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Introduction to fundamental analysis on TradingView

Fundamental analysis is a method of identifying an asset's intrinsic, or true, value. Those who use it believe that an asset may be overvalued or undervalued.

To conduct their research fundamental analysts examine corporate reports with the Stock Screener, and follow the Economic Calendar. They also closely monitor regulations, by applying qualitative and quantitative approaches. Fundamental analysis aims at estimating the value of not only assets, but also companies — their financial outlook and long-term viability.

CONTENTS:

What is fundamental analysis

Fundamental analysis is an approach in investment analysis used for evaluating whether a company or an asset is undervalued or overvalued.

If a stock is undervalued, fundamental analysts assume that it is likely to benefit investors, if they buy it at that price.

Conversely, if a stock is overvalued, it is considered a risky and unjustified investment and is likely to result in a loss.

To be defined as such, the business must have solid groundwork and prove its reliability and stability under different market circumstances — high profits during overall market growth and less severe losses than its rivals during turmoil.

To identify the fair value of an asset, fundamental analysts look at micro- and macroeconomic data. These include global market trends, the company's industry growth potential and capital inflow, and how company's products are relevant to the current economy.

The corporate data they use is usually derived from company reports.

Financial statement analysis is used to understand the business's durability by analyzing key financial metrics derived from the Income statement, Balance sheet, and Cash flow statement.

These are the three main financial reports, which provide investors and C-level management with insights about a company regarding its income, expenses, liabilities, ongoing operations financing, and much more.

In short, they are used for in-depth analysis or a quick snapshot of a company's financial health.

Fundamental analysis vs technical analysis

Fundamental analysis is based on the data provided by the company itself, while technical analysis uses data from exchanges displayed on the charts. Hence, fundamental analysis can be applied to both private and public companies, while technical analysis is applied to financial instruments with trading history, such as public company's stocks.

As a result, choosing one of these analyses as a prime system for making your trading and investment decisions comes down to choosing which source of information to trust — company reports or the actions of market participants.

Fundamental analysts may be more prone to trust a company and how it performs, while technical analysts may place more trust in how market participants value a company's stock.

Previously, there were more intense debates between the supporters of these approaches, but that has begun to fade as Efficient Market Hypothesis (EMH) gains all the attention. It states that all available information is already reflected in asset prices, suggesting that neither fundamental nor technical analysis can consistently outperform the market.

As a result, adherents of EMH promote a completely different objective — not to try to beat the market, as technical and fundamental analysts do, but to focus on broad participation and accept the average market return.

Today, many traders and investors use both approaches, as they complement each other — fundamentals can help in choosing the right asset, its likely price direction, and a fair price range, while technicals can help pinpoint entry and exit points.

A common approach is: Fundamentals first / Then technicals.

To learn more, explore what Technical analysis is and how it works in our Knowledge base.

Top-down and bottom-up analysis

Both represent different angles for identifying an asset's value.

With the top-down approach, the research starts at the macroeconomic level. Investors look at global trends and metrics, including GDP, inflation rate, and interest rate. Then they narrow their focus to a single country and industry, ultimately identifying a company that has solid fundamentals and could potentially outperform its industry and the market.

Conversely, in the bottom-up approach, research starts with a single company by reviewing its financial statements and studying various aspects of the business — for instance, its management team and environmental record.

The bottom-up approach is more common in fundamental analysts. However, both top-down and bottom-up heavily rely on corporate reports.

For example, studying a single company by examining its EBITDA, Gross Profit, and other financial metrics may provide an investor with valuable insights about the company. They can learn how it performs over time under different conditions, and what its chances are of surviving in the long run.

As with most things in trading and investing, both of these methods compliment each other. With the top-down approach, you may discover a company you would never have known about if not for narrowing your search to that industry and region, while bottom-up analysis can help you better understand a company and whether or not it's worth your capital.

Global economy, industry and company analysis

These are the three levels of a top-down analysis. They represent the steps to follow when looking for a promising company.

When going top-down, investors start with the Global economy, trying to spot global trends. They may begin with global inflation, unemployment, and government debt to GDP ratios, then continue their research by examining other data or narrow down to the industry level.

When exploring an industry, investors look at its lifecycle, market size and growth potential, and many other factors. They may compare industries by how they compete with each other for customers and geographic regions.

At this level, investors gather a wide spectrum of intelligence about regulations that create barriers for new companies to emerge and for established ones to thrive.

On the company analysis level, investors study a company's financial statements to make informed decisions about their future capital allocations.

Quantitative and qualitative analysis

Quantitative analysts develop their investment strategies based on numbers derived from corporate statements. They are usually less interested in the company itself, its product line, or management, while financial ratios take center stage.

Qualitative analysis is the complete opposite. It is impossible (at least for now) to calculate things such as a business's long-term goals, the impact of management style, the ethical standards a company adheres to, and other subjective information that greatly impacts the life within a company and its position among competitors.

Financial statement analysis

Financial statement analysis is a quantitative, bottom-up approach. It is performed by investors and a company's management to evaluate business performance, determine whether it aligns with the business model, and assess the likelihood of the company's ability to scale by financing its operations in the future.

International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) outline the main rules for how companies should report their income and expenses.

These two standards define the structure of financial statements to ensure transparency and consistency in a business's operations. They also set clear components for the income statement, balance sheet, and cash flow statement.

