TradingKey -The Trump administration's tariff policies have eroded confidence indices for U.S. businesses and consumers, leading to increased caution among global investors regarding the U.S. market. Simultaneously, a weaker U.S. dollar and declining Treasury yields have influenced global trade dynamics, affecting business operations and stock performance. Changes in the macroeconomic environment can significantly impact stock market trends. This article will detail how to conduct a fundamental analysis for stock investments.

Fundamental analysis involves researching and assessing the key factors that influence stock values and pricing. It covers crucial aspects such as a company's financial status, market position, industry trends, and the macroeconomic environment. By analyzing these elements thoroughly, investors gain insights into a company's intrinsic value, assess whether its stock price is reasonable, and make informed investment decisions.

Components and Fundamentals of Financial Statements

Financial statements provide a comprehensive overview of a company's financial activities and health over specific periods. These documents serve critical stakeholders—investors, management, and regulators—by offering actionable insights into financial performance and strategic decision-making.

Three interconnected statements form the core of financial reporting, each offering unique perspectives on corporate finances:

Balance Sheet

The balance sheet, also known as the statement of financial position, provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time. It complies with the accounting equation, ensuring that total assets equal the sum of liabilities and equity.

Assets are resources owned or controlled by a business that can generate future economic benefits, including cash, accounts receivable, inventory, and fixed assets.

Liabilities represent present obligations of the enterprise expected to result in an outflow of economic benefits, such as short-term loans and accounts payable.

Owners' equity reflects the residual interest in the assets of the enterprise after deducting liabilities, encompassing share capital, additional paid-in capital, retained earnings, and undistributed profits.

Through the balance sheet, investors can gauge a company's asset size, debt level, and composition of owners' equity, allowing them to assess its financial strength and solvency.

Income Statement

The income statement is a report that summarizes a company's operating results over a specific accounting period, detailing its revenues, costs, expenses, and profits. 

Operating revenue represents the inflow of economic benefits generated by the enterprise from selling goods or providing services. 

The cost of goods sold (COGS) refers to the direct costs associated with producing the goods that generate operating revenue. 

Period expenses include administrative, selling, and financial expenses. This statement is essential for illustrating the company’s ability to generate profit and effectively manage its expenses. Investors analyze the income statement to assess a company's operational efficiency and potential for future profitability.

The cash flow statement tracks the inflows and outflows of cash within a business, categorized into operating, investing, and financing activities.

Cash flows from operating activities reflect the cash receipts and payments associated with a company's core business operations.

Cash flows from investing activities indicate the cash movements related to the acquisition and construction of long-term assets and external investments.

Cash flows from financing activities represent changes in cash resulting from equity or debt financing, debt repayment, and dividend distributions.

The cash flow statement emphasizes the movement of cash within the company, helping to assess its liquidity and ability to meet financial obligations. This statement is essential for understanding a company's cash position and operational viability, as it reveals how the company generates cash to fund its operations and growth.

Key Financial Ratios Decoded

Current Ratio

Formula: Current Assets ÷ Current Liabilities

Measures short-term debt coverage. While higher ratios indicate stronger liquidity, excessively high values may signal inefficient capital utilization.

Debt-to-Asset Ratio

Formula: Total Liabilities ÷ Total Assets ×100%

Assesses financial leverage and long-term solvency. Lower ratios suggest reduced risk, though industry norms vary (e.g., real estate typically operates with higher leverage).

Return on Equity (ROE)

Formula: Net Income ÷ Average Shareholders' Equity ×100%

A vital profitability metric reflecting capital efficiency. Consistently high ROE often signals competitive advantages and growth potential.

Analytical Techniques

When analyzing financial statements, it's essential not only to focus on the absolute values of various financial data but also to pay close attention to the trends of data changes and the interrelationships among them. Meanwhile, key information in the footnotes to the financial statements should never be overlooked.

Analyzing the Trends of Financial Data Changes: Take a listed company as an example. Observe the trends of key indicators such as its operating revenue, net profit, and gross profit margin over the past five years. If the operating revenue steadily increases year by year, the net profit rises accordingly, and the gross profit margin remains relatively stable, it indicates that the company has a good business development momentum and strong market competitiveness. Conversely, if the operating revenue declines, the net profit drops significantly, and the gross profit margin continues to fall, investors need to conduct an in-depth analysis of the reasons. It could be due to factors such as intensified market competition, increased product costs, or faulty business strategies.

Extracting Key Information from the Footnotes to the Financial Statements: The footnotes to the financial statements are detailed explanations and supplements to the main body of the statements, containing a wealth of important information. For instance, an enterprise may disclose significant related-party transactions in the footnotes. If a company has frequent and large-value transactions with related parties, investors should pay attention to the rationality and fairness of these transactions and determine whether there are issues like improper transfer of benefits. In addition, the footnotes may also include explanations of accounting policy changes, contingent matters, etc. Such information can have a significant impact on the company's financial position and future development. Investors need to study them carefully to evaluate the company's value more comprehensively and accurately.

