Introduction to Fundamental Analysis

Fundamental Analysis (FA) is a comprehensive method to studying a business. It is crucial to view the business from multiple perspectives when an investor wants to invest in the business for the long term, typically 3 to 5 years. For such investors, it is important to separate regular short-term variations in the stock market and focus on the primary business evaluation. Companies that have strong fundamentals are more likely to experience appreciation over the long-term thus generating wealth for investors.

The companies that are fundamentally strong have a robust underlying business. When the other company shares are bleeding at the time of the stock market condition, usually the stocks of the fundamental companies remain far better than others. The metrics you should use in order to evaluate the strength of these fundamentally strong companies are profitability, debt, business model, products and services, management, capital, etc.

In Bangladesh, we have several of these companies. To name a few, one can think of Marico, IBN SINA, Reckitt Benckiser (Bangladesh) Limited, Berger Paints Bangladesh Limited etc. To put in numbers, Marico Bangladesh's revenue CAGR (3y) stands at 14.1%. The business made record profits (BDT 310.87 crore) in their fiscal year 2020-21, despite the dire situation of the country due to the coronavirus pandemic. Similarly, 3-year CAGR (2018-21) of IBN SINA Pharmaceutical Industry and Beximco Pharmaceuticals Limited stand at 17.2% and 15% respectively. Thus, investing in firms with greater CAGR that have solid fundamentals speeds up the process of wealth creation.

You might be questioning why we are highlighting businesses with the most promising charts. In reality, stocks that create and destroy wealth coexist. And to find these wealth destructors, all you need to do is keep a close watch on the trends.

For instance, the following equity’s declining trends indicate weak fundamentals and a propensity to destroy wealth.

To sum it up, the strategy has always been to distinguish between companies that generate wealth and are worth your money and time and those that destroy wealth. The investment-grade companies have specific characteristics that set them apart from peers. Similarly, companies that destroy wealth have characteristics that a savvy investor cannot ignore.

Thus, Fundamental Analysis is simply an approach that allows an investor to have confidence to build strong, long-term investment plans by recognizing the characteristics of a wealth generating company.