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A Beginner’s Guide to Fundamental Analysis: Understanding Businesses Before Investing

When investing in stocks, it’s crucial to understand a company’s business model and key performance drivers before diving into financial ratios and numbers. This guide will help beginners learn how to analyse a company fundamentally and make informed investment decisions.

Highlights

  • 📊 Understanding financial statements aids in identifying promising stocks for investment.
  • 🔍 Focus on the business model before analysing numbers and ratios.
  • 📈 Utilise sources such as annual reports and analyses from securities firms.
  • 🏢 Importance of knowing revenue segments and performance influencing factors.
  • 💡 Avoid making investment decisions based solely on ratios.
  • 📚 Practise analysing annual reports to gain a better understanding of companies.

Why Understanding a Business Matters

Investing without knowing how a company operates can be risky. While financial ratios like Price-to-Earnings (P/E) or Price-to-Book Value (PBV) provide quick insights, they can be misleading without context. For example, low ratios may indicate a cheap stock, but if the business is poorly managed or declining, it could lead to losses or even suspension.

By understanding a company’s business model, you can:

  1. Identify opportunities and risks specific to the business.
  2. Avoid reliance on surface-level metrics that may not reflect the true value.
  3. Gain insights into industries and sectors to build a robust portfolio.

Sources of Information for Fundamental Analysis

To thoroughly research a company, use these trusted sources:

  1. Annual Reports:

    • Accessible via the IDX website (idx.co.id) or directly from the company’s website under “Investor Relations.”
    • Annual reports provide a comprehensive overview of the company’s performance, structure, and strategies.

  2. Investor Presentations:

    • These documents give a quick summary of a company’s highlights and are often available alongside annual reports on corporate websites.

  3. Broker Reports:

    • Brokers and securities firms publish analyses that include detailed discussions with management.
    • These are excellent for discovering new investment opportunities.

Steps to Analyse a Company

Here are three essential steps to start analysing a company fundamentally:

  1. Understand the Business Model:

    • Identify how the company generates revenue, what its main expenses are, and how it achieves profits.
    • For example, MAP (code: MAPA), which manages Starbucks and Burger King in Indonesia, earns by selling branded products. Its expenses include wages and store rents.

  2. Break Down Segments or Products:

    • Determine the key segments or products contributing to revenue and profit.
    • Example:
      • MAP’s revenue largely comes from specialty stores (70%).
      • For Sido Muncul, herbal products account for 60% of revenue, while food and beverages make up 30%.

  3. Identify Key Drivers:

    • Key drivers are factors that influence the company’s performance.
    • Example:
      • MAP’s performance is tied to mall visitor numbers.
      • Sido Muncul depends on consumer demand for herbal products.

Practical Example: Analysing MAP

Let’s analyse MAP as an example:

  1. Business Model:

    • MAP operates as an official retailer for international brands.
    • Revenue primarily comes from specialty stores.

  2. Segments:

    • Revenue split includes specialty stores, department stores, and others, with specialty stores contributing the most.

  3. Key Drivers:

    • Mall traffic is a significant driver for MAP’s performance. An increase in visitors boosts sales, while rising rental costs or fewer visitors could negatively impact profits.

Next Steps: Diving Deeper

Once you’ve understood the business model, segments, and key drivers, the next steps include:

  • Analysing historical performance (e.g., 10-year trends).
  • Reviewing financial ratios like growth rates, profitability margins, and leverage.
  • Comparing the company against its peers in the industry.

Conclusion

By focusing on a company’s fundamentals, you can make informed investment decisions. Start with the basics—understand the business, explore its segments, and identify what drives its performance. With time and practice, you’ll develop the confidence to analyse numbers and ratios effectively.

source: Cara Baca Laporan Keuangan Untuk Memahami Perusahaan (Analisa Fundamental Untuk Pemula)