Introduction to Fundamental Analysis

Hello, I am Umesh Tripathi, and we are learning the concepts of Fundamental Analysis.
In this video, we will understand what Fundamental Analysis is.
Fundamental Analysis is essentially a way to assess the health and potential of a particular company.
When we conduct fundamental analysis, we are analysing the underlying business — this involves examining the company’s financial statements and key financial ratios, along with studying the overall industry in which the company operates.
At the end of this process, we arrive at a certain value called the intrinsic value.
In later videos, you will learn in detail what intrinsic value means.

When it comes to the types of Fundamental Analysis, there are broadly two — Quantitative and Qualitative.
Quantitative analysis deals with numbers — for example, studying financial ratios.
Qualitative analysis, on the other hand, involves evaluating aspects like management quality, brand value, and the competitiveness of the business.

Let’s take an example to clearly understand the difference between qualitative and quantitative approaches.
Imagine there are two companies selling pizzas. In the pizza business model, customers can choose from many companies that sell pizzas. However, there is one company — let’s call it Company A — that, because of its competitive advantage, brand value, and overall competitiveness, holds about 85% of the pizza market share.
This means that out of every 100 pizzas sold in that segment, 85 are sold by Company A.
From a qualitative perspective, this company clearly has an edge over other competitors in the pizza business.
From a quantitative perspective, analysing this pizza company would involve studying its financial performance — such as sales figures, profitability, and financial ratios — to assess its business strength in numerical terms.

When conducting fundamental analysis, we need to consider certain key components, such as financial statements, important ratios like Return on Equity (ROE) and Return on Capital Employed (ROCE), management analysis, and also macroeconomic trends.

There are standard approaches to analysing a company or industry:

• First, analyse the underlying business.
• Next, review the company’s financial statements.
• Then, conduct management analysis — understanding the management’s future plans, evaluating their decisions, and studying industry peers and competitors.
  At the end of this, we derive the intrinsic value, which is the ultimate goal of fundamental analysis.

There are two main approaches to conducting fundamental analysis:

1. Top-Down Approach – Start by analysing the economy as a whole, then move to sector analysis, followed by industry analysis, and finally, the company’s own fundamentals.
2. Bottom-Up Approach – Start directly with the company’s fundamentals, then analyse the industry, then the sector, and finally the overall economic situation.

Now, why do we need Fundamental Analysis?
The bottom line is: Fundamental Analysis helps us determine the financial health of a company. It aids in making long-term investment decisions, forecasting future revenue and profitability, and identifying whether the company is undervalued or overvalued.
Overall, Fundamental Analysis is a powerful tool that helps evaluate long-term investment opportunities based on data rather than speculation, enabling investors to build strong long-term portfolios.

That’s all for this video on Fundamental Analysis. See you in the next video.

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