A Summary of Stock Fundamental Analysis Methods

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Macroeconomic Analysis

Research on the impact of economic policies (monetary policy, fiscal policy, industrial policy, exchange rate policy, etc.), economic indicators (gross domestic product, unemployment rate, inflation rate, interest rate, exchange rate, etc.) on the stock market.

Monetary policy: When a central bank raises interest rates, it usually leads to less money flowing in the stock market and lower stock prices. Conversely, when a central bank lowers interest rates, it usually leads to an increase in the flow of money in the stock market and a rise in stock prices.
Fiscal policy: When the government increases spending or reduces taxes, it usually leads to lower corporate profits and lower stock prices. Conversely, when the government reduces spending or raises taxes, it usually leads to higher corporate profits and higher stock prices.
Industrial Policy: When the government supports the growth of an industry, it usually causes stock prices in that industry to rise while those in other industries fall. Conversely, when the government restricts the development of a certain industry, it usually causes the stock price of this industry to fall, while the stock price of other industries rises.
Exchange rate policy: When a central bank takes steps to revalue a country's currency, it usually causes the stock prices of exporting firms to rise and that of importing firms to fall. Conversely, when a central bank takes steps to devalue a country's currency, it usually causes the stock prices of exporters to fall and those of importers to rise.
Gross Domestic Product: When GDP grows, it usually results in higher money flows in the stock market and higher stock prices. Conversely, when GDP falls, it usually leads to less money flow in the stock market and lower stock prices.
Unemployment: When unemployment rises, it usually leads to lower corporate earnings and lower stock prices. Conversely, when unemployment falls, it usually leads to higher corporate profits and higher stock prices.
Inflation rate: When inflation is higher than expected, it usually causes investor confidence in the currency to decline and stock prices to fall. Conversely, when inflation falls below expectations, it usually leads to higher investor confidence in the currency and higher stock prices.
Interest rates: When interest rates rise, it usually leads to less money flow in the stock market and lower stock prices. Conversely, when interest rates fall, it usually leads to an increase in the flow of money in the stock market and a rise in stock prices.
Exchange rate: When the exchange rate appreciates, it usually causes the stock prices of exporting companies to rise and the stock prices of importing companies to fall. Conversely, when the exchange rate depreciates, it usually causes the stock prices of exporting companies to fall, while the stock prices of importing companies rise.

industry analysis

Look at the prospect of an industry from the direction of national policy

Assume that the Chinese government decides to increase support for the new energy vehicle industry and promote the development of the industry through policy guidance and financial support. This will have several effects:

Market size growth: Government support will encourage more consumers to purchase new energy vehicles, thereby driving market size growth. This will lead to an increase in the performance of new energy vehicle production and sales companies, which will drive up stock prices.
Intensified competition in the industry: Government support will attract more companies to enter the new energy vehicle industry, leading to intensified competition in the industry. This could lead to lower profits for the industry as a whole, which could affect the stock prices of the companies involved.
Technological innovation: Government support will encourage enterprises to increase investment in technological innovation, thereby promoting technological progress in the new energy vehicle industry. This may cause some technology-leading companies to stand out, driving the stock prices of related companies higher.

Look at the stage and scale of the industry

Suppose an emerging industry, such as artificial intelligence, is in a stage of rapid development. this means:

Growth Potential: The industry has huge growth potential because of the wide-ranging applications of artificial intelligence technology in various fields. This will cause investors to become interested in the shares of the related company, thereby driving the stock price up.
Increased investment: With the development of the industry, more and more investors will increase their investment in related companies to obtain higher returns. This will lead to increased demand in the stock market, which will push up the stock price.
Earnings uncertainty: However, emerging industries also face high earnings uncertainties. Due to increased competition and fluctuations in market demand, the companies involved may not be able to achieve expected profitability, which may result in a decline in stock prices.

Industry concentration and the company's market position in the industry

Suppose Company A is in a highly concentrated industry, such as automobile manufacturing. Company A is a leading company in the industry with a high market share. this means:

Competitive advantage: Company A has a competitive advantage in the industry because it can achieve higher profits through economies of scale and branding. This could attract investor interest in the company's stock, driving the stock price higher.
Industry risk: However, industries with high concentration also face higher industry risks. If there are changes in the industry, such as technological advances or changes in consumer preferences, Company A may not be able to adapt quickly, causing the stock price to fall.

Tools website

Company situation (micro) analysis

Basic situation analysis of the company

Understand the company's business : By understanding the company's products or services, market, competitors and customers, you can better understand the company's operating model, market strategy and competitive environment. This information can be obtained through company websites, industry reports, news media and company announcements.
Research the company's historical data : By studying the company's historical financial data, you can evaluate the company's development and business trends. For example, by analyzing the growth rate and stability of a company's revenue and profits, it is possible to judge a company's competitiveness and profitability.
Analyzing the company's competitive advantages : Knowing the company's strengths and weaknesses compared with its competitors can help investors judge the company's potential development prospects. For example, a company may have advantages such as unique technology, brand awareness, and cost control capabilities, which can bring more market share and profits to the company.
Check the company's management : Knowing the background and experience of the company's management can help investors evaluate the company's management capabilities and risk control capabilities. For example, management may have extensive industry experience, strong leadership skills, and strategic vision that can help the company achieve its long-term growth goals.
Viewing the company's financial reports : By viewing the company's financial reports, including financial statements, cash flow statements, and shareholders' equity statements, it can help investors evaluate the company's financial status and operating efficiency. For example, by analyzing the company's balance sheet, you can understand the company's assets and liabilities, as well as the company's solvency and financial risks.
Understand the company's regulatory and legal risks : Understanding the company's regulatory and legal risks can help investors evaluate the company's risk control capabilities and long-term development prospects. For example, the company may face issues such as industry policies, environmental protection, and compliance, and these risks may have an impact on the company's operations and reputation.
Conduct field research : By conducting field research, you can gain a more comprehensive understanding of the actual situation of the company. For example, you can visit the company's production workshop, office, warehouse and other places to understand the company's production situation, employee situation, customer situation, etc. This information can help investors gain a deeper understanding of the company's operations and potential risks.

business analysis

Understand the company's business, analyze the company's competitive advantages, check the company's market position, understand the company's R&D capabilities, and understand the company's regulatory and legal risks.

