{"id":222208,"date":"2025-04-16T11:27:16","date_gmt":"2025-04-16T15:27:16","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=222208"},"modified":"2025-04-16T11:33:14","modified_gmt":"2025-04-16T15:33:14","slug":"fundamental-analysis-finding-the-real-value","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/podcasts\/cents-of-security\/fundamental-analysis-finding-the-real-value\/","title":{"rendered":"Fundamental Analysis: Finding the Real Value"},"content":{"rendered":"\n<p>Fundamental&nbsp;analysis&nbsp;is a common phrase in conversations about a company\u2019s value, health, and liquidity. What makes up this&nbsp;analysis&nbsp;style and how do you go about assembling it?&nbsp; Reda Farran, Global Markets Analyst at Finimize joins Cassidy Clement to discuss.<\/p>\n\n\n\n<iframe title=\"Fundamental Analysis: Finding the Real Value\" allowtransparency=\"true\" height=\"150\" width=\"100%\" style=\"border: none; min-width: min(100%, 430px);height:150px;\" scrolling=\"no\" data-name=\"pb-iframe-player\" src=\"https:\/\/www.podbean.com\/player-v2\/?i=kfnc4-1881911-pb&#038;from=pb6admin&#038;share=1&#038;download=1&#038;rtl=0&#038;fonts=Arial&#038;skin=1b1b1b&#038;font-color=auto&#038;logo_link=episode_page&#038;btn-skin=c73a3a\" loading=\"lazy\"><\/iframe>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-summary-cents-of-security-podcasts-ep-93\">Summary \u2013 Cents of Security Podcasts Ep. 93<\/h2>\n\n\n\n<p><em>The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made<\/em>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Welcome back to the <em>Cents of Security<\/em> podcast. I&#8217;m Cassidy Clement, Senior Manager of SEO and Content here at Interactive Brokers, and today I&#8217;m your host for the podcast. Our guest is Reda Farran, Global Markets Analyst at Finimize. Fundamental analysis is a common phrase in conversations about a company&#8217;s value, health, and liquidity\u2014but what exactly makes up this analysis style, and how do you go about assembling it?&nbsp;<br>In this episode, we&#8217;re going to explore all of that and more. Welcome back to the program, Reda.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Sure, nice to be back. Thank you for having me again.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-0\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Of course. We have touched on technical analysis in our episodes here on <em>Cents of Security<\/em> in the past\u2014a little bit more in-depth\u2014but it&#8217;s about time we go into fundamental analysis. So what exactly is it, and are there certain elements or maybe fundamentals\u2014no pun intended\u2014that make up this analytic strategy?&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp-0\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Yeah, sure thing. There are many ways to go about analyzing a particular investment. You touched on technical analysis. I&#8217;m sure you&#8217;ve had some experts come up to your show and explain what that is. And fundamental analysis is basically another particular way or method of looking and analyzing a particular investment.&nbsp;<br>I&#8217;m sure we&#8217;re going to focus a lot on stocks in this podcast. You can apply fundamental analysis really to almost any investment. What does it involve? From the name, it involves analyzing the underlying fundamentals. So if you are looking at a particular stock\u2014what is the stock at the end of the day? A piece of paper that gives you partial ownership in a company.&nbsp;<br>So if you wanted to analyze, using fundamental analysis, a stock, what you&#8217;re going to end up doing is basically analyzing the underlying company. So you will be looking at factors such as its financials, its management team, its competitive position, the wider industry, and so on\u2014trying to analyze these underlying factors and ultimately trying to come up with some kind of view on the intrinsic value of the stock.&nbsp;<br>So basically, what you think the stock is actually worth, regardless of what the stock price tells you\u2014but what you think the stock is actually worth based on the company&#8217;s, like I said, underlying profitability, cash flows, its position within the wider industry, and so on.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-1\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Yeah. Really what it seems to come down to is: we&#8217;re looking for what value would accurately be attributed to this stock or item because of a change in price, whether it&#8217;s up or down\u2014and then, of course, wider market trends.&nbsp;<br>So when we compare this to technical analysis\u2014and it&#8217;s a common thing where somebody says they&#8217;re for technical analysis over fundamental analysis or vice versa, or sometimes a mix\u2014what exactly is the difference? And the age-old question: is one actually better than the other?