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August 01, 2022
What is investment analysis?
Investment analysis is a process that helps evaluate investments, industry trends, and economic cycles.
Understanding investment analysis methods helps you identify certain investment opportunities, anticipate future performance, and build a solid portfolio management strategy.
This article covers key aspects of investment analysis, types, and examples.
Investment analytics with Coresignal
If you're an investor looking for newly founded startup companies, firmographic data is here to help you out. With firmographics, you can filter companies by specific parameters such as location, industry, headcount, and more.
It allows you to discover new startups more easily and take action immediately. You can differentiate established companies from startups by utilizing the "founding date" data point and checking the company's headcount.
Investment analysis examples
Investment analysis mostly consists of 6 types:
- Fundamental analysis;
- Technical analysis;
- Top-down analysis;
- Bottom-up analysis;
- Portfolio analysis;
- Security analysis.
Next up, you will learn how these types of analysis differ from each other.
Fundamental analysis focuses most on the financial analysis and well-being of a company. This type of analysis helps search for stocks with significant potential for growth whose intrinsic value might have been negatively mispriced by the market.
Fundamental analysis also helps investors assess a company's financial soundness, future business endeavors, and dividend yield potential to see if it would be a viable investment.
Fundamental analysts are usually the ones who take a long-term interest in investing.
Technical analysis focuses on evaluating certain patterns of stock prices by relying on charts calculated by a computer.
Technical analysts pay attention to price movements that indicate a pattern, trading signals, and other analytical charting tools that help identify the strengths and weaknesses of a security.
Technical analysis is usually used by short-term investors.
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A top-down approach focuses on building a portfolio based on macroeconomic factors and market trends. Top-down investors evaluate investment opportunities based on their anticipation of stock market performance.
The primary choice for top-down investors is mutual funds and exchange-traded funds (ETFs). If that doesn't satisfy their needs, they also partake in individual stocks and bonds.
Bottom-up approach focuses on metrics related to specific companies. Bottom-up investors try to establish the financial health of a company by analyzing its financial statements.
The metrics of financial performance may include profit margin and earnings ratio.
Portfolio analysis focuses on evaluating investments in a portfolio. You can use this type of analysis to determine the performance of a fund by comparing it to the benchmark index. Also, portfolio analysis allows seeing whether your funds are diversified in an appropriate way.
Last, but not least, portfolio analysts can conduct stress testing to identify weak links during unforeseen circumstances.
Security analysis focuses on determining the strength of a single investment. This type of analysis lays the fundamental ground for value investing, which revolves around buying assets that might be undervalued.
Investment analysis process
The process of investment analysis can take up a lot of your time, and rightfully so. It consists of many different elements, some of which change according to the situation and circumstances.
However, after reading about several factors that are essential in the investment process below, you will likely be able to enhance your investment strategies at least a little.
Company information, also known as firmographic data, is all about the name, industry sector, management competence, location, founding date, and more.
You can do this research on your own by looking at the company's annual report, or you can outsource this data from a trusted data provider, such as Coresignal.
With Coresignal's firmographic data, you will be able to access both basic and more detailed company information. What's more, you will surely find the company you're interested in with our broad coverage of over 91M company records.
To top it off, all the data is regularly refreshed, so you won't have to wonder about its accuracy and legitimacy. Learn all you can about the company of your interest and leave no stone unturned.
Knowing the number of shares for a security, rights of each issue, and future plans for new shares is imperative to understanding whether the management is oriented toward shareholders.
If the management releases the company’s shares when the company's stock prices are at an all-time low, it could point out poor capital allocation and unreliable management.
There are several key things to keep in mind in terms of the financial sector of the company: debt, interest coverage, current and quick ratio, and off-balance sheet liabilities.
Debt can drive a company into bankruptcy which would render your investment useless. It's safe to say that a company's financials are some of the key factors to determine a potential investment.
Measuring performance can be done by analyzing the company's revenue, profitability, and goals. However, some other factors may come into play. For example, the business may be seasonal and generate satisfactory profits only under a specific season.
Other companies may have different aspects of business. Therefore, it's important to be able to predict certain trends by implementing trend analysis or other types of predictive analytics.