Suppose Company B is a biotechnology company whose business is mainly to develop and sell innovative drugs.

Business and competitive advantage: Whether company B has strong R&D capabilities, whether its products have competitive advantages, and whether they are successful in the market. If Company B's product has a significant competitive advantage and there is strong market demand, this may attract investor interest in the company's stock, driving the stock price higher.
Market position: Company B's share and competitiveness in the market. If Company B has a high market share and strong competitiveness, this may increase investors' expectations for the company's future, thereby driving the stock price higher.
R&D capabilities: Whether company B's R&D pipeline is substantial, whether it has advanced technology and equipment, and whether it can attract outstanding technical talents. If Company B's R&D capabilities are strong, this may increase investor confidence in the company's future growth potential, driving the stock price higher.
Regulatory and Legal Risks: The biotechnology industry faces high regulatory and legal risks. If Company B faces a major regulatory or legal challenge, this could affect the company's stock price. For example, if Company B's product encounters serious regulatory hurdles, this could cause the stock price to fall.

financial analysis

Financial analysis must be combined with the industry

It is meaningless to analyze the financial statements of enterprises apart from the industry, because the indicators of enterprises vary widely in different industries.

For example, for a high-tech enterprise and a traditional manufacturing enterprise, their profit margin levels may be very different. High-tech companies usually need to invest a lot of research and development expenses to develop new products and technologies, which leads to their relatively low profit margins. Traditional manufacturing companies may gain higher profit margins by improving production efficiency and reducing costs.

Balance Sheet Analysis

Analyze the rationality of the financial structure of the enterprise : When evaluating the financial structure of the enterprise, it is necessary to pay attention to some important subjects, such as accounts receivable, inventory and net asset ratio. The accounts receivable item reflects the credit policy and sales receivables of the enterprise, the inventory item reflects the inventory level and sales ability of the enterprise, and the net asset ratio reflects the asset structure and financial stability of the enterprise. Through the analysis of these subjects, it is possible to evaluate whether the financial structure and asset allocation of the enterprise are reasonable.
Analyzing a company's financial solvency : The current ratio is a common indicator for evaluating a company's financial solvency. The current ratio refers to the ratio of the company's current assets to current liabilities, which can reflect the size of the company's short-term solvency. The higher the current ratio, the more current assets the company has, the less current liabilities, and the stronger its solvency.
Analysis of shareholder's interest in corporate net assets : Net assets per share is a common indicator for assessing shareholders' equity in corporate net assets. The net assets per share refers to the net assets of the enterprise divided by the total number of shares, which reflects the value of the net assets of the enterprise represented by each share. By analyzing the net assets per share, we can understand the size of shareholders' equity in the company's net assets.
Analyze the operating capacity of the enterprise : When evaluating the operating capacity of the enterprise, you can pay attention to the two indicators of accounts receivable turnover days and inventory turnover days. The turnover days of accounts receivable refers to how many days it takes an enterprise to collect accounts receivable on average, and it reflects the flow speed of accounts receivable of an enterprise. Inventory turnover days refer to how many days it takes an enterprise to sell out its inventory on average, and it reflects the flow speed of the enterprise's inventory. By analyzing these two indicators, we can understand the operating capacity and sales efficiency of the enterprise.

Income Statement Analysis

Analyze the company's revenue sources : Knowing the company's main revenue sources can help investors evaluate the company's business model and operating conditions. For example, if the company's main source of income is the sale of a certain type of product or service, then investors can analyze the demand and market conditions for the product or service; if the company's main source of income is investment income, then investors can analyze the company's Portfolio and investment returns.
Analyzing the company's costs and expenses : Knowing the company's cost and expense structure can help investors evaluate the company's operating efficiency and profitability. For example, if a company's raw material costs are too high, investors can analyze changes in raw material market prices; if a company's labor costs are too high, investors can analyze changes in the labor market and wage levels.
Check the company's gross profit margin and net profit margin : Knowing the company's gross profit margin and net profit margin can help investors evaluate the added value and profitability of the company's products or services. For example, if the company's gross profit margin is too low, then investors can analyze the company's product or service competition and market demand; if the company's net profit rate is too low, then investors can analyze the company's cost control and business management.
Check the company's revenue growth : Knowing the company's revenue growth can help investors evaluate the company's growth and market competitiveness. For example, if the company's revenue growth rate continues to be higher than the industry average, then investors can analyze whether the company's products or services have a competitive advantage; if the company's revenue growth rate continues to decline, then investors can analyze the company's market conditions and operating conditions.
Examine a company's earnings growth : Knowing a company's earnings growth can help investors assess a company's profitability and long-term growth potential. For example, if the company's profit growth rate continues to be higher than the industry average, then investors can analyze the company's business strategy and market demand; if the company's profit growth rate continues to decline, then investors can analyze the company's competition and business conditions risk.
Viewing the notes to the company's income statement : Viewing the notes to the company's income statement can help investors understand the company's operating conditions and risks more comprehensively. For example, by looking at items such as asset impairment loss and fair value change gains and losses in the notes to the income statement, you can understand the risks faced by the company due to market fluctuations or industry competition; by looking at items such as related party transactions and government subsidies in the notes to the income statement , can understand the risks faced by the company due to policy changes or market changes.