Investment Analysis

What is investment analysis?

Investment analysis is a process whereby potential and accrued investments are reviewed and evaluated against industry data and economic information to forecast future performance.

Possible risks and returns of investments go under evaluation because the positive and negative data are both crucial in determining potential outcomes. Stakeholders and business owners must have a full picture of likely results to make informed investment decisions. 

Profitability is something that all stakeholders take into account with regard to their expenditures. Using investment portfolio management software, they can track current and prospective investments across time. This software provides important information that helps investors buy and sell, tracks progress against financial markets, and automates reporting.

Types of investment analysis

The type of investment analysis a business conducts depends on the investment it’s assessing. Some include:

• Top-down analysis. Using this broad approach, investors review the market as a whole to find the types of investments they believe will be the most profitable. Instead of narrowing down to one kind of investment or company upfront, top-down analysis may specify a region, industry, or asset type, and analysis will be conducted for that overall category.
• Bottom-up analysis. This investment analysis usually studies an individual company or group of companies that an investor is considering. Profit margins, price to sales, and earnings per share are some of the most important pieces of information gathered during this assessment.
• Portfolio analysis. This assessment evaluates an investor’s entire life portfolio. The total risk and potential income of the current holdings are reviewed; it’s typically used to inform investors when it’s time to diversify their investments, sell anything they currently have, or maintain the status quo.
• Technical analysis. Using market data, investments are analyzed for trading opportunities. Short-term investors usually make use of this type of analysis to review trading volumes and changes to prices on stock.
• Fundamental analysis. Finding the fair market value for an investment is the goal of fundamental analysis. As the focus here is usually on one or two investments, the process is much shorter than the other methods.
• Security analysis. This type of analysis reviews a single investment in extensive detail for its current profitability and risk. Market data, historical performance metrics, and future forecasts are all assessed to determine if the investment is worth continued funding.

Basic elements of investment analysis

Regardless of the type of investment or the process used to gather data, all investment analysis should cover the following.

• Company data. Annual reports, conduct reviews, current investor status, and business strategies are all critical pieces of information that should be reviewed before moving ahead with a new investment.
• Financial positioning. Most analysts look at a company’s financial history from the previous five years before making an investment recommendation. This allows for context when comparing a company’s past performance against market data, making it clearer about whether to make an investment.
• Industry outlook. There are hundreds of factors that influence what an industry’s performance looks like, both within the industry itself and the economic outlook as a whole. While some things are impossible to predict, reviewing information about the industry at large can give investors an idea of investment valuation for the immediate future.

Benefits of investment analysis

No business should make an investment without conducting a thorough analysis first. Some of the many benefits of this research are:

• Knowledge of risk and return. Reviewing market data, economic factors, and company performance all help inform investors about the potential rewards that investment could bring them. There’s also an opportunity to assess and discuss which risks are involved and if those risks are worth taking.
• More diverse portfolios. When reviewing various possible assets, investors can decide which ones best align with their objectives and risk tolerance. A diverse portfolio helps mitigate risks that come with investing in a single asset or industry. 
• Undervalued investments. It’s always possible that the market has overlooked an investment and significantly undervalued it. These assets may be lucrative opportunities for investors, particularly if the potential rewards outweigh the risks. 
• More confidence. Analysts build strong relationships with their investors by providing them with ongoing data. Analysis helps investors understand their assets in greater detail. The more information an investor and analyst have, the better.

Best practices for investment analysis

When working on detailed investment analysis, some of the best practices that both analysts and investors should consider are:

• Matching investment financial impact to business objectives. Understanding the financial potential of an investment is essential before moving ahead with buying. But it’s also important to know how those investments tie into the strategic goals and objectives of the business. This means that the budget aligns with overall goals.
• Continually reviewing forecasts. Investment forecasting changes all the time, so this type of analysis should also be ongoing. Using investment analysis tools here is beneficial, as these can automate various reports that track investments against market data and look at overall industry growth or decline.
• Anticipating possible risks. Planning for worst-case scenarios with investments is a smart move. Using risk analysis data, businesses ought to make contingency plans should an asset or investment lose value quickly or if market changes occur that impact an investment’s potential.

Manage the financial aspects of your investments with dedicated investment accounting software that tracks trading security, sale availability, and more.