&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp-1\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>That&#8217;s a great question, and I will get to that\u2014but maybe just to explain the differences. So I already explained what fundamental analysis is, right? So you&#8217;re analyzing the underlying fundamentals of the investment. If you&#8217;re looking at a stock, it&#8217;s the company in question.&nbsp;<br>If you&#8217;re looking at a government bond, then you&#8217;re really looking at the underlying finances of the country or the government in question, and so on. So you&#8217;re doing this kind of deep analysis, trying to come up with a view of whether you think the stock is undervalued or overvalued.&nbsp;<br>So is the stock price above where you think the intrinsic value is and you should avoid it? Or is the stock price meaningfully below where you think intrinsic value is?&nbsp;<br>So you&#8217;re trying to come up with a view on what you think the stock is worth.&nbsp;<br>Now, fundamental analysis, I would say, is more long-term focused. Because just because you find an undervalued stock, it doesn&#8217;t mean\u2014hey, tomorrow, suddenly, the stock price is going to go up to where you think the intrinsic value should be.&nbsp;<br>In the long run, stock prices do trend or converge toward intrinsic value. In the short run, you have these crazy kind of whipsaws\u2014volatility, prices can be very overvalued, very undervalued, and so on.&nbsp;<\/p>\n\n\n\n<p>Technical analysis doesn&#8217;t really care much about underlying fundamentals. The argument the technical analysts make is that the stock price captures all of the underlying fundamentals\u2014and there&#8217;s a certain element of truth to that, right?&nbsp;<br>If you have a particular company that&#8217;s growing its earnings consistently every year and so on\u2014so its earnings are going up like that\u2014you&#8217;re going to probably find its stock price also going up, reflecting that growth.&nbsp;<br>So the underlying argument, or the big argument they make\u2014which has a lot of truth, to be quite honest\u2014is that the stock price already captures a lot of the fundamental information. And because they believe that, technical analysts say, \u201cLook, the most important thing to analyze is the stock price and volume attributed to that,\u201d and so on.&nbsp;<\/p>\n\n\n\n<p>So they&#8217;re looking at the stock price, they&#8217;re looking at stock graphs, they&#8217;re computing different indicators, they&#8217;re looking for trends and patterns in the stock chart\u2014and trying to take buy or sell decisions based off of that.&nbsp;<\/p>\n\n\n\n<p>Now, which is better?&nbsp;<br>Look, personally, I really don&#8217;t like when certain investors who are hardcore fundamental analysts completely dismiss technical analysis\u2014and vice versa.&nbsp;<br>Some people who are really into technical analysis say, \u201cHey, fundamental analysis is useless.\u201d&nbsp;<br>The truth is\u2014or perhaps <em>my<\/em> truth, what I believe\u2014is that both are really useful.&nbsp;<br>At the end of the day, these are two tools\u2014not mutually exclusive, quite complementary\u2014two tools that you have at your disposal as an investor to take good investment decisions.&nbsp;<br>Why just say, \u201cThis one is correct,\u201d and completely dismiss the other?&nbsp;<br>Why don\u2019t you try to utilize both of these tools in your own investment decision-making?&nbsp;<br>It\u2019s completely fine to have a stronger preference for one of the two.&nbsp;<\/p>\n\n\n\n<p>Personally, because I spent the bulk of my career as an equity analyst, I like fundamental analysis more\u2014but that does not mean I dismiss technical analysis. I actually still use it.&nbsp;<br>For me, fundamental analysis tells me <em>what<\/em> to buy.&nbsp;<br>So basically, if I find stocks are cheap, trading below where I think their intrinsic value should be\u2014&nbsp;<br>But then technical analysis tells me <em>when<\/em> to buy.&nbsp;<br>So it helps me as a timing tool, essentially.&nbsp;<\/p>\n\n\n\n<p>And I think that&#8217;s really reasonable, because even if you&#8217;re correct about a particular stock\u2014you think it&#8217;s undervalued\u2014&nbsp;<br>But then if you look at the chart, and you look at the technicals, and it&#8217;s just in this massive downtrend\u2014&nbsp;<br>Perhaps that&#8217;s not the right time to buy it.&nbsp;<br>But perhaps there&#8217;s what technical analysts call a \u201ctrend reversal.\u201d&nbsp;<br>So basically, you&#8217;re seeing this big downtrend, you think the stock is undervalued, and then something happens\u2014maybe a catalyst kicks in, some rumors of a takeover attempt because the company is too cheap, etc.&nbsp;<br>Suddenly the stock price jumps up, and then you get this uptrend.