In the fundamental analysis of stock investments, assessing a company's market position is a critical aspect of evaluating its investment value. A company's standing in the market reflects not only its current competitiveness but also its future growth potential, directly influencing the long-term investment value of its stocks. Below, we will explore how to evaluate a company's market position from multiple dimensions, including industry analysis, market share, brand influence, and product uniqueness.

Industry Analysis

Industry Scale and Growth Trend: The industry scale represents the overall size of the industry within the economic system, serving as an important basis for judging the industry's development space. For example, in recent years, the scale of the new energy vehicle industry has expanded rapidly. Globally, its sales volume and market value have been continuously rising, indicating that this industry has broad development prospects. The growth trend, on the other hand, reflects the industry's vitality and potential, acting as a significant driving force for the future performance growth of enterprises.

Market Share

A high market share often implies that an enterprise has advantages in multiple aspects. Firstly, the effect of economies of scale is remarkable. Enterprises can reduce unit costs through means such as large-scale raw material procurement, centralized production, and unified distribution. Secondly, a high market share helps enhance the enterprise's brand awareness and reputation. Consumers generally tend to choose brands with a larger market share, believing that their product quality and after-sales service are more reliable.

Brand Influence and Product Uniqueness

Brand Influence: Brand influence is a comprehensive manifestation of consumers' recognition, trust, and loyalty towards a brand. A strong brand influence enables an enterprise to gain higher visibility and reputation in the market, attracting more consumers to purchase its products or services, thus expanding its market share.

Product Uniqueness: Product uniqueness refers to the unique advantages that an enterprise's products or services possess compared to those of its competitors, such as innovative technologies, unique designs, and personalized services. Products with uniqueness can better meet consumers' personalized needs, attract their attention and purchases, and help the enterprise gain a competitive edge.

Importance of Economic Indicators

Economic indicators are essential for businesses, investors, and policymakers. They help assess current conditions, forecast future trends, and guide spending and investing decisions. For instance, a strong retail sales report can signal increased consumer spending, which often leads to growth in the stock market, particularly for consumer-oriented companies. Conversely, weak sales may indicate a slowdown, negatively impacting stock prices and investor sentiment.

Key Economic Indicators

Gross Domestic Product (GDP)

GDP is a fundamental economic indicator that represents the total value of all goods and services produced by a country. As a lagging indicator, it provides insights into economic performance. Theoretically, GDP growth typically signifies economic expansion, leading to increased sales and profits for businesses. Consequently, investors, anticipating growth in corporate earnings, are likely to buy stocks actively, driving stock prices higher.

However, the relationship between GDP and stock prices is not simply positive. Rapid GDP growth can trigger inflationary pressures, prompting the government to implement tightening policies that increase operational costs for businesses and curb investment and consumption, thereby impacting the stock market. Additionally, the stock market is influenced by factors such as investor sentiment, meaning that even with strong GDP growth, stock prices may still decline.

Unemployment Rate(UR)

The unemployment rate serves as a barometer for labor market conditions. Low unemployment generally indicates a healthy job market and higher consumer spending, which can positively influence stock prices. In contrast, high unemployment may signal economic distress, reducing consumer confidence and spending, leading to potential declines in corporate profits and stock performance.

Inflation Rate

Moderate inflation can stimulate the stock market. During mild inflation, economic activity increases, leading to higher product prices and profits for companies, which attracts investors and boosts stock prices. Additionally, an expanded money supply brings more funds into the stock market, further driving up prices.

However, excessively high inflation has negative effects. It reduces the real purchasing power of money, curbing consumers' spending power. Production costs for businesses surge, compressing profit margins and lowering earnings expectations. Investor confidence is dampened, causing stock prices to decline. Furthermore, to combat high inflation, central banks may implement tight monetary policies such as interest rate hikes, raising corporate financing costs, and intensifying operational pressures, all of which are detrimental to the stock market.

Interest Rates(IR)

Changes in interest rates influence corporate financing costs, investor decision-making, and macroeconomic expectations, all of which impact stock prices. When interest rates rise, corporate financing costs increase, compressing profit margins and potentially reducing investment, leading to stock price declines. Conversely, lower interest rates reduce financing costs for businesses, fostering growth and pushing stock prices up.

From an investor's perspective, higher interest rates make fixed-income products more attractive, reducing the appeal of stock investments. This leads to outflows from the stock market and lower stock prices. The opposite occurs when interest rates fall.

Regarding macroeconomic expectations, if interest rates rise due to robust economic growth, stock prices may increase. However, if the rise is to combat inflation, stock prices may decline. Conversely, when interest rates fall as a signal of economic stimulus, stock prices tend to rise. Yet, if the cut is due to severe economic conditions, stock market performance may suffer.