What is Fundamental Analysis and How to Do It?

Fundamental analysis has been one of the most rewarding analyses in the history of stock markets.

Fundamental analysis is a method of evaluating the intrinsic value of an asset, such as a stock, by examining its underlying economic and financial factors.

It helps in determining the fair value of any stock. It also evaluates the health and performance of an organisation with the help of its financial and major economic indicators.

How should you go about fundamental stock analysis?

1. Understanding the company - It is important to understand the company you intend to invest in. It will give you further insights into how the company is performing, and whether it’s taking the right decisions.
2. Review the financial statements - Analysing the company's financial statements, including the balance sheet, income statement, and cash flow statements gives an idea about the financial performance of the company over the years.
3. Check for debt - Debt is one of the important factors which can bring down a company’s performance. Security cannot perform well and reward you if it has a huge debt to pay. Think about the dividends you’ll enjoy after investing in debt free companies.
4. Analyse future prospects - Fundamental analysis is most effective when you want to stay invested for the long-term. Thus, invest in those companies whose products will still be useful 15-25 years down the line. The company should have a solid moat and longevity for its products.
5. Evaluate economic indicators - Consider the macroeconomic factors that may impact the company's future earnings potential, such as interest rates, inflation, and GDP growth.
6. Analyse industry trends - Research the industry trends to identify risks/opportunities.

Let’s understand more on this topic with a company’s example - Hindustan Unilever (HUL).

HUL's financial statements have shown consistent revenue and earnings growth, high profit margins, and a strong balance sheet with low debt levels and high cash reserves.

The FMCG company’s management team has a strong track record of successful leadership and has consistently delivered growth and shareholder value.

HUL has a strong portfolio of brands, including popular household names like Dove, Surf Excel, and Lipton. The company also has a wide distribution network that reaches a large consumer base across India.

It operates in the highly competitive FMCG industry in India, which is characterized by rapidly changing consumer preferences and intense competition. HUL has a history of successfully adapting to these changes and introducing new products to meet evolving consumer demands.

HUL's growth is influenced by macroeconomic factors such as inflation, interest rates, and economic growth in India.

This is how you should go about fundamental analysis and study the company in detail. The example of HUL illustrates how fundamental analysis can be applied to a real-world company.