&nbsp;<\/p>\n\n\n\n<p>It&#8217;s fine\u2014I&#8217;d rather miss out on the first 10\u201320% of the stock rebounding, but then capture the rest of the upside, as opposed to buying a stock in a downtrend and continuing to hold it as it falls. And Cassidy, I&#8217;m going to ask you a question. What&#8217;s the difference between a stock that&#8217;s gone down 80 percent and a stock that&#8217;s gone down 90%?&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-2\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Depends on who you&#8217;re asking. Somebody might say it&#8217;s undervalued, so they have the potential to buy more on the downtrend at 90, while others may say, \u201cI want to get out fast,\u201d and it leads to a panic.&nbsp;<br>I hate that was my answer, but all of my years of finance content\u2014I feel those are the two viewpoints I hear the most.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp-2\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>It&#8217;s a really good answer. I&#8217;ll tell you perhaps a funnier, but even truer, answer. A stock that&#8217;s gone down 80 percent has gone down 80%. A stock that has gone down 90% has, first of all, gone down 80%\u2014and then halved.&nbsp;<br>Think about it. If you had a stock at a hundred, it goes down to 20\u2014that\u2019s an 80% drop. Then you halve the 20, and it goes down to 10. So it&#8217;s gone down 90%.&nbsp;<\/p>\n\n\n\n<p>What I mean by that\u2014so even though a stock has gone down 80%\u2014okay, it&#8217;s gone from a hundred to 20\u2014you\u2019re like, \u201cCool, this is now undervalued. I&#8217;m gonna buy it at 20.\u201d And then it halves and it goes to 10, and you lost 50 percent of your money.&nbsp;<\/p>\n\n\n\n<p>So I guess what I&#8217;m trying to say is: look, technical analysis can go hand in hand with fundamental analysis in the sense that you can use fundamental analysis to try to discover undervalued stocks, but then you can try to use technical analysis as a timing tool\u2014when to jump in, when to buy it\u2014as opposed to buying in too early if a stock is in a massive downtrend and then losing a lot of money.&nbsp;<br>Ideally, you want to buy a stock when it&#8217;s in an uptrend and ride it. And you want to try to avoid those stocks that are just perpetually going down.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-3\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>I think those were really great points, because really when it comes down to it, you have to think about\u2014before you go and apply an analysis style or strategy\u2014A) do you have any background or education on the matter, if it&#8217;s you actually initiating this strategy?&nbsp;<br>There\u2019s a chance that you may have an advisor or someone else who helps you with your financials.&nbsp;<\/p>\n\n\n\n<p>The other elements, of course, are: what is your risk tolerance? Your financial goals? Is there any type of trading style that you utilize because you either have to, or because that\u2019s the type of trader you are?&nbsp;<br>All of that goes into what elements you can pick and choose from either of those strategies. And also, if you tend to favor one over the other\u2014which, as you mentioned, it&#8217;s really dependent on what type of trader you may be.&nbsp;<\/p>\n\n\n\n<p>Your example is very good, and I think it may be a little complex for those who are just getting into the area, but that&#8217;s the exact point. These strategies are not hard and fast and proven for thousands of years to be better than the other.&nbsp;<br>There&#8217;s a lot of elements to it, and the market&#8217;s unpredictable. So when we go to fundamental analysis, though, there&#8217;s a lot to still consider.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp-3\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Yeah, absolutely. You said it really well. I think, look, there&#8217;s no secret sauce.&nbsp;<br>To me, if you ask me what&#8217;s the secret to investing, it&#8217;s having a good investment process and sticking to it.&nbsp;<br>But that second part\u2014sticking to your investment process\u2014you&#8217;re only more likely to do that if your investment process is tailored to your own investment style and your own kind of personality.&nbsp;<\/p>\n\n\n\n<p>If you happen to be more of a short-term trader\u2014that\u2019s your particular style\u2014then perhaps technical analysis is better geared toward you, because technical analysis is more short-term in focus.&nbsp;<br>If you happen to be a long-term investor, then fundamental analysis will perhaps be better geared to you.&nbsp;<\/p>\n\n\n\n<p>So if you adopt a particular process that\u2019s more aligned with your style and personality, you&#8217;re more likely to stick to it.&nbsp;<br>But that doesn&#8217;t mean you have to completely disregard the other particular method.&nbsp;<br>You could be a fan of fundamental analysis, utilize it heavily, but still back it up with some technical analysis.&nbsp;<br>Like I said at the start\u2014these are two tools. They&#8217;re not mutually exclusive; they&#8217;re complementary.