TradingKey - The tariff policy implemented by the Trump administration in 2025 has disrupted the global economic "landscape." U.S. companies are hesitant to expand aggressively, consumers are spending more cautiously, and global investors have grown increasingly wary of U.S. stocks.
The dollar has begun to weaken, leading to declining bond yields. While these changes may seem distant from our daily lives, they quietly impact the operational status of every business—fluctuating raw material costs, international orders, and profit margins ultimately reflect in stock prices.
This is the "butterfly effect" of macroeconomics: even minor adjustments in policy can create significant ripples in the stock market.
So how can ordinary people seize investment opportunities in this complex and ever-changing market? The answer lies in "fundamental analysis."
Simply put, it’s like giving a company a comprehensive health check-up—from its revenue and profits reflected on its balance sheet to its competitive position within the industry and the broader macroeconomic environment; no detail is overlooked.
Through this analysis, you'll gain a clearer understanding of what a company is truly worth and whether its current stock price is undervalued or overvalued. This insight will help you avoid inflated traps and identify genuinely promising investment opportunities.
Next, we will break down the intricacies of fundamental analysis step by step.
What Are the Components and Basic Concepts of Financial Statements?
To understand a company's financial health, financial statements serve as an "instruction manual."
Whether you are an investor, a company manager, or a regulator, you can find key information in these reports to assess the company's financial foundation and profit-generating ability, as well as to predict its future growth potential.
Financial statements mainly consist of three key documents.
They are interrelated and present the financial position of the business from different perspectives.
Balance Sheet
First, let's discuss the balance sheet. It acts like a snapshot of the company at a specific point in time, capturing its assets, liabilities, and shareholders' equity.
Imagine opening this report: on the left side is a column listing the company's "assets": cash, accounts receivable, inventory in warehouses, and property and equipment—these are all valuable resources that can generate revenue.
On the right side is a column for "liabilities": short-term loans owed to banks and unpaid supplier invoices.
Shareholders' equity represents what remains after subtracting liabilities from assets; it reflects the true financial stake belonging to shareholders and includes items like stock capital and additional paid-in capital.
Through this statement, you can quickly gauge how substantial the company is, how much debt it has incurred, and its capacity to repay that debt.
Income Statement
The income statement records the company's operational results over a specific period.
First up is operating revenue—this refers to money earned from selling products or providing services.
Next comes operating expenses directly associated with generating revenue: costs for raw materials and wages for production workers.
Then there are period expenses such as office rent, sales promotion costs, and loan interest payments.
Finally, we focus on net profit—the actual earnings of the company after all expenses for that period have been accounted for.
By examining this statement, you can determine how strong the company's profit-generating capabilities are, whether it manages its spending wisely or extravagantly, and what potential growth opportunities lie ahead.
Cash Flow Statement
This document functions as a "cash steward" for the company by meticulously tracking cash inflows and outflows.
It accounts for everything from cash received from sales to expenditures on equipment purchases or funds raised from investors—everything falls within its purview.
The cash flow statement is divided into three sections: cash flows from operating activities show how effectively core business operations generate cash; cash flows from investing activities reflect future expenditure plans such as purchasing facilities or investing in new projects; while financing activity cash flows detail how money is borrowed or repaid by the company.
By analyzing this statement, you can determine just how much readily available cash a company has to meet its debt obligations promptly and assess whether it has sufficient momentum for growth.
(Source: Freepik)
How to Analyze Financial Ratios?
Simply looking at the numbers on a company's financial statements isn't enough; it's also important to learn a few common financial ratios and some tips for analyzing these reports.
Current Ratio
Current Ratio = Current Assets ÷ Current Liabilities
This ratio indicates how well a company can meet its short-term financial obligations.
For example, suppose a company has current assets of 1 million and current liabilities of 500,000.
In that case, its current ratio is 2, meaning that for every dollar of short-term debt, there are two dollars in current assets available to cover it.
Generally speaking, a higher current ratio indicates stronger short-term liquidity. However, an excessively high current ratio might signal inefficiency in the use of funds and could suggest that there is too much idle capital.
Debt-to-Asset Ratio
Debt-to-Asset Ratio = Total Liabilities ÷ Total Assets × 100%
This ratio reveals how leveraged a company is and illustrates the pressure it may face regarding long-term debt repayment.
For instance, if a company has total assets of 10 million and total liabilities of 6 million, its debt-to-asset ratio would be 60%, indicating that 60% of its assets are financed through borrowing.
A reduced debt ratio suggests that the company takes a more cautious approach, resulting in lower financial risk.
Conversely, while a higher debt ratio can amplify returns, it also increases the risk of falling into debt crises if the business encounters difficulties.
It’s important to note that different industries have significantly varying levels of acceptable debt ratios; sectors such as real estate or banking typically operate with higher leverage, so one should consider industry characteristics when evaluating these ratios.
Return on Equity (ROE)
Return on Equity = Net Profit ÷ Average Shareholders' Equity × 100%
Return on Equity (ROE) evaluates how efficiently a firm utilizes shareholders' equity to generate profits.
A higher ratio indicates a greater ability to generate earnings from equity capital and better returns for shareholders.
Investors tend to favor companies with consistently high ROE over time because this may reflect underlying competitive advantages such as unique technologies, brand strength, or efficient management.
Analysis Tips
Track trends in data changes to forecast signals about corporate development.
For example, when examining key metrics like revenue, net profit, and gross margin for a publicly listed company over the past five years: if revenue steadily grows year over year along with net profit while gross margin remains relatively stable, this suggests strong business development and competitive strength in the market.
Conversely, if revenue declines significantly along with sharp drops in net profit and continuous decreases in gross margin as well, further analysis is warranted.
The decline could result from intensified market competition, rising product costs or operational missteps.
Extracting Key Information from Financial Statement Notes
Meanwhile, the notes accompanying financial statements offer comprehensive explanations and additional insights about the primary reports, often revealing important, yet overlooked, details.
For instance, companies may disclose significant related-party transactions in the notes.
If you discover that a company has frequent and large transactions with related parties, it becomes essential for investors to examine the reasonableness and fairness of these transactions to determine whether there are issues such as potential conflicts of interest.
Additionally, information regarding sudden changes in accounting policies (such as adjustments in the useful life of fixed assets) or contingent events (like potential lawsuits or guarantee risks) can also be found in the notes. These seemingly insignificant details might hold immense power, similar to the butterfly effect, potentially impacting the company's future financial condition significantly.
By spending more time studying these notes, you can identify potential pitfalls earlier than others or uncover "buried treasures" that the market may have overlooked.
How to Assess Market Position?
Want to know whether a company's stock is worth investing in?
Besides reviewing financial statements, evaluating its position in the market is crucial.
After all, a company that remains stable and progresses in the marketplace often has greater potential for long-term returns.
Industry Analysis
To determine how well a company is performing, it's essential to examine its industry first.
The size of the industry can be likened to the size of a cake; if the industry continues to expand—like the booming electric vehicle market in recent years, where global sales and market value have surged—it indicates that the cake is getting bigger, offering more opportunities for companies within it to claim their slice.
Moreover, the growth trend of the industry reflects how quickly this cake is expanding; fast-growing industries tend to be vibrant and dynamic, making it easier for companies to achieve performance growth. In contrast, declining industries resemble a cake that is gradually shrinking, making it much harder for companies to generate profits.
Market Share
Next, consider market share; leading companies generally hold an advantage.
Companies with a high market share can leverage economies of scale—buying in bulk and producing centrally—to reduce costs, similar to how wholesale prices are usually cheaper than retail prices.
Additionally, consumers are often more willing to pay for "popular choices"—people subconsciously believe that brands with many buyers offer higher quality products and better after-sales service.
This creates a virtuous cycle: the higher the market share, the better the reputation, leading to increased sales and ultimately higher profits.
Brand Influence and Product Uniqueness
A strong brand makes consumers think of it as soon as they hear about a specific category—for example, when discussing smartphones, many people's first reaction would be Apple (NASDAQ: AAPL) or Huawei.
This recognition and trust directly translate into purchasing power and help companies expand their market share.
Meanwhile, product uniqueness serves as a company's secret weapon.
Whether through exclusive technology, creative design, or personalized services—as long as they can differentiate themselves from competitors—they can effectively address consumer needs and establish their foothold in the market.
(Source: Freepik)
What Are the Key Economic Indicators Affecting Stock Prices?
When trading stocks, have you ever wondered why the market suddenly rises or falls?
Often, it’s the underlying economic indicators that are pulling the strings.
Understanding these indicators can help businesses, investors, and even policymakers gain clarity on the current situation and anticipate future trends.
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) measures the total economic value of all goods and services produced within a country.
Generally speaking, a rise in GDP reflects a growth in the economy.; businesses sell more and earn more, leading investors to buy stocks and push prices higher.
However, the reality is not so straightforward: if GDP growth is too rapid, it may trigger inflation, prompting central banks to tighten monetary policy.
Higher costs for businesses can put pressure on stock prices.
Additionally, market sentiment and policy changes can also disrupt stock movements—sometimes even when GDP figures look promising; stocks may not behave as expected.
Unemployment Rate (UR)
A low unemployment rate means that people have jobs and disposable income to spend, which leads to booming business for consumer companies and naturally pushes stock prices higher.
Conversely, when unemployment rates spike, consumers become hesitant to spend; this results in declining corporate revenues and shrinking profits which negatively impacts stock performance.
Inflation Rate
The inflation rate acts like a “double-edged sword” for the stock market.
Moderate inflation is beneficial: it signals a heating economy where companies can raise prices and increase profits; with more money circulating in the market, people are more willing to invest in stocks, causing prices to rise.
However, if inflation spirals out of control and diminishes purchasing power, consumer spending may slow down while business costs surge.
Margins get squeezed leading worried investors to sell off stocks. Even worse is when central banks raise interest rates in an attempt to curb inflation—making borrowing more expensive for businesses—which intensifies operational pressures and makes it challenging for stock markets to rally.
Interest Rates (IR)
When interest rates rise, borrowing costs increase for companies; expansion plans may be put on hold resulting in reduced profits that can lead to falling stock prices.
Additionally, fixed-income products like bonds or savings accounts become more attractive as alternatives—resulting in funds flowing out of the stock market further weakening share prices.
Conversely, when interest rates decrease, companies face lighter burdens allowing for a more aggressive investment strategy that rekindles interest in equities.
For example: when central banks lower interest rates many might think: "With lower savings yields available it’s better to invest in stocks.” A surge of capital into equities provides upward momentum for share prices.
