Stage One: Macroeconomic Indicators

The dynamics of the gross domestic product (GDP) of the country where the company is located. GDP is the value of all goods and services sold in that economy. If it is growing steadily, it is a positive signal – the country is developing and the national currency is getting stronger. This is an important indicator: a currency depreciation can “eat” part of the profit from assets in this currency.

To simplify the understanding of the situation, the faster the GDP grows and the more stable the situation in the economy, the more money is injected into the stock market and the more chances to make money on it. If things are not going well in the country, the markets fall and the chance to lose grows.

Central bank prime rates. They reflect the cost of money in the economy, the availability of credit and consumer demand. When interest rates are low, stock prices rise because businesses can borrow cheaply and invest in production. In addition, domestic demand grows – the products of companies are more actively bought.

Unemployment rate. High unemployment creates uncertainty about the future and negatively affects consumer demand. This means that it becomes more difficult for enterprises to sell their goods. At the same time, excessively low unemployment makes the labor market uncompetitive, companies cannot attract good specialists, which affects their efficiency.

News. Wars, revolutions, natural disasters obviously have a negative impact on the market of the country in which they occur. However, the interrelationships of businesses, industries, and economic factors are not always obvious. For example, war in the Middle East pushes up the Russian economy. When a crisis occurs in oil producing countries, supply falls, oil prices rise, and Russia and other oil producing countries gain additional revenue from barrel sales. At the same time, the coronavirus has a negative impact on U.S. stocks: a large number of U.S. factories are located in China, and they were not working due to quarantine.

Based on macroeconomic indicators, it is worth evaluating the market and the industry as a whole. If a country’s economy or industry is feeling bad, investing can be extremely risky.

Step Two: Industry Analysis

Even in an economically successful country, there can be, say, a drought that destroys crops, leaving the agricultural industry in crisis. And, for example, international sanctions can have a negative impact on banks and industries related to foreign trade.

The state of industries can be categorized as follows:

Crisis. Characterized by a sharp decline in production.
Depressed. The state of stagnation, unclear prospects of companies.
Stable. An industry with steady and promising growth, above the national average.
Promising. Great development potential, investments under clear, targeted comprehensive programs.
Growing. High profitability, enterprises’ capacities are fully utilized, no problems with sales.
Third level: Company’s indicators

The lowest level of fundamental analysis is the study of the company’s indicators. You can find them on the websites of joint-stock companies in their periodic activity reports. Every PJSC publishes them, it is a legal requirement.

It should be noted that capital (value of all assets) and capitalization of companies (total value of all shares) are different values. An approximate equality of these indicators should be considered optimal for most companies. If they are drastically different, it is very likely that the company is undervalued or overvalued.

The IT industry is an exception. A company may have a couple of laptops and a printer on its balance sheet, but due to a breakthrough idea and a popular product, its capitalization will exceed the value of its assets several times over. In other cases, an undervalued company may be attractive for investment, while an overvalued one may disappoint. But the final conclusion can be made only after a thorough evaluation.

Investing in a large international company may be less profitable than in a small startup. Profit depends not on the size, but on the efficiency of the business.

To assess the investment attractiveness of a business, investors use special financial indicators – multiples.

Price / profit ratio (P/E multiple)

It is calculated as follows: capitalization (i.e. the stock exchange value of the company) should be divided by net profit for the calendar year. The result is the profitability of the company. If the multiplier is equal to, for example, 5, it means that the company will pay off in five years if the current profit level is maintained.

Small values of the coefficient signal that the company is undervalued, while large values signal that the company is overvalued. Assessing the “normality” of this ratio is quite subjective and based on common sense. It is obvious that no investor will wait for 100 years, and the company is overvalued, while a figure of 3-5 for a large business indicates undervaluation. For the Russian market, the average figure fluctuates around 6-7 years, but this only indicates that it is undervalued.