Basic stock market analysis: A complete guide
Let us discover together the techniques and steps necessary to dominate fundamental analysis on the stock exchange, a key method for measuring the true value of companies.
What is fundamental stock market analysis?
Basic stock market analysis is a method used to assess the intrinsic value of a company by examining its economic and financial elements. Unlike the technical analysis, which focuses on market trends, the fundamental analysis focuses on financial statements, management, the company's development market and its outlook. Benjamin Graham, pioneer of fundamental analysis, stresses that market volatility can generate buying or selling opportunities when the price diverges from the real value.
The main stages of fundamental analysis
To conduct an effective fundamental analysis, several steps are crucial. These include the general economic context, the business sector, operational performance, asset structure, governance, future prospects and valuation methods.
Study of the general economic environment
The first step in the fundamental analysis is to understand the overall economic environment. This implies looking at macroeconomic indicators such as interest rates, inflation and GDP growth, as well as major events such as the health crisis of VOCID-19 which has had varied impacts on different sectors. For example, the tourism sector has been heavily affected, offering opportunities for valuation for solid but undervalued businesses.
Sector and competition study
A thorough analysis of the enterprise sector is key. Key characteristics of the sector, competitive forces, market shares and barriers to entry must be identified. Questions like, « What is the growth potential? », « What are the market shares of the main players? » and « What are the distribution channels? » are important.
Analysis of activity and operational performance
Examining financial indicators such as turnover, operating margin, EBITDA and free cash flows makes it possible to judge the quality and sustainability of a company's performance. For example, comparing the EBITDA of a company with that of its main competitors can provide clarification on its relative performance.
Review of asset structure and soundness
Assessing financial health involves analysing the company's balance sheet, including liabilities and equity. The ‘gearing' is a key indicator that can reveal the company's ability to repay its debts and finance its growth.
Analysis of corporate governance
Governance analysis includes operational management, investor relationship and capital allocation. Criteria such as transparency of communication and growth strategy are crucial. You can find more details in specialized articles on corporate governance.
Study of future business prospects
Growth prospects based on past performance and analysis of previous aspects are essential to predict future performance. A well-managed company with a strong competitive edge is likely to continue to perform.
Comparison of methods of valuing shares
There are several methods of valuing actions. The following is a comparative table of the three main approaches:
| Valuation method | Benefits | Disadvantages |
|---|---|---|
| Homeland | Simple to understand | Does not take into account future profitability |
| Future flows | Most realistic approach | Hard to predict |
| Comparison | Use market data | May be influenced by market volatility |
Practical cases and concrete examples of fundamental analysis
Let us illustrate the theoretical concepts of fundamental analysis with concrete examples and real case studies.
Example of heritage valuation
Let us study the case of a fictitious company with a strong asset base. Asset valuation involves calculating the value of capital assets and liabilities. For example, a company with buildings and production equipment will have to assess the market value of its assets and then subtract its debts to obtain a net value.
Example of future flow valuation
The updated cash flow methodology (DCF) uses future cash flow forecasts for a growing company, updating them at the appropriate rate to obtain the present value. For example, projecting future flows for a startup and updating them at a rate of 10% determines its valuation.
Example of comparative method
The comparative method is to compare a company with similar competitors in the sector. For example, if competitor A has a valuation equivalent to 8 times its EBIT, the valuation of our company with a similar EBIT should be aligned with that multiple.
Tools and resources essential for fundamental analysis
The following are the tools and resources required to conduct an effective fundamental analysis.
Analysis tools and software
Key financial analysis tools and software include Bloomberg Terminal, FactSet, and Morningstar Direct. They offer advanced features such as access to financial data, forecasting modelling and performance analysis.
Recommended books and training
- Common shares and extraordinary profitsby Philip Fisher
- Security AnalysisBenjamin Graham
- The Intelligent InvestorBenjamin Graham
Frequently asked questions about basic stock market analysis
Responses to common questions to clarify the critical points of the fundamental analysis.
To complete your skills in fundamental analysis, it is essential to master thetechnical analysis to better understand markets.
To complete your strategy,technical analysis on the stock exchange through graphs and trendsallows you to identify investment opportunities by detecting market movements.
To master the fundamental analysis, it is essential to understandmechanisms for the functioning of stock markets.
What is the BNPA?
The BNPA (Net Profit Per Action) is calculated by dividing the net profit by the total number of shares, representing the profits generated for each share held.
How do I interpret a high RIP?
A high RIP (Price Learning Ratio) may indicate high expectations for future growth from investors, but may also indicate an overvaluation of the share.
What is the best method of valuation?
There is no single method. The most sensible is to use several methods and cross-check the results to obtain a more complete view of the real value of the enterprise.
Sectoral analyses: Identifying opportunities and risks
Immerse ourselves in the importance of sectoral analysis to identify sector-specific opportunities and risks.
Sectoral characteristics
Defining the characteristics of different sectors of activity is crucial. For example, the technology sector is often characterized by high innovation and rapid product cycles, while the industrial sector can offer more stable prospects but sensitive to economic fluctuations.
Sectoral opportunities
Identifying growing sectors and potential investment opportunities is essential. Sectors such as green energy, technology and health offer many investment opportunities.
Sectoral risks
Analysis of sector-specific risks, such as supplier dependence, regulation, and economic risks. For example, the construction sector can be heavily influenced by environmental regulations, while the banking sector is sensitive to economic policies.
Finally, a well-structured and enriched fundamental analysis provides a clear view of the value of a company and its prospects in the market, allowing for informed investment decisions.