Valuation by flow discounting.
Valuation of stock exchange indicators. Balance sheet analysis. To this diversity of analytical techniques must be added the diversity of sectors listed on the stock exchange (banking, electricity, real estate, insurance, construction, etc.), which means that it is difficult to speak of general principles, since the same valuation and analysis criteria do not apply to all sectors. Therefore, it is not possible to talk about fundamental analysis methodology, but rather about different submethodologies depending on the analyzed and valued sector.
However, one should not forget that although the instruments of analysis are the same for the same group of companies, strategic analysis may be very different. For example, the analysis of a cement company is not the same as that of a metallurgical sector. This even applies to companies from the same sector, as, for example, they may have very different degrees of differentiation. It is commonly accepted that discounting flows is the most appropriate method of valuation, because it takes into account the value of money in time. However, it is good to try to calculate the intrinsic value using different methods, as this can give a more realistic value that does not depend on the assumptions of one model.
Valuation – Two types or approaches to analysis
The fundamental analysis of companies covers a wide range of techniques and approaches. Different economies, markets and sectors are studied. But it is also important to carry out an in-depth analysis of individual companies, i.e. to examine their market position, strengths and weaknesses and financial structure. All this is done in order to try to determine the prospects of their activities, calculate their intrinsic value and thus be able to provide an investment recommendation. However, the analyst’s subjective judgment and objective or numerical analysis (the result of complex calculations) are always linked. And this is where the added value lies in the analysis, in the ability to interpret the objective and, what is more difficult, in the ability to assess the value objectively. Depending on the perspective you want to use for analysis, there are two methods or approaches: analysis and analysis.
The first approach, or top-down analysis, is to move from the most global to the most specific. In other words, to move from a macro-economic study to a company study. In this way, the decision-making process starts in a global context, then becomes more concrete and finally comes to a conclusion about the company to be analyzed. This approach attempts to determine which sectors are most favoured by the current economic situation. In other words, what are the “root causes” that motivate sectors to behave in a particular way. A top-down approach is particularly useful for portfolio managers who have to make global investment decisions and therefore have to make comparisons between sectors in different countries.
Depending on the perspective from which the analysis is to be conducted, another possible approach is the bottom-up approach. Unlike the previous approach, the analysis starts with the individual (in some cases general conclusions can also be drawn). In fact, good investment opportunities are sought. Neither the economic situation of the country nor the attractiveness of the sector is relevant (as it is considered that the value retention of the sector is not homogeneous). It is the concept of value analysis that prevails.