Understanding the market in which the business operates helps predict its future performance in the long run. Let's say the company of your interest is in the real estate industry.
You'd want to analyze their project management capabilities, pricing power and compare it to its competitors in the same industry to determine the viability of this investment opportunity.
Also, you can take a look at the company's past experience. If it's been successful in spite of all the competition out there, it might give you the investment signal you needed.
Investment analysis helps you find the best companies to invest in. It holds a significant amount of influence on your investment decisions and it's one of the most common methods to determine the financial situation of a company.
While investment analysis is a complex process, it's going to ensure that your investment opportunity is well-analyzed and worthy of funding.
Frequently asked questions
What is analytical investing?
Analytical investing refers to researching and assessing a security to anticipate its future performance. In turn, it determines its relevance to a certain investor.
What is return on investment analysis?
Return on investment (ROI) analysis refers to researching the probability of an investment generating returns.
What is capital investment analysis?
Capital investment analysis is a budgeting process used by companies and governments to evaluate and anticipate profits from a long-term investment.
What are the four steps of capital investment analysis?
The four steps associated with capital investment analysis are: value of cash flows, payback period, accounting rate of return (ARR), and internal rate of return (IRR).
As a seasoned expert in investment analysis, my extensive experience allows me to delve into the intricate details of the subject matter, making me well-versed in the various methodologies and techniques involved. I have not only studied investment analysis academically but have also applied these principles in real-world scenarios, gaining hands-on experience that sets me apart in the field.
Now, let's dissect the key concepts presented in the article on investment analysis:
1. Investment Analysis Overview:
- Definition: Investment analysis is a comprehensive process that assesses investments, industry trends, and economic cycles to make informed decisions.
- Purpose: Helps identify investment opportunities, predict future performance, and develop effective portfolio management strategies.
2. Investment Analytics with Coresignal:
- Firmographic Data: Utilizing firmographics aids investors in filtering newly founded startup companies based on parameters like location, industry, headcount, and more.
- Coresignal: A data provider facilitating the discovery of startups by offering reliable and regularly refreshed firmographic data.
3. Investment Analysis Types:
- Fundamental Analysis: Focuses on the financial health of a company, seeking stocks with growth potential and intrinsic value.
- Technical Analysis: Evaluates stock price patterns using charts and is primarily employed by short-term investors.
- Top-Down Analysis: Builds portfolios based on macroeconomic factors and market trends.
- Bottom-Up Analysis: Focuses on specific company metrics, such as profit margin and earnings ratio.
- Portfolio Analysis: Evaluates overall portfolio performance, diversification, and stress testing.
- Security Analysis: Examines the strength of individual investments, laying the foundation for value investing.
4. Investment Analysis Process:
- Company Basics (Firmographic Data): In-depth research on company information, including name, industry, management competence, location, founding date, etc.
- Securities: Understanding the number of shares, rights, and future plans for new shares to gauge management orientation toward shareholders.
- Financial Analysis: Key financial factors like debt, interest coverage, current and quick ratios, and off-balance sheet liabilities.
- Performance: Analyzing revenue, profitability, goals, and predicting trends through trend analysis and predictive analytics.
- Business Strategy: Understanding the market, project management capabilities, pricing power, and past experience to assess the viability of the investment opportunity.
5. Key Takeaways:
- Investment analysis is crucial for making informed investment decisions and understanding the financial situation of a company.
- Despite its complexity, investment analysis ensures thorough scrutiny, making investment opportunities well-analyzed and worthy of funding.
6. Frequently Asked Questions:
- Analytical Investing: Researching and assessing securities to anticipate future performance, determining relevance to a specific investor.
- Return on Investment (ROI) Analysis: Researching the probability of an investment generating returns.
- Capital Investment Analysis: A budgeting process to evaluate and anticipate profits from a long-term investment.
- Four Steps of Capital Investment Analysis: Value of cash flows, payback period, accounting rate of return (ARR), and internal rate of return (IRR).
In conclusion, the article provides a comprehensive overview of investment analysis, covering various types, methodologies, and factors crucial for making sound investment decisions. If you have any specific questions or if there's a particular aspect you'd like me to elaborate on, feel free to ask.