Whether you’re interested in becoming a stock analyst or simply searching for a better understanding of the Philippine stock market - fundamental analysis is a great topic to familiarize yourself with.

If you’re a stock picker (or an aspiring stock picker) a brief knowledge of fundamental analysis can help you better understand everything from research reports to articles in your favorite business publication.  You may be like many investors who don’t have hours each day to perform fundamental analysis to find stocks.  Knowing the basic concepts behind fundamental analysis can help you better understand the stock market, and whether you should learn it yourself. 

Do you need to learn fundamental analysis before you invest?

The question is…do you need to master fundamental analysis to invest in the Philippine stock market?  It’s great if you want to learn and practice fundamental analysis on your own.  But, the truth is…it’s not necessary to perform it on your own – BDO Securities can do that for you. 

When you’re a BDO Securities customer, you have top-tier research at your fingertips.  We have a team of research analysts whose job it is to provide high-quality fundamental analysis on a regular basis.

Each week, reports are made available for our customers including:

• Weekly Wrap
• Stock of the week
• Morning brief
• Individual stock analyses

Each of these reports can be found in the research window under the Fundamental Analysis tab.  With BDO Securities, you don’t need to learn fundamental analysis to invest – you can utilize our quality research to help you make money in the stock market.

That being said, understanding the basic concepts behind fundamental analysis can help you better understand BDO Securities’ reports and stock market investing as a whole.

Types of fundamental analysis

Fundamental analysis doesn’t just focus on stocks.  Someone can perform this analysis on an economy, a specific sector, or, of course, a company.  If an analyst performs fundamental analysis on an economy, they will likely use factors such as interest rates, unemployment, GDP growth, etc.  These factors are called macroeconomic factors – they focus on an entire economy.

When performing fundamental analysis at the company level, you may not focus on macroeconomic factors such as GDP growth and inflation.  Instead, you will likely use more microeconomic factors, such as company debt, company assets, liabilities, earnings growth, etc. These microeconomic factors are essential when performing fundamental analysis of stocks.

The importance of financials

Fundamental analysis at the company level focuses on company financials.  What are company financials?  You’ve likely heard of them before; they include the income statement, balance sheet, and cash flow statement.

When performing fundamental analysis these different financial statements are used to determine the overall value of a company’s stock price.  Some areas investors focus on when performing fundamental analysis include - but are not limited to:

• Profit margins
• Revenue
• Debt
• Taxes
• Cash
• Accounts payable
• Accounts receivable

The list goes on, but you get the point.  There are many factors going into fundamental analysis.  These factors can also be turned into financial metrics such as:

• Price to earnings ratio
• Price to book value
• Debt to equity ratio
• Current ratio
• Return on assets
• Return on equity
• Price to sales
• Etc.

There are different ratios used in fundamental analysis to determine the value of a company. Fundamental analysis attempts to take all this information from the company’s financials and distill it into three categories: overvalued, undervalued, fair valued. 

If a company is determined to be overvalued, someone may sell the stock.  Fairly valued companies may be held by investors.  Undervalued stocks are likely to be purchased.

Quantitative vs qualitative

So far, everything mentioned in this article has had to do with quantitative analysis. 

Quantitative analysis involves the actual measurable numbers of a company.  The numbers found in the balance sheet, the statement of cash flows, the income statement, are all quantitative figures.

Qualitative analysis focuses more on the business model of a company.  A company’s management and its future revenue streams may be qualitative factors.  Some examples of qualitative factors may include:

• Management
• Barriers to entry
• Vertical vs. horizontal integration
• Ethics
• Etc.

As you can see, some of the above examples are much harder to measure than qualitative data.  For example, measuring the impact of management on a company can be subjective and difficult to ascertain.  None-the-less qualitative analysis is an important part of fundamental analysis.

Conclusion – What is fundamental analysis?

Fundamental analysis is a process used to determine whether a stock is overvalued, undervalued, or fair valued.  The fundamental analysis of a stock includes both qualitative and quantitative factors.  Quantitative data is measurable and can be found in a company’s financial statements.  Qualitative data is more subjective but still important for fundamental analysis.

The more you learn about fundamental analysis, the more you’ll understand about stock picking.  It’s not completely necessary to do your own fundamental analysis when investing in the Philippine stock market - with BDO Securities, you have a team of analysts who provide reports on fundamentals as often as daily. 

If you’re not yet a BDO Securities customer, click the link below to open an account and begin investing!

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