Investment Analysis

Article byMilan Jha
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Investment Analysis?

Investment Analysis is the method adopted by analysts to evaluate the investment opportunities, profitability and its associated risks in their portfolio. It helps them to determine whether the investment is worth it or not.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Investment Analysis (wallstreetmojo.com)

It includes steps like gathering data from reports, financial statements, and economic indicators and then analyzing them to interpret the percentage return and the possible risk from such investments. It also aims at reducing and managing risk so that investors can make decisions regarding whether they should put their money in it to meet their financial needs and goals.

Key Takeaways

  • Investment analysis involves assessing and evaluating various factors to make informed investment decisions.
  • Fundamental analysis focuses on evaluating a company’s financial health, industry trends, and economic conditions to determine the intrinsic value of a stock.
  • Technical analysis involves studying price patterns, trends, and market indicators to identify potential investment entry and exit points.
  • Risk management is a crucial aspect of investment analysis, and it involves assessing and mitigating potential risks associated with investments.

Investment Analysis Explained

Investment analysis is the method in which analysts evaluate an investment opportunity in terms of their profitability, risk, and return. Such analysis not only helps financial advisors and investor take decisions regarding putting money on them but also help the entities identify and designing profitable opportunities that can be used to raise money from the general public to finance their operational needs.

This kind of analysis is done using financial statements, economic data and indicators, and other useful reports published by companies and the government occasionally. It is crucial that the data gathered should be relevant and shpow the actual picture. Otherwise the possible risk and return will be miscalculated.

Various mathematical and financial models are used for return on investment analysis. These models consider some historical and current data and other important factors. This analysis not only identifies but also reduces or manages risk that arise due to various factors like inflation, market volatility, political unrest, etc. It is always better to analyze an opportunity to understand whether it is really worth investing in it or not.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Types

Now let us look at the different approaches to investment analysis that experts do.

Investment Analysis

#1 – Bottom-Up

The bottom-up analysis focuses on an individual company in which the investment is to be made. This helps the small investors to focus and plan their investment in a particular selected company rather than studying the entire market for investment purposes. It is a conservative approach but on the other hand, helps the investors in taking the right decision.

#2 – Top-Down

Top-Down analysis, investors are required to study the entire market. Generally, big investors are interested in this type of strategy. The focus is entirely on the big markets and, not on the small companies. It is a comparatively broader approach than any other investment analysis.

#3 – Fundamental

It is a traditional method in which analysis is done by finding out the Fair market value of the investment, and by that, the investor decides whether to buy the stock of the company or not. It is yet another excellent and effective method of analyzing investments and evaluating the return on investment analysis.

#4 – Technical

This method is used to determine and identify the trading opportunities by observing the statistics of the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more. The experts give guidance about when and where to invest in increasing the returns.

Factors To Consider

It is a very complex procedure and involves many approaches to investment analysis that are considered. Given below are some important factors that are considered in the process.

Company Data – Company data or the financial reports are the most important source of information for evauating the investment decision because it helps to understand the financial condition of the company. It includes various factors like revenue, profits, debts, cash flow, etc.

Sector Trend – It is always necessary to understand the trend of the sector in question. It will give a clear idea about which way the growth opportunities may arise or the company may face any kind of resistance. It helps investors identify positions that they can take advantage of.

Level Of Competition– The competition environment is very important since it will give an idea about where the company stand in terms of revenue, profits, risk, expenses, etc. It will also point out the benefits and limitations of the business and the industry as a whole, its future trends and current market conditions. Thus, peer comparison is very important.

Company Regulations– The rules and bylaws of the company are essential becausethey have a significant impact on the growth, operations and profitability of the company.

Management – The management team is the one who drives the entity towards its future endeavors and risk-taking and also handles the current conditions. Their skill, experience, previous track record, risk-taking ability, and planning methods matter a lot in taking the company forward toward a successful path.

Economic Conditions– The economic condition of the country like inflation, interest rate, the employment levels, political conditions, etc also decide the financial performance of an entity. Thus, if these factors show a negative sign, it affects the company performance. Investors tend to stay away from such organizations.

Valuation Metrics– They help in understanding whether the entity is over or undervalued or has a fair valuation because that will affect the stock prices. Metrics like price to earning ratio, debt to equity ratio, Return on equity, Return on capital employed, free cash flow per share, etc are sed for the same.

Examples

Fundamental investment analysis can be different for different people here. We take the example of two individuals and their investment goals.

A 23 years old woman who works in an MNC wants to understand her investment plans. She will hire an expert for the same. The expert may advise her to invest in Mutual funds or to buy individual stocks as she is in a position to take a little risk. The investment planner has to understand that she is now earning a good salary per month so she will be able to contribute some money as an investment. Therefore, she can act as an aggressive investor. The idea of making this investment analysis is to make her understand the future benefits of savings and also to invest wisely.

On the contrary, if an expert is asked to make an investment plan for a 70 years old man who is a retired bank manager, then the strategy will be absolutely different. The older man is basically concerned about the stability in his finances. He is more likely to save and invest in riskless securities.

He can’t act as an aggressive investor; he will be more conservative in his approach. Now the investment analysis should be such that the old is required to invest in fixed deposits, government bonds, also in some retirement benefits schemes which may happen to get matured by that time. The financial advisor should defiantly work for the betterment of the client as per their choices and convenience.

Therefore, it is always advisable to make wise investment decisions at the peak of your career so that we can get more benefits from the same.

Advantages

Here are some of the benefits of analysing the potential investment avenue.

Disadvantages

Even through it has many benefits, some of the limitations of the process should also be taken into account.

  • It requires investment plans, and they are somewhat complicated; also, it needs a whole lot of financial knowledge. Some small investors or medium investors cannot do justice with the same, and hence they may end up making the wrong decisions and also may incur huge losses in place of gains.
  • It requires knowledge, and sometimes risk-aware investors appoint experts for the same. The experts give them proper guidance but the expert charges fees for the same. This can become an additional cost for many small and medium investors.
  • When an individual is trying to have financial planning, he should determine the market risk, which is not predictable. No one in this world, not even the finance mister can predict the exact amount of risk that can be involved in any transaction. Therefore, there are unavoidable risk factors associated with investment analysis.
  • Government policy can be a hamper in this financial investment analysis if this factor is not taken into account.

Frequently Asked Questions (FAQS)

What is a capital investment analysis?

A capital investment analysis, or capital budgeting or investment appraisal, is used to evaluate potential investment projects or expenditures to determine their financial viability and impact on a company’s long-term financial health. It involves analyzing a specific investment opportunity’s costs, benefits, and risks.

What are some standard investment analysis tools?

Various tools and resources are available for investment analysis, including financial statements, industry reports, economic indicators, valuation models, technical analysis charts, and research platforms. These tools can provide valuable insights into investments’ performance, valuation, and potential risks.

How to do a return on investment analysis?

Performing a return on investment (ROI) analysis involves assessing the profitability and efficiency of an investment. Here’s a general outline of the steps in conducting an ROI analysis, including defining the investment goal, identifying the costs, determining the gains or returns, calculating the net investment, evaluating the ROI, and considering additional factors.

This has been a guide to What is Investment Analysis and its Definition. Here we discuss investment analysis types along with examples, advantages, and disadvantages. You can learn more about investments from the following articles –