This simplest definition of an investment analysis is the act of evaluating the worthiness of an investment. Not just worthiness though: a thorough evaluation of any investment also looks at the possible risks. The purpose of any investment is usually straightforward: earning maximum profit.

Besides profit, one must also consider the value an investment will add to a portfolio and how befitting it is. There are several forms of investment, including a bond, mega-corporate projects, a startup or other similar undertakings.

For more details on what an investment analysis entails, keep reading below.

Investment Analysis- A Deeper Insight

For starters, experts believe that investment analysis is a substantial strategy of portfolio management. But how you ask? Well, there’s a simple logic behind it.

When you design an investment analysis strategy with particular emphasis on its stellar performance and suitability for the investor, you seal profitable returns. Certain factors play an essential role in ensuring that their investment analysis is a success.

These include the correct entry price, the timeline the investor can expect for holding their investment and the latter’s role in their portfolio. The truth about investment is that there isn’t a particular size that fits all.

The fact is that different kinds of investments suit different kinds of parameters. Just as you would see different investors outlining different goals, incomes and timelines, similarly you will see different investment opportunities too.

It is also not uncommon for people to question why bother with an investment analysis at all? Wouldn’t it be simply convenient to use the index instead?

The fact is investment brings vast returns, wealth building and better provision opportunities for your family. Sure investment analysis is far from easy and simple but one also has to consider how worth the efforts are in the end. An index would not provide all these advantages to you.

If you take the right approach in investment, cover your bases really well during research, there’s nothing to stop you from making a fortune. In fact, even as a small investor you’d be able to beat the market: that is the power of investment analysis.

Investment Analysis- The Process

The process of investment analysis includes judgment of an investment, in terms of profit, risk and its resale value. Irrespective of the type of investment, it is important that you evaluate these three factors thoroughly.

Let’s take a closer look at the three essential factors that an investment analysis evaluates.

  1. Cash Flow or Profit

We wouldn’t be overstating the truth if we said that cash flow is perhaps the most essential outcome of an investment. Hence, the very first factor you must critically analyze is the returns on your investment. Cash flow can occur in several ways, including:

  • Dividends that a publically traded stock earns
  • Interest payments you get on a bond
  • Free cash flow

An investment can pay off in several different ways, one of which is cash flow. Thus, you will want to evaluate the kind of cash flow your particular investment will give, in addition to assuming the risks. In case of negligence in this evaluation, you could suffer a loss of your investment capital.

  1. Risk

Many consider risk evaluation as the first vital step of investment analysis. First or second doesn’t matter: what matters is running a thorough research on the level of risk your investment involves. It is vital to do so and foresee the repercussions it could have on your near future.

There is a simple truth behind this: if your investment choice comes with a great level or risk, surely the loss will be greater too. Even if the investment promises tremendous resale value or cash flow, it will be worthless if it’s too risky.

At the same time, it is important for an investor to remember that risk does not amount as a definite factor. You must evaluate all the factors that relate to your investment: including industry, market, company and government etc.

There is a formula for evaluating the level of risk of an investment. However, one may vary it to suit the kind of investment they’re undertaking.


Risk= rate of occurrence x the impact of the event

Resale Value

The third vital factor of an investment analysis is its resale value. You earn a profit when your asset earns a gain in its market value. Hence, when you sell the same asset to another investor, you make a significant profit in the higher value than the original purchase price of your asset.

During your investment analysis, you must measure your asset’s expected rate of growth. This is what resale value is all about. This will help you ensure that your asset’s associated cash flows and its value will be larger in the long run and will more than make up for the investment loss.

Also, an increase in the resale value of your investment helps minimize the value of the risk it includes.

We’ve given you an overview of the three essential factors to weigh in your investment analysis. Like we said, there are also variations of the evaluation method, but overall these three vital factors apply to all investment sorts.

Whether you’re buying stocks as investment or treasury bills, this general method is applicable to it. In fact, for many investors, currency trading and business growth may also be a form of investment. For them too, this overall method of evaluation would help confirm the worthiness of their investment decision.

Final Thoughts

The crux or primary goal of every investment analysis is to evaluate and research on an industry or security for investment purposes. This evaluation process helps estimate the future performance of an investment and analyze how well it would suit an investor.

The process of investment analysis also incorporates the creation and evaluation of an overall financial strategy. Regardless of the kind of investment one chooses, there are three important facets. These include cash flow, risk and resale value.

Regardless of the several types of investments, weighing the three key factors will help gain a significant idea of their value in the future.