&nbsp;<br>If you want to be a good investor, it doesn&#8217;t matter if you think theoretically this method is better than that.&nbsp;<br>What matters is to make money.&nbsp;<br>And you&#8217;re more likely to make money by using many different tools to arrive at a smart investment decision.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-4\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Yeah. There&#8217;s definitely the question of: does this actually fit what I need when it comes to your application?&nbsp;<br>But when we actually look at technical analysis and fundamental analysis, there are elements that go into each of them that\u2014some people may say, \u201cOkay, I get it in the example, but where do I actually find these metrics to help initiate my strategy?\u201d&nbsp;<\/p>\n\n\n\n<p>And what I mean by that is\u2014it\u2019s a common lesson in business school or economics\u2014which is finding certain statements or filings from a public company to be able to utilize in different ratios or formulas to bring you to different fundamental metrics, performance metrics, etc.&nbsp;<br>So for fundamental analysis, where would someone go for the elements?&nbsp;<\/p>\n\n\n\n<p>You would initially think, \u201cOkay, if you&#8217;re calculating earnings per share, there&#8217;s a certain formula,\u201d but where would you find those numbers?&nbsp;<\/p>\n\n\n\n<p><strong>Reda Farran<\/strong>&nbsp;<\/p>\n\n\n\n<p>So the good news is that it\u2019s honestly never been easier to find this kind of information in this day and age.&nbsp;<br>And also\u2014and we can touch on this as well later\u2014but also thanks to AI, it\u2019s also never been easier to arrive at summaries of big annual reports and so on.&nbsp;<\/p>\n\n\n\n<p>So in terms of where you find this information: every single publicly listed company has a dedicated investor relations website, where they have their annual reports, investor presentations, financial statements, and so on.&nbsp;<br>Those are a great place to start\u2014particularly the annual report\u2014because the first X amount of pages in any annual report is a very in-depth overview of the business.&nbsp;<\/p>\n\n\n\n<p>You cannot invest in a stock if you&#8217;re using fundamental analysis\u2014if you&#8217;re doing technical analysis, it&#8217;s fine. You hear a lot of analogies of people buying and selling things they don&#8217;t even know what company it is.&nbsp;<br>But if you&#8217;re doing fundamental analysis, and you&#8217;re trying to understand the company and value the company, you need to have a really good understanding of what this particular business does. How does it make money, exactly?&nbsp;<\/p>\n\n\n\n<p>So the very first section of an annual report has a very in-depth overview of the business\u2014it\u2019s called \u201cBusiness Overview.\u201d&nbsp;<br>They tell you what they do, who their customers are, who their suppliers are, and so on.&nbsp;<\/p>\n\n\n\n<p>Also, the annual report is really good in the sense that it lists all the big risks facing the particular company\u2014or that could impact a company.&nbsp;<br>I think that&#8217;s something really important\u2014something very overlooked with beginner investors. They focus a lot on the upside, not so much on the downside.&nbsp;<\/p>\n\n\n\n<p>And what I mean by that is\u2014everyone&#8217;s trying to find the next big winner, focusing on how much money they can make in a stock\u2014but they don&#8217;t think enough about the risk. What could go wrong? And how much they can potentially lose in a particular stock.&nbsp;<\/p>\n\n\n\n<p>And I can tell you one thing about investment success: it\u2019s not so much about how many winners you have, but it\u2019s about avoiding catastrophic losses.&nbsp;<br>If you concentrate your portfolio in a few stocks that end up going down 50%, it&#8217;s going to be very hard for you to recover from that.&nbsp;<\/p>\n\n\n\n<p>So the annual report is a great place to start.&nbsp;<\/p>\n\n\n\n<p>They also, in the annual report, obviously have financial statements. You can find summary financial statements on the website and so on. Investor presentations are a really great resource\u2014I would encourage any investor to look at those.&nbsp;<br>So these are PowerPoint presentations done by company management teams that, again, provide very nice summaries and overviews of the business. They provide outlook\u2014you know, their future outlook, where they expect, let\u2019s say, their revenues, their profits to go, and so on.&nbsp;<br>Very useful source of information.&nbsp;<\/p>\n\n\n\n<p>Now in terms of particular financial metrics that you mentioned\u2014earnings per share\u2014and in fundamental analysis, there are hundreds of ratios you can compute, from profit margins to return on equity, and so on.