Using AI and Fundamental Analysis to calculate Share Price

Editor in Chief

1 year ago

User Guide: Using ChatGPT for Fundamental Analysis of Stock-Listed Companies

Using ChatGPT to calculate the fundamentals of stock exchange-listed companies involves understanding which financial data and metrics are crucial for fundamental analysis. Here’s a detailed guide for effectively using ChatGPT to help analyze a company’s financials, calculate its intrinsic value, and estimate a fair market share price.

1. Understanding Fundamental Analysis

Fundamental analysis involves assessing a company’s financial statements, market position, and economic environment to determine its fair value. This process focuses on several key financial metrics and ratios to assess the company’s financial health, profitability, growth potential, and overall value relative to its current market price.

2. Key Financial Data Needed for Fundamental Analysis

To use ChatGPT for fundamental analysis, the following data from a company’s financial statements should be entered. These values can typically be found in the company’s Income Statement, Balance Sheet, and Cash Flow Statement:

Revenue (Sales): Total income generated from sales of goods and services.
Cost of Goods Sold (COGS): Direct costs attributable to the production of goods sold.
Gross Profit: Revenue minus COGS.
Operating Income (EBIT): Earnings before interest and taxes.
Net Income: Total profit after all expenses, taxes, interest, and depreciation.
Total Assets: Total resources owned by the company.
Total Liabilities: Total debts and obligations.
Equity (Shareholder’s Equity): The owners’ claim after all liabilities are settled.
Free Cash Flow (FCF): Cash generated by the company after capital expenditures.
Earnings Per Share (EPS): Net income divided by outstanding shares.
Dividend per Share (if applicable): Dividend paid per outstanding share.

3. Additional Metrics and Ratios for Company Valuation

After collecting the above data, you can calculate key ratios and metrics that help gauge a company’s financial performance. You can enter these metrics into ChatGPT for further interpretation:

Price-to-Earnings Ratio (P/E Ratio): Market price per share / EPS. Compares the stock price to its earnings per share.
Price-to-Sales Ratio (P/S Ratio): Market capitalization / Total revenue.
Price-to-Book Ratio (P/B Ratio): Market price per share / Book value per share. Compares the stock price to the company’s net asset value.
Debt-to-Equity Ratio: Total liabilities / Shareholder’s equity. Indicates the company’s financial leverage.
Return on Equity (ROE): Net income / Shareholder’s equity. Measures profitability relative to equity.
Return on Assets (ROA): Net income / Total assets. Indicates how efficiently assets are used to generate profit.
Dividend Yield: Annual dividend per share / Current share price.
Current Ratio: Current assets / Current liabilities. Measures liquidity.
Quick Ratio: (Current assets – Inventory) / Current liabilities. Measures liquidity excluding inventory.

4. Calculating Intrinsic Value and Fair Market Price

Using these metrics, ChatGPT can guide you through methods for determining the company’s fair value. Here