Public companies face much stricter reporting requirements and must follow accrual accounting, while private companies are more flexible and can use either accrual or cash accounting methods.

Two key components of qualitative analysis

Competitive Position

The end goal of competitive position analysis is to determine the sustainability of a business relative to its competitors.

Competitive position analysis uses various approaches to evaluate how well a company is positioned in its industry, including how defensible its market is against new entrants and how efficiently it operates within that market.

It can also provide insights into the company's potential for long-term stability and its readiness for change.

In short, competitive position analysis:

  • Follows a bottom-up approach
  • Can be explored from both qualitative and quantitative angles
  • Is a part of both company- and industry-level analyses

"If you think you don't have competitors, you're either not looking hard enough or you don't understand your market," said Reid Hoffman, LinkedIn co-founder and venture capitalist.

Two of the most reputable theories that can greatly help you understand this crucial component of fundamental analysis are Porter's Five Forces and Economic Moats.

The first helps investors to validate an industry's attractiveness and profitability. The second, promoted by Warren Buffett, helps define a company's durability and the advantages that protect the business from its rivals in a highly competitive environment.

Business model

The business model informs investors about the company's income-generation strategy, target markets, and projected future expenses to sustain growth.

There's no complete list of business models to choose from — potentially, their number is infinite, as new technologies and markets continue to emerge.

There are nine components, or blocks, included in every business model:

  • Customer Segments
  • Value Proposition
  • Channels
  • Customer Relationships
  • Revenue Streams
  • Key Resources
  • Key Activities
  • Key Partnerships
  • Cost Structure

Each of these components can be changed, so it alters the model.

Every business has its own model, which defines its core customers and relationships with them, distribution channels, and other key elements. Precise adjustments to any of these blocks often occur when a business has to shift its focus from one area to another.

For example, Netflix started as a video rental business but later began offering streaming services.

The two aforementioned theories — Porter's Five Forces and Economic Moats — are influential strategic frameworks used in modern fundamental analysis to evaluate industry structure and company competitiveness.

By studying a company using both frameworks, an investor can map out the strong and weak points of an organization's business model and assess whether its operations correlate with it, compare the company's prospects with those of its rivals, and evaluate the business's potential profitability.

Fundamental analysis of cryptocurrencies

There are two different types of fundamental analysis of cryptocurrencies — tokenomics and valuation frameworks. Like the broader market, crypto is also affected by regulations and news. However, as cryptocurrencies are distributed across the blockchain, which is an open and web-distributed ledger, coins and tokens are observed differently from the traditional companies and their stocks.

To perform tokenomics analysis, investors use tools like the Crypto Coins Screener to sort coins by unique metrics such as daily active addresses, total value locked (TVL), circulating supply.

Benefits and limitations of fundamental analysis

It all may seem reasonable — undervalued and overvalued companies, diverse business models, accounting principles, and a plethora of financial metrics. But as "nothing vast enters the life of mortals without a curse," fundamental analysis may appear overcomplicated and perhaps not fully reliable and here's why.

First, fundamental analysis relies on past data, which must be extrapolated into the future. This may result in using outdated and unreliable data for the current situation in a world of rapid change.

Second, investors must acknowledge that a company may not be fully transparent in its filings.

Third, there are just too many metrics. Investors can hardly examine all of them thoroughly enough to be completely confident in their decisions.

Fourth, it's highly energy-consuming.

Fifth, unlike technical analysis, fundamental analysis does not account for market sentiment, which plays a crucial role in investment decisions.

None of this implies that fundamental analysis doesn't work. However, by choosing one set of rules for stock and business evaluation, analysts may disregard others that could be more appropriate for a particular company under specific circumstances.

Also, during tectonic shifts like the Tariff Wars, reaffirming a strategy without adapting it may lead to misleading conclusions and, ultimately, wasted time — especially if the anticipated changes fail to materialize.

TradingView fundamental analysis tools

As we've mentioned, financials and technicals are often used together by traders and investors.

TradingView indicators can display both technical calculations and financial data right on the Supercharts. You can choose to display them next to the stock price and integrate both approaches into your analysis.

Also, Supercharts can display corporate events such as earnings reports, stock splits, and dividends reports. 

Further, you can easily access the latest news on a selected symbol without the need to switch tabs.

After you learn how to configure your Supercharts, you'll be able to adjust them accordingly to fit your trading style.

With the Economic Calendar, track recent and upcoming events that impact the global economy, or narrow down your search to a particular region.

TradingView News Flow can help you keep up with rapid changes and corporate activities.

The bottom line

Fundamental analysis is the primary method used to evaluate a company's past performance and assess its durability during market storms. It can be applied to both private and public companies, as well as to other financial instruments such as cryptocurrencies, exchange-traded funds, and others.

Financial statements in fundamental analysis serve as the main source of information. They reflect the company's performance within its industry and how its business model aligns with its business goals.

Management style and corporate culture help investors assess whether a business will survive and reach its targets in intense competition.

Both qualitative and quantitative data are used to estimate a business's performance and project its future capabilities to scale.

Regulations and rivals' actions, driven by the emergence of new technologies in a fast-paced environment, are key factors affecting a company's operations. This is due to the potential for optimizing manufacturing and product delivery.

Businesses with solid economic moats have proven to be more stable and attractive to investors seeking reliable returns.

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