Fundamental Company Analysis

by Sam Ashe-Edmunds, studioD

Savvy investors use more than a stock’s recent performance or current price to determine its long-term potential as a sound investment. Understanding a mix of hard data and intangible factors that affect the business helps you get a clearer picture about where a stock may be headed over time. Performing a fundamental analysis of businesses will help you increase your chances of strengthening your portfolio.

Quantitative Analysis

Analyzing hard data about a company using information such as annual and earnings reports will help you get a firm understanding of what’s actually going on at a business, rather than looking at market factors that might influence a stock price. Hard data includes information such as revenues, profit or loss, debt, price-to-earnings ratio, market share, sales, dividends and earnings per share. This data lets you see how the company has performed in the past, how it is currently performing and if the numbers show any trends, such as shrinking market share, rising profits or increasing debt. Examine a company’s balance sheet, income and cash-flow statements and quarterly earning reports when performing a quantitative analysis.

Qualitative Analysis

Evaluating factors that can or have affected a company’s performance is important when performing a fundamental analysis of a business. Examples of areas to examine include senior management, sector trends, legislation, regulation and lawsuits. Look for the dates key patents and copyrights expire. As an example, Apple had the same product line, debt and dividends history the day after Steve Jobs passed away as the day before. His departure from Apple, however, led to great uncertainty as to whether the company could continue to innovate and develop new products with strong consumer demand. During the British Petroleum oil spill in the Gulf of Mexico in 2010, questions arose as to whether the Obama administration would fine the company and how large lawsuits would be.

Sector Analysis

In addition to analyzing an individual company’s hard numbers and internal intangibles, evaluate its market sector to determine if any factors could lead to a downturn or increase in the company’s fortunes. For example, if an otherwise sound company makes unregulated health supplements, the business might be adversely affected if legislation passes that regulates natural health supplements. The collapse of the American housing market affected plumbers, painters, general contractors, landscapers, dry wallers, carpet installers and electricians — all of whom made up a significant portion of Home Depot’s and Lowe's customer base. Analyzing housing reports and proposed mortgage legislation would improve your evaluation of these two stocks. The BP oil spill led to questions about a moratorium on offshore drilling by the Obama administration, affecting multiple energy companies.

Putting it all Together

Once you have gathered your hard numbers, examined your intangibles and looked at the market sector of a business, analyze their effect on each other. Simply because pending legislation might have an adverse affect on a group of businesses doesn’t mean that a particular company won’t survive and thrive. In fact, bad news for a sector might eliminate weaker players and make those that survive stronger with less competition and increased market share. Use your fundamental analysis to try and find securities that are undervalued and that will rise in price once the marketplace recognizes their true value.

About the Author

Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.

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