Fundamental analysis is a method of analyzing target companies’ economic activities and motivations.
It is mainly based on statistics collection and company financial data analysis. As well as assessing the potential within the market environment to explore such criteria as internal growth or decline, competitive edge or lack thereof compared to competitors and other factors that sum up to determine the total capacity of a company’s financial position.
The importance of fundamental analysis
The goal here is not to analyze companies’ profits; instead, it aims at evaluating their prospects by studying any factor that may influence them: sectoral trends, environmental changes and so forth. Also called “bottom-up investment”, this type of analysis performs structured assessments using available information rather than attempting forecasts based on unverified assumptions.
Since the early 20th century, foreign investment in Belgium has taken place. Many foreign investments come from neighbouring European countries, mainly France and the Netherlands.
Advantages
There are several advantages to fundamental analysis when applied to companies’ growth prospects.
First of all, it goes beyond simple financial statement evaluation because it considers factors that could influence a company’s performance, such as changing demographics, environmental effects or political events.
It makes fundamental analysis an efficient tool for performing risk-related assessments concerning short-term and long-term investment strategies.
It’s easy to understand
A significant benefit is that private investors and professional analysts can perform fundamental analysis. It does not require any particular knowledge, nor does it call for specialized education; all it takes is a computer, internet access and time to perform research.
It makes it particularly easy to understand and implement; however, this very simplicity could lead to the false assumption that fundamental analysis can be performed solely using data mining and number crunching.
Since there are numerous resources available for gathering information, knowing where to find relevant information quickly underlies the critical advantage of fundamental analysis over other investment strategies
In addition to maximizing the potential profits from investments, conducting fundamental analysis also minimizes risks due to its nature as an assessment tool. Its results may be used as a support mechanism for all kinds of investment decisions, both short-term and long-term.
Using fundamental analysis can be performed by anyone who has some basic knowledge of accounting and finance. Such a person does not have extensive experience, qualifications, or professional training.
It represents one of the most relevant benefits derived from conducting fundamental analysis.
It permits private individuals interested in investing their money but do not necessarily have the financial resources nor the required expertise to hire expensive analysts’ teams to perform the assessments for them.
Diversification
Fundamental analysis may also provide investors with an opportunity to diversify investment portfolios more efficiently than relying solely on technical analysis.
For instance, if an investor believes that there is low risk associated with investing in company A, he may support a certain percentage of his capital in company A and another portion in company B while placing the remainder in company C.
Such diversification is critical for minimizing investment risks because it offsets losses that might arise due to possible unforeseen events concerning any one specific company.
This type of diversification can further help limit volatility by ensuring consistent returns over time.
Thanks to fundamental analysis, investors may gauge prospects better than relying solely on technical indicators, thus allowing their investments to perform more predictably.
It essentially means that investors do not need to depend on luck or timing their entry into or exit from the market correctly.
Seeing the bigger picture
Another benefit of using fundamental analysis when investing is its ability to accurately picture what profits may be expected based on current performance.
The process of conducting primary research involves interpreting information on a company’s income statement, balance sheet and cash flow statement to assess its financial health and prospects.
As such, it may provide investors with a better understanding of how much money they can expect to receive from their investments over time.
Risk management
Fundamental analysis is also an attractive tool for managing risk because it enables investors to measure the likelihood that certain events will occur.
It does this by helping them determine whether or not a specific company’s stock price will rise or fall in value based on what is currently known about its business and prospects.
Link to Saxo Belgium for more information.