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The basics of fundamental analysis

It is generally considered that there are two different types of fundamental analysis methodologies or what we call ‘schools of fundamental analysis’. These two schools are bottom up fundamental analysis and top down fundamental analysis.

Bottom up fundamental analysis

Bottom up investing is an investment approach that focuses on the analysis of individual stocks or other assets. It can be seen as going to a garage and taking a look at a car from underneath. When you perform bottom up fundamental analysis you look at asset-specific information, or what we call micro drivers, rather than at macroeconomic factors. You can for example look at every individual stock within a certain industry.

If you were to look at a company from a bottom up perspective and if you were searching for company specific information, you could for example ask the following questions:

Looking at earnings, you could ask: What does the earnings stream of the company look like? Are they making money or losing money? What is the trend in their earnings stream? Are their earnings decreasing or increasing over time?

Looking at profit margins, you could ask: Is the cost of the raw materials that they use for manufacturing their goods rising or falling? And is that affecting the company’s profit margins?

Looking at the balance sheet, you could ask: What does the company’s balance sheet look like? Did they have to go into debt to start and maintain their business? And what does the debt servicing cost look like? Is it a heavy burden, is it a light burden? Do they have any debt? Do they have no debt?

These questions and their answers will provide you with very company specific information.

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