&nbsp;<br>The good news is, you don\u2019t have to sit down and calculate all of these yourself. I think it\u2019s good if you have an understanding of <em>how<\/em> these ratios are calculated\u2014because only if you understand how a ratio is calculated and what it tells you can you actually interpret it\u2014but you don\u2019t have to sit there and manually calculate all these ratios for a company you\u2019re interested in.&nbsp;<\/p>\n\n\n\n<p>You have plenty of websites online\u2014Yahoo Finance, CNBC, Koyfin, Atom Finance, etc.\u2014so basically cheaper versions of the Bloomberg Terminal that calculate all these ratios for you. So you don\u2019t have to waste a lot of time doing it yourself. You can go to these platforms, go to these websites, look at the key financial ratios for a particular company.&nbsp;<br>It can be very telling.&nbsp;<\/p>\n\n\n\n<p>One thing to keep in mind: looking at a particular financial ratio\u2014let\u2019s say a company\u2019s profit margin or return on equity\u2014is okay, good in isolation, but it becomes a lot more informative if you can compare that company\u2019s ratios to other companies in the industry, or if you compare it to the company\u2019s own history.&nbsp;<br>So, for example, you see this year, this company\u2019s profit margin is 20%.&nbsp;<br>Okay\u2014is that good or bad? It depends, right?&nbsp;<br>If its profit margin five years ago was 50%, then you\u2019re like, okay, that\u2019s really bad, right? Its profit margins have gone down.&nbsp;<br>But if its profit margin was 5% five years ago, then that kind of tells you, okay, this company\u2019s becoming more cost-efficient, becoming more profitable, and so on.&nbsp;<\/p>\n\n\n\n<p>Going back to that 20% example\u2014you need to take that within the context of the industry.&nbsp;<br>If you\u2019re looking at a company in the software industry\u2014software is well known to have high profit margins because you\u2019re selling software, not physical products\u2014then perhaps that 20% suddenly doesn\u2019t look that good.&nbsp;<br>You look at similar companies in the industry selling similar software\u2014they have profit margins in the 40% range. And then you\u2019re like, okay, this particular company is not so good relative to its peers.&nbsp;<\/p>\n\n\n\n<p>So what I\u2019m trying to say\u2014or the key takeaway from all of this\u2014is that it\u2019s really important to look at financial ratios, but it\u2019s also really important to put those ratios in context. Compare them to the company\u2019s own history, and compare them to other companies in the wider industry.&nbsp;<\/p>\n\n\n\n<p>So that\u2019s where you get the statements, that\u2019s where you can look at and get those financial ratios, and you compare them with other companies.&nbsp;<\/p>\n\n\n\n<p>And then the last thing I want to touch on\u2014it\u2019s again a relatively new development\u2014is AI.&nbsp;<br>And I said, it\u2019s never been easier these days to not only access information, but to try to understand and interpret information.&nbsp;<\/p>\n\n\n\n<p>Look, I am not telling you\u2014and this is completely wrong\u2014to rely on AI to make investment decisions. No.&nbsp;<br>But AI can be a really useful tool to make your research process faster, more efficient, and perhaps more informed.&nbsp;<br>Right now, you can literally open ChatGPT, upload a PDF\u2014so upload an annual report of a company\u2014and have a conversation.&nbsp;<br>And basically ask ChatGPT to summarize the company\u2019s business model. Ask it to summarize the key risks facing the company.&nbsp;<br>You can even ask ChatGPT to calculate some of the financial ratios we mentioned, give you some interpretations, and so on.&nbsp;<\/p>\n\n\n\n<p>So basically now, you can use\u2014there are plenty of AI tools out there\u2014to help you with this process of fundamental analysis.&nbsp;<br>Again, don\u2019t rely on an AI tool to conduct all the analysis and come up with investment decisions, but use it as a tool to help you make your process more efficient, faster, and perhaps more informed.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-5\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>I think that\u2019s a really good point, because for a long time\u2014at least within, let\u2019s say, the past 10 to 15 years\u2014while we did always have Yahoo Finance and other additional financial websites, the large-scale idea was: you need to have large-scale data in order to look at this from a broader picture.&nbsp;<\/p>\n\n\n\n<p>And what I mean by that is: the idea almost was, unless you had access to humongous data sets\u2014like a Bloomberg Terminal\u2014your fundamental analysis was limited and potentially flawed.&nbsp;<br>We\u2019re at the point now where you have all of these presentations and elements and investor relations websites that are pretty robust.&nbsp;<br>You have some tools that involve AI or larger databases really at your disposal\u2014where you can look at these ratios and not look at them in a vacuum.