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  • Steps in Fundamental Analysis

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    Shanmathi D
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    The document outlines a 5-step process for conducting fundamental analysis: 1) Analyze industry structure, products, costs, strategy, and regulations; 2) Examine financial statements including balance sheets, income statements, and cash flows; 3) Forecast key value drivers and potential undermining factors; 4) Formulate a security value using a valuation model with data from steps 1-3; 5) Make a buy, sell, or hold recommendation and qualify any forecasts.

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    Steps in fundamental analysis

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    The document outlines a 5-step process for conducting fundamental analysis: 1) Analyze industry structure, products, costs, strategy, and regulations; 2) Examine financial statements including balance sheets, income statements, and cash flows; 3) Forecast key value drivers and potential undermining factors; 4) Formulate a security value using a valuation model with data from steps 1-3; 5) Make a buy, sell, or hold recommendation and qualify any forecasts.

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    © All Rights Reserved
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    Download as pdf or txt
    37 views1 page

    Steps in Fundamental Analysis

    Uploaded by

    Shanmathi D
    The document outlines a 5-step process for conducting fundamental analysis: 1) Analyze industry structure, products, costs, strategy, and regulations; 2) Examine financial statements including balance sheets, income statements, and cash flows; 3) Forecast key value drivers and potential undermining factors; 4) Formulate a security value using a valuation model with data from steps 1-3; 5) Make a buy, sell, or hold recommendation and qualify any forecasts.

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    of 1

    How to do fundamental analysis

    from
    Penman, Financial Statement Analysis and Security Valuation, 2001.

    Step 1: Economic and Market Analysis

    Structure of the Industry: competition and market dynamics


    Products being produced: what the products do, technology, substitute products
    Firm cost structure and revenue composition
    Firm Strategy: what are the firm’s stated objectives for future growth
    Regulatory Environment

    Step 2: Analysis of Financial Statements

    Balance sheet: Price to book value of equity; net market value of assets
    Income statement: earnings, free cash flow, revenues, EVA
    Cash flow statement: Operating, financing and investing
    Other factors not included in the financial statements: industry and government publications

    Step 3: Forecasting relevant payoffs

    What are the important ‘value drivers’?


    What are ‘best guess’ forecasts of the value drivers?
    What factors could act to undermine the forecasts?

    Step 4: Formulating a security value

    Specifying the approach to valuation


    Applying the valuation model to the available data from steps 1-4

    Step 5: Making a recommendation

    For an outside investor, recommend buy, sell or hold.


    Stating qualifications to the forecast

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