1. Financial statement analysis
As mentioned above, the foundation of any fundamental analysis is the study of a company’s financial statements. These documents provide a view of a company’s profit potential, financial health, as well as its ability to generate future cash flow.
2. Ratios and metrics
Financial ratios and metrics can provide quick snapshots of a company’s performance. Here are some that you can use when conducting fundamental analysis:
These metrics are not interpreted in isolation. Always remember that context matters, especially in environments where sectors like mining or banking can distort benchmarks.
3. Industry and competitive analysis
No company operates in a vacuum. Understanding the industry structure is the key to interpreting financial results. Fundamental analysis should consider:
- the number of competitors and barriers to entry
- market share and pricing power
- regulatory risks or dependencies
Let’s use a contrasting example. Banks operate in an oligopolistic system. This means strong margins and consistent profitability. In contrast, the cannabis sector remains volatile and oversupplied.