&nbsp;<\/p>\n\n\n\n<p>And you came up with the competitive analysis\u2014well, not <em>came up with<\/em>\u2014but mentioned it; it\u2019s a common one.&nbsp;<br>And I think it\u2019s really important to look at things in the view of the sector itself, because some example you might have is\u2014maybe you look at Tesla and think of it as an automotive company and not necessarily an innovative technology company.&nbsp;<br>If you look at it in relation to the rest of the automotive market, those ratios can be incredibly different from those of a standard American, we\u2019ll say, automotive company\u2014because they\u2019re not as focused, we\u2019ll say, on the technology and innovation as much as they are more of a blue-chip type of company.&nbsp;<\/p>\n\n\n\n<p>And it\u2019s important to keep those things in mind, and that\u2019s where you need to utilize maybe an AI or some type of larger data assistant\u2014because there may be, in some cases, a hundred years\u2019 worth of data now as we\u2019re getting closer to 2029. For Ford, that would be about a hundred years, if I believe so.&nbsp;<\/p>\n\n\n\n<p>It\u2019s helpful to utilize that for a larger trend. While trends may lean themselves more toward a technical analysis, fundamental analysis elements will absolutely bleed into that.&nbsp;<br>That kind of leads me into my next question, which is: the way that fundamental analysis is used outside of just ratios itself\u2014are there certain ways that it\u2019s used for a larger scale of analyzing liquidity, or maybe overpriced or underpriced sectors, or maybe just broader company health or industry health?&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp-4\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>100%. You touched on quite a few there.&nbsp;<br>And fundamental analysis is not purely looking at ratios. Actually, if you say \u201clooking at ratios,\u201d that\u2019s assuming that fundamental analysis is purely quantitative\u2014which it isn\u2019t.&nbsp;<br>There\u2019s a big qualitative element to fundamental analysis.&nbsp;<br>Companies don\u2019t operate in a vacuum, as you rightfully said. Companies operate in a wider industry.&nbsp;<br>So a big part of fundamental analysis that\u2019s very qualitative in nature is analyzing the particular industry that this company operates in.&nbsp;<br>So: how competitive is the industry? Who are the competitors?&nbsp;<\/p>\n\n\n\n<p>How cutthroat is the competition? Who are the key suppliers, the key customers of this particular industry? What are the regulations for this particular industry?&nbsp;<br>Some industries are heavily regulated\u2014like utilities, for example\u2014so you cannot just sit down and invest in utilities purely quantitatively, because you need to understand qualitatively the quality of regulations in different states, because utility regulation differs from state to state, and so on.&nbsp;<\/p>\n\n\n\n<p>As you also mentioned\u2014things like liquidity\u2014trying to understand: is this company financially solvent? Can it actually meet its debt obligations or not? Or is it on the verge of going bankrupt?&nbsp;<br>That particular form of fundamental analysis is really done by shorting analysts\u2014so people who are looking at companies and stocks to bet against.&nbsp;<br>So basically betting that the stock price will decline.&nbsp;<br>They&#8217;re not interested in profitability ratios as much\u2014they&#8217;re more interested in things like debt, and so on.&nbsp;<br>Is this company on the verge of going bankrupt? Is this in a declining industry? And so on.&nbsp;<\/p>\n\n\n\n<p>So there are many different ways to use fundamental analysis. It&#8217;s really important to stress\u2014it doesn\u2019t have to be, and it shouldn\u2019t just be, quantitative. There\u2019s a big qualitative element to it.&nbsp;<\/p>\n\n\n\n<p>We touched on industry. I think quality of the management team is another really important thing to consider\u2014very qualitative in nature, but something really important.&nbsp;<br>You can have a phenomenal company, and then you put in a really bad management team in there, and they\u2019re going to drive the company to zero, right?&nbsp;<br>And vice versa\u2014you can have a very troubled company, bring in an external kind of new management team that has a really strong background in turnarounds, and then they manage to turn the company around. And there\u2019s a lot of money to be made in these kinds of situations.&nbsp;<\/p>\n\n\n\n<p>So qualitative analysis is equally as important as quantitative analysis.&nbsp;<\/p>\n\n\n\n<p>You touched on things such as liquidity, profitability, and so on. I said at the start, when I was explaining what fundamental analysis is, there are many different things and different ways to do it.&nbsp;<br>But one of the main end goals is to arrive at a valuation of the company\u2014so basically arrive at what you think the intrinsic value of the stock should be.&nbsp;<br>That involves basically doing a valuation on the company.&nbsp;<\/p>\n\n\n\n<p>And there are different ways to do that. You can use shorthand, shortcut methods\u2014like looking at price-to-earnings ratios of that particular stock, comparing it to its peers, and so on\u2014to more very detailed methods, such as doing a discounted cash flow model.&nbsp;<\/p>\n\n\n\n<p>And on that kind of detail, that takes me to an important point\u2014which is that fundamental analysis can be time-consuming sometimes.&nbsp;<br>Perhaps that\u2019s why it\u2019s not for everyone.&nbsp;<br>If you\u2019re a casual investor, a bit time-constrained, you have a full-time job\u2014deep fundamental analysis might not be the best approach for you, because it <em>is<\/em> rather time-consuming.&nbsp;<br>But that\u2019s the end goal at the end of the day\u2014to have that in-depth understanding of the company in question and arrive at some kind of view on the valuation level of the stock.&nbsp;<\/p>\n\n\n\n<p>And to try to buy undervalued stocks that you think are undervalued, and then to avoid\u2014at the very least\u2014stocks that you think are overvalued.&nbsp;<br>Or, if you happen to be confident enough to implement shorting strategies, even short stocks you think are very overvalued.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-6\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>You mentioned a little bit about the time consumption if you do fundamental analysis traditionally\u2014fully doing your own calculations, etc.&nbsp;<br>My last question is really about the limitations and strengths of incorporating fundamental analysis into your research for financial strategies.&nbsp;<br>Could you speak a little bit on that\u2014for maybe some rules or ideas to keep in mind before people just jump into it, and then they find themselves a month later with two new calculators and Excel spreadsheets that are a thousand lines deep?&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp-5\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Absolutely. So the pros and cons\u2014let\u2019s perhaps start off with the cons, because I led into\u2014we drifted into this by me talking about one of the cons of fundamental analysis, which is that it <em>is<\/em> quite time-consuming.&nbsp;<br>That is the truth. Look, you can do shorter, simpler fundamental analysis in a shorter amount of time, that\u2019s fine.&nbsp;<br>But if you think about these professional equity analysts who are studying stocks for a living\u2014they conduct really in-depth fundamental analysis, which is very time-consuming.&nbsp;<\/p>\n\n\n\n<p>When I was an equity analyst at Fidelity, on average, it took me about two full weeks of work to do an in-depth kind of analysis on a company, build a valuation model, and produce a report. So two weeks on a particular stock\u2014as a full-time job.&nbsp;<br>So that gives you the idea on the amount of work involved.&nbsp;<\/p>\n\n\n\n<p>Another con of fundamental analysis is: <em>garbage in, garbage out.<\/em>&nbsp;<br>And what I mean by that is that when you\u2019re conducting your fundamental analysis, you\u2019re relying on information provided to you by the management team\u2014the financials, the investor reports, and so on.&nbsp;<\/p>\n\n\n\n<p>And these could be prone\u2014and have been, as we&#8217;ve seen in many episodes in the past\u2014prone to manipulation.&nbsp;<br>So basically, management teams can fudge some of the accounting numbers, make things look better than they seem, and so on.&nbsp;<br>In investor presentations\u2014remember I mentioned that the companies can give their outlook\u2014they say, \u201cWe expect to grow earnings by 10 percent a year for the next five years.\u201d&nbsp;<br>Those could end up being extremely optimistic and not true at all.&nbsp;<\/p>\n\n\n\n<p>So, <em>garbage in, garbage out.<\/em>&nbsp;<br>If the underlying data you\u2019re relying on to do fundamental analysis is bad or fudged or manipulated accounting data, then you&#8217;re going to come up with bad, fudged, or manipulated conclusions at the end of the day.&nbsp;<\/p>\n\n\n\n<p>And then perhaps one third and final con of fundamental analysis is that sometimes it cannot be universally applied to any particular kind of investment.&nbsp;<br>Fundamental analysis is much more easily understood and applicable to investing in stocks\u2014because you can analyze the underlying company and try to arrive at a stock valuation.&nbsp;<\/p>\n\n\n\n<p>But Cassidy, if I told you\u2014what\u2019s the intrinsic value of the Mexican peso?&nbsp;<br>What\u2019s the intrinsic value of a particular cryptocurrency?&nbsp;<\/p>\n\n\n\n<p>It\u2019s really hard, right? These are particular investments or asset classes where it\u2019s really hard to come up with a concept of intrinsic value.&nbsp;<br>Currencies, cryptocurrencies, and so on\u2014there\u2019s not necessarily underlying cash flows.&nbsp;<br>There\u2019s not necessarily a physical underlying asset, like a business, that you can suddenly value.&nbsp;<\/p>\n\n\n\n<p>So what I mean by that is: sometimes fundamental analysis is a lot harder to apply on certain types of investments where it\u2019s hard to think of fundamentals, or think of a concept of intrinsic value.&nbsp;<\/p>\n\n\n\n<p>Again, it\u2019s very easy to understand when you\u2019re thinking about stocks, but much more arcane and harder to understand and utilize when you\u2019re thinking about some non-traditional asset classes.&nbsp;<\/p>\n\n\n\n<p>That\u2019s why, actually, if you look at the Forex space\u2014or currency traders\u2014they rely a lot more heavily on technical analysis.&nbsp;<br>Not necessarily because they think that\u2019s the better approach, but because they don\u2019t really have an alternative.&nbsp;<br>There\u2019s only so much fundamental analysis you can do on the Mexican peso\u2014but at some point, you have to look at charts of how it\u2019s trading relative to another currency, and then try to formulate a buy or sell decisions based off that.&nbsp;<\/p>\n\n\n\n<p>In terms of the pros of fundamental analysis\u2014and, excuse the pun\u2014but it\u2019s a <em>fundamentally sound<\/em> process.&nbsp;<br>If you think about it, trying to find stocks that are undervalued and buying them, trying to find stocks that are overvalued and avoiding them\u2014that\u2019s fundamentally sound. That\u2019s logical. That\u2019s a sound investment process.&nbsp;<br>Buying something cheaper than what it\u2019s really worth is fundamentally sound.&nbsp;<\/p>\n\n\n\n<p>And many of the best investors\u2014the investing legends that we talk about, like Warren Buffett and so on\u2014one of the most well-known investors out there, is purely a fundamental analyst.&nbsp;<br>His approach is trying to find undervalued companies, buying them, and holding on for a really long time.&nbsp;<br>So fundamental analysis is a fundamentally sound investment strategy.&nbsp;<\/p>\n\n\n\n<p>There are many examples of successful investors using it to make money.&nbsp;<br>It has a strong track record, and it can be applied to almost anything.&nbsp;<br>I mentioned a few asset classes where it&#8217;s hard to apply, but you can apply it to real estate, you can apply it if you\u2019re analyzing bonds\u2014corporate bonds, government bonds, and so on.&nbsp;<\/p>\n\n\n\n<p>So it\u2019s a really sound approach. I think that\u2019s the biggest thing fundamental analysis has going for it.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-7\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Yeah, if you have the access to those additional metrics to help you paint a picture of the value\u2014I think you\u2019re right.&nbsp;<br>Outside of stocks, it gets a little bit weird, just in the sense of\u2014you\u2019re going to have a lot of blank variables.&nbsp;<br>But it does help understand\u2014or give the user an understanding\u2014of how the price point has gotten to where it is today, and how the value\u2019s been established.&nbsp;<\/p>\n\n\n\n<p>But you brought up some awesome points today, Reda. Thanks for joining us.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-reda-farran-nbsp-6\"><strong>Reda Farran<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Pleasure as always. Thank you, Cassidy.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cassidy-clement-nbsp-8\"><strong>Cassidy Clement<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Yeah, sure.\u00a0So, as always, listeners can learn more about an array of financial topics for free at interactivebrokers.com\/campus.\u00a0Follow us on your favorite podcast network, and feel free to leave us a rating or review.\u00a0Thanks for listening, everyone.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Fundamental\u00a0analysis\u00a0is a common phrase in conversations about a company\u2019s value, health, and liquidity. What makes up this\u00a0analysis\u00a0style and how do you go about assembling it?\u00a0 Reda Farran, Global Markets Analyst at Finimize joins Cassidy Clement to discuss.<\/p>\n","protected":false},"author":1280,"featured_media":222222,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[15591,13857],"tags":[10121,311,1666,12340,1065,1291,19143,787],"contributors-categories":[13597,13576],"class_list":{"0":"post-222208","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-cents-of-security","8":"category-podcasts","9":"tag-fundamental-analysis","10":"tag-health","11":"tag-liquidity","12":"tag-overpriced","13":"tag-strategies","14":"tag-technical-analysis","15":"tag-underpriced","16":"tag-value","17":"contributors-categories-finimize","18":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Fundamental Analysis: Finding the Real Value | IBKR Podcasts<\/title>\n<meta name=\"description\" content=\"Fundamental\u00a0analysis\u00a0is a common phrase in conversations about a company\u2019s value, health, and liquidity. 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