fundamental Analysis believes that short-term price movement does not reflect the intrinsic value. The short-term price is caused by market emotion. In the long term, the stock price will move closer and even exceed its value.

Value analysis is a broad and time consuming analysis method. It involves analysis of the company's Financial Statement, Core Business, Management Team, Industry Performance & Comparison, Future Prospects, Market Share, National Monetary & Fiscal Policy, and Global Effects. This requires considerable depth of knowledge and the data obtained by each person will have difference. Besides, everyone is holding different views; the so called "value" will also vary by different person.

Difference between Fundamental Analysis and Technical Analysis

Fundamental Analysis focus on Intrinsic Value of the company. Buy when undervalued and sell when overvalued.

Technical analysis use historical price to predict future price movement. Make sure there is a “profit range” (Target price – Current Price), then buy with “buy signal” and sell when “sell signal” appear.

Fundamental Analysis: Some Methods

1. Management Team Analysis – who is managing and leading the company, how is the historical business performance, and what the future prospects are.

2. Financial Statement Analysis - analyze company's historical financial performance, future prospects, to forecast future growth and its value.

3. Industry and Market Share - the company's business is in what industry. What is their rank in the industry? Who are their competitors, and what are the effects on its revenue.

4. Asset Analysis - analysis of the company's existing assets, such as property, to see whether the assets are undervalued (Property revaluation), to get the intrinsic value.

5. Local and Foreign Market Analysis - Market Trends, National Budget & policy, subsidies, tax rebate, and global demand will also affect the company's profitability.

6. Each analysis will get different "number". Some are current some are future. Discount future “figure” before adding into current value, to get the real value (Inflation will affect the value of money. RM1, 000 today worth more than RM1,000 in 10 years later, use at least inflation to “discount” the company future cash flow in order to get “current intrinsic value”).

Things you should know in Fundamental Analysis

1. Stock price will reflect its value in “One Day”. But when is this “one day”? This is something Fundamental Analysis not able to tell you, you need Technical Analysis to see the change in trend and estimate this “one day”.

2. Fundamental Analysis involves very broad analysis, especially Blue Chip Company that has a number of subsidiaries from different industry. It makes nearly impossible to do in-depth fundamental analysis for the company.

3. Be aware of faulty Financial Information (Window Dressing). Analyze the report carefully and read the auditor statement. Do not analyze a company value solely based on financial statement.

4. All information and data, in fact, come from the company itself, be careful to distinguish between true and false. Analyze the company management team is very important.

5. Fundamental Analysis is for long-term investment, do not use for short-term trading.

By the Young Investors Team