Fundamental Analysis
Fundamental analysis is a type of stock market analysis that attempts to establish the theoretical price of a security through the study of the variables that affect its value.
First of all, fundamental analysis is a type of stock analysis. In other words, although it can be used to value unlisted securities, it is mainly used to invest in the stock market.
Second, fundamental analysis attempts to establish the theoretical price of a security. What does this mean? It means that it tries to calculate what the price of a security should be so that it is fairly valued. With which, he does not venture to say whether the price should rise or fall, but rather establishes that in the long term the value should approach that price.
Third and last, but not least, it does so through the study of the variables that affect its value. Among these variables we find some such as financial statements, future expansion plans, sector to which the company belongs or economic environment of the country or countries in which it operates.
When it comes to fundamental analysis, reference is also made to value investing. To be more exact, value investing is an investment strategy based on fundamental analysis.
Types of fundamental analysis approach
The variables that affect the value of a company can be microeconomic or macroeconomic. Microeconomic variables are those that exclusively affect the company. However, macroeconomic variables affect any type of company. So, when evaluating a company there are two types of approach:
Top-Down Method: It is an analysis from top to bottom, from the general to the particular. First, he studies the macroeconomic variables and then the microeconomic ones. For example:
  • Study of the world economic situation
  • Study of the most attractive countries to invest
  • Within each of these countries, the sectors with the most potential are chosen.
  • Within the sectors with more potential, they are analyzed to be more interesting to invest.
Bottom-Up Method: This approach goes from bottom to top, from the particular to the general. It looks first at the microeconomic variables and later at the macroeconomic ones. For example:
  • Companies that have growth potential are chosen.
  • An analysis is then carried out of the sector or sectors in which these companies operate.
  • The economic situation of the country or countries in which they operate is studied.
  • Finally, the global economic situation is analyzed.
Business valuation methods
Regardless of the type of approach an analyst takes, there are different methods of valuing a company. Business valuation methods are quantitative methods that calculate the "fair" price of a company.
The main methods of valuation of companies are:
Balance-based methods: They try to calculate the value of the company by estimating its equity. Several subtypes can be differentiated:
  • Book value
  • Adjusted book value
  • Real net assets
  • Liquidation value
  • Substantial value
Methods based on the income statement: They value the company based on multipliers based on:
  • Benefits: PER
  • Sales
  • EBITDA
  • Other multiples
Methods based on goodwill: They value the company according to intangible elements such as trademarks, patents or the quality of the client portfolio. These include:
  • Classic
  • Union of experts
  • European accountants
  • Abbreviated rent
  • Others
Methods based on the discount of cash flows: They try to establish the value of a company based on the estimate of the cash flows that it will generate in the future. The main ones are:
  • Financial cash flow
  • Cash flow per share
  • Dividends
  • Capital cash flow
Difference between value and price
Fundamental analysis tries to analyze the value of a company or a security. This value is assigned a number known as the theoretical price or fair price. One of the most famous quotes from Warren Buffet, one of the best investors in history, states the following about value and price:
β€œThe price is what you pay. Value is what you get Β»
Warren Buffett
Price is the amount of money at which the goods are exchanged. In this case, from the stock market, the price is the stock price. It is at this price that buyers agree with sellers.
However, that price may not match reality. That is, the price may be above the intrinsic value or the theoretical price. If so, we would say that the title is overrated. And, of course, the price can also be lower than the theoretical estimated price. Which would be telling us that the title is undervalued. If there is no substantial difference between the theoretical price and the market price, the analyst will say that the security is fairly valued.
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