Signals from Fundamental Analysis

While technical analysis studies what the market is doing, fundamental analysis asks a different question: why? Instead of focusing on price movements, it examines the underlying business to determine whether it is becoming stronger or weaker, and whether its current share price reflects its true value.

Unlike technical analysis, where the chart provides the information, fundamental analysis begins with company disclosures and financial data.

Where do fundamental signals come from?

The best source of fundamental information is the company itself. Listed companies communicate developments to investors through SENS announcements, annual and interim financial reports, earnings presentations, investor webinars, conference calls, and other regulatory disclosures.

These announcements are a primary source of information about a company. Rather than relying on analysts, financial media, or social media commentary, investors can hear directly from management about the company’s performance, strategy, opportunities, and challenges.

The challenge is volume. Large, listed companies publish hundreds of pages of reports every year, alongside dozens of SENS announcements and presentations. Understanding what actually matters requires experience, technical knowledge, and a considerable time commitment, making it difficult for individual investors to consistently capitalise on fundamental analysis.

This is one reason many investors choose diversified index funds from providers such as Satrix and Sygnia, or entrust their portfolios to professional fund managers who spend their careers analysing businesses full-time.

What do these signals actually tell us?

Not every announcement matters. Many are administrative or regulatory and have little impact on the long-term investment case. The real value lies in announcements that reveal the health of the business and the decisions management is making.

Trading statements, financial results, dividend declarations, share buyback programmes, acquisitions, major capital investments, executive appointments, and earnings calls all provide valuable signals about where a company is heading.

These disclosures reveal whether revenue and profits are growing, whether margins are expanding or contracting, how much debt the business is carrying, and how management is allocating capital. A company reinvesting profits into expansion sends a very different signal from one returning excess cash to shareholders through dividends or share buybacks. Neither approach is inherently better, but both provide valuable insight into management’s confidence, priorities, and expectations for future growth.

Collectively, these signals allow investors to build a picture of a company’s financial health and form the foundation of any meaningful fundamental valuation.

How do investors decide whether a company is worth buyingusing fundamental analysis?

The ultimate goal of fundamental analysis is simple: determine whether a company’s share price represents good value for money.

Large institutional investors often use discounted cash flow (DCF) models to estimate a company’s intrinsic value by forecasting future cash flows and discounting them back to today’s value. While these models are powerful, they rely heavily on assumptions about growth, profitability, and interest rates. Even small changes to these assumptions can produce dramatically different valuations, making DCF models better suited to experienced analysts with deep industry knowledge.

For most investors, relative valuation provides a far more practical starting point. Rather than trying to calculate an exact intrinsic value, it compares one company with its peers to determine whether the market is placing a higher or lower value on its earnings. Relative valuation strips out the size effect of a company, allowing for more intuitive comparisons.

The most widely recognised measure is the Price-to-Earnings (P/E) ratio, which compares a company’s share price to the earnings it generates per share. Put simply, it tells investors how much they are paying for every R1 of annual earnings. A company trading at R100 per share that earns R10 per share has a P/E ratio of 10, meaning investors are paying R10 for every R1 of current annual earnings. Lower P/E ratios are often considered “cheap”, while higher P/E ratios are generally viewed as “expensive”.

However, valuation ratios should never be viewed in isolation. A company with a low P/E ratio is not automatically a bargain. Sometimes businesses trade cheaply because profits are deteriorating, their industry is in long-term decline, or the market has correctly identified structural problems that are unlikely to disappear.

Conversely, exceptional businesses often deserve premium valuations. Nvidia is a perfect example. For years, it traded on an earnings multiple that many investors considered expensive (especially relative to its peers). Yet the market recognised its dominant competitive position and the enormous long-term opportunity presented by artificial intelligence. In hindsight, paying a premium for an outstanding business proved far more rewarding than buying many companies that looked cheap but failed to deliver meaningful growth.

This is the true objective of fundamental analysis. It isn’t about buying the cheapest companies. It’s about identifying high-quality businesses whose future prospects are stronger than the market currently appreciates. Sometimes that means buying a great company facing temporary macroeconomic headwinds. At other times, it means recognising that a truly exceptional business deserves to trade at a premium.

Doing this consistently is extremely difficult, particularly for investors with full-time careers outside the financial industry. That is why many investors choose professionally managed equity funds or broad market index funds, allowing experienced investment teams to perform the detailed research and company analysis on their behalf.