While the majority of people connect fundamental analysis to investment, the truth is that the fundamental analysis concept has far wider implications than just investment. Although many people see this process of fundamental analysis as a highly technical (heavy on the numbers), and specifically designed for analysts on Wall Street, finance majors, and seasoned traders, the reality is that it offers a much broader application than that. Therefore, it is not solely an investment analysis but also a tool for people to improve their understanding of how they can achieve success in whatever field they are currently in.
This article will provide a brief synopsis of the fundamentals of fundamental analysis, the general purpose of applying fundamental analysis outside of the traditional investment industry, and how one can apply fundamental analysis to everyday life-related decisions.
What is Fundamental Analysis?
Fundamental analysis evaluates the current, future, and real value of an asset, industry, or entire economy through observation and analysis of the following areas:
· Financial statements
· Business model
· Competitive advantage
· Trends within the industry
· Quality of Management
· Economic Indicators
Investors use this information to help identify the stock’s intrinsic value, or the “True” value, of the stock for purposes of comparing it against the current trading price. However, the analytical reasoning skills obtained from doing Fundamental analysis can be applied to many areas of our lives, not just when we are investing. By performing Fundamental analysis, a person learns how to dig deeper into an issue and ask questions such as the following:
· Is the company healthy financially?
· Are the promises made by the company legitimate or simply marketing hype?
· Does the industry have a future here?
· Is management honest and/or competent?
· Is the economy changing in ways that will impact me?
Understanding companies you interact with daily
Companies are involved in your daily life as a customer, user, employee, and partner. To be sure these businesses will be around to fulfill their obligations to you, you should do a fundamental analysis on their stability and reliability. Once you are confident how stable the company is, you can choose to rely on them for the following:
· mobile agreements
· real estate
· Private Education
· Health Care
· Financial Services
If the company has had stable growth in the past and will have sufficient cash flow to continue to support its obligations to you for several years after you sign the agreement, then you have a good chance of being satisfied with the service you receive. However, if the company's debt levels are excessive compared to the amount of profit it generates, you risk a poor quality service or total failure of the agreement.
You will save yourself a lot of time and frustration in the future by having a basic understanding of a company's financial stability.
There are many claims made by companies each year in various industries to promote their products or services. For example, companies will say they:
· have new revolutionary technology
· guarantee you returns
· will provide explosive growth
· offer you unbeatable offers.
Fundamental analysis provides you with a way of determining if these claims are believable. For example, if a company is promising massive growth but has low revenue, does not have enough cash to operate, and has no competitive advantages, this is a red flag.
By being able to identify these discrepancies between hype and what is real, you will save yourself from getting involved in scams or making poor decisions for yourself.
Making Better Consumer Decisions:
Using fundamental analysis, you can identify which companies will produce higher-quality products, provide excellent customer service, and provide a high-value proposition long term.
Brand Strength and Company Stability
For example, if a smartphone manufacturer is losing market share and daily cash and is on the verge of bankruptcy, would you trust investing in this brand? If an airline has an extremely high level of debt and is facing multiple lawsuits, would you book a flight with them?
With your focus on reliability and not merely stock prices, you will not simply make a judgment based solely on stock prices, but rather, you will take multiple factors into consideration when making a decision.
· Understanding Company Pricing Strategies
· You can use the principles of fundamental analysis to determine:
· Why some companies are able to command a premium pricing strategy;
· Why some products experience a significant reduction in price over time,
· Why certain industries face rapidly increasing input costs;
By understanding a company's pricing, margin structure, and operating costs, you will know if a particular company, product, or service is actually a great value or simply marketed and priced smartly.
Choosing the right Employer
Fundamental analysis helps job seekers determine which organizations to pursue when looking for a job.
Financially stable companies can give job seekers a sense of security that they will remain employed while learning new things and developing their skill sets.
Instead of focusing only on salary, job description, and corporate culture, the job seeker should ask questions that reflect the company's financial health:
1. Will my position just be a place holder if the company doesn't generate enough revenue?
2. Is this company expanding or contracting?
3. Is there a high employee turnover rate because of financial issues?
4. Is the entire industry on the decline?
The answer is that if a company is experiencing financial difficulties, restructuring, and has too much debt, job security becomes questionable. Jobs may disappear, raises may be put on hold, and layoffs may occur.
Ultimately, when you understand the basics of fundamental analysis, you can both identify a stable company with good long-term growth potential and identify growing industries where upward career potential exists.
Another use of fundamental analysis is to determine the viability of a startup. Learning to distinguish between startups that have a real shot at success versus startups that are simply burning through their investor's money can protect you from industries with the potential for layoffs.
Using fundamental analysis as a career insurance policy is a great way to invest your time and talents into a company in which you ultimately want to develop and grow.
Becoming a Smarter Entrepreneur
Fundamental analysis will allow you to learn about:
Competition: You'll want to know about your competitors' strengths and weaknesses so that you can grow and distinguish yourself from the competition. Knowing what their cost structure is and if they have a lot of debt or shrinking margins, for example, are fundamental-analysis questions that will help you decide how best to position yourself.
Long-term financial survival: The majority of businesses fail not because they don't have great products, but because their financial plans were not made with an eye toward the future. By knowing the basics about cash flow, return on invested capital, and breakeven points, you as an entrepreneur can significantly increase your chances of financial survival! How to Conduct Fundamental Analysis?
Understanding the Economy and Protecting Yourself Financially
Fundamental analysis can also aid in the macroeconomic understanding of the world. On a macroeconomic level, fundamental analysis is able to explain the economy as well as its cycles, inflation, interest rates and market conditions.
You don't have to invest to find this important
Economic conditions are directly related to;
· Employment opportunities
· Loan Rates
· Housing Market Prices
· Cost of Living
Business Growth and Development
Government Policy
Understanding macroeconomic indicators can help you to make better personal choices.
Examples
When there are increasing interest rates, it's probably not the right time to take out a larger loan. if a recession may happen in the near future it may be better to stay with a stable job rather than looking for something that is more of a risk. When inflation is growing, it is essential to review your current household budget and adjust accordingly.
Even if you're not an investor, you will still be affected by the economy in your everyday life.
Spotting Trends Before They Become Mainstream
Fundamental analysis can help you find real trends hidden beneath the noise in technology.
Early on in the development of artificial intelligence, those with a solid understanding of business fundamentals recognized:
1. Companies that had a data advantage.
2. Companies that had a profitable business model.
3. Companies that were taking advantage of the hype surrounding AI technology.
Having the ability to differentiate between true innovation and marketing hype allows you to position yourself appropriately for the future, regardless of whether you invest money.
In addition, fundamental analysis allows you to identify:
1. Declining industries such as print media, DVD rental companies, and landline telephone companies; and
2. Emerging industries such as renewable energy, digital payments, and telehealth
Understanding these trends can assist you with your career, in making business decisions, and in developing long-term strategies.
Improving Your Financial Literacy
As a result of doing fundamental analysis, you become more adept at understanding the following:
· income statements
· balance sheets
· cash flow statements
· profit margins
· debt ratios
· revenue models
All of the above skills will enable you to better manage your personal finances as you now know:
· where your money comes from and what happens to it
· how to think about and treat your assets and liabilities
· how using money to borrow/debt will impact your long-term stability
· the difference between profit and cash flow
Now you are making confident financial decisions instead of confusion over what to do.
Evaluating Risks in Everyday Life
Risk assessment is one of the most critical aspects of the basic definition of Fundamental Analysis (Analysis for Investment) and is an essential skill to have no matter what you do or where you are in life.
For example, you might find yourself assessing the security of a job contract to know whether you have stability and how long you can expect to be working there; assessing whether to lend someone money, including determining if you will be paid back and when; assessing the potential for a new business idea; verifying that a company's solvency before making a large deposit to them; determining the difference between a long-term and short-term trend of price movement.
Fundamental Analysis also trains you to be aware of "Red Flags," inconsistencies within a company or its operations, and any potential warning signs that could warn you.
Companies with "glamorous advertising and marketing" may be in a financially unstable situation; on the other hand, companies that appear "boring" may be incredibly stable, strong, and trustworthy.
Improving Negotiation and Decision-Making Skills
-basic knowledge in business gives you an advantage in negotiations.
-By understanding the financial context of your negotiations, you can negotiate better.
-When negotiating for big-ticket items (e.g., purchasing a car, a home or a large service), knowing the average profit margin of the industry allows you to find out where companies will negotiate on price.
-Knowing the cost structure of a company will help you spot products or services that are overpriced.
-Knowing how companies behave gives you insight into their negotiation strategies and at what point they will start to apply pressure on you to make a decision.
-If you have this information, you can potentially save yourself thousands of dollars.
-Make better choices.
-Fundamental analyses allow you to use logical and data-based decision-making rather than emotional or impulse-driven decisions. As a result of understanding the fundamentals of your investment decision, you can ask yourself:
Building a Critical, Analytical Mindset
The most significant advantage of performing fundamental analysis is that it teaches you to change the way you think.
By performing fundamental analysis, you:
Start to question
"What is the reason this product is priced this way?"
"What business model does this app have?"
"How does this particular company make money?"
"Is this too good to be true?"
"What are the long-term trends affecting this market?"
You will stop accepting information as being correct without thinking; instead, you will view the information like an analyst.
The process will also make you more economically aware and capable of seeing the links among:
· Gov. policy
· Market behavior
· Corporate strategy
· Consumer behavior
· New technology
· Global trends
This will help you to be a better citizen and make better decisions.
Conclusions
An understanding of how to use fundamental analysis will give you better ways of understanding the world... Even if you don't invest in stocks, using fundamental analysis will help you:
· make better product choices
· identify stable employers
· assess businesses
· have a better understanding of the economy
· see where trends are headed
· manage your money better
· evaluate financial risks
· have improved negotiating skills
· better develop critical thinking skills.
At its core, fundamental analysis is all about determining what is valuable, and how stable and likely it is to survive for the long run. Skills developed by using fundamental analysis are not unique to those investing in the stock market. They can be used in all areas of your life, and, when you apply these skills, you are better equipped to make informed decisions and navigate an increasingly changing and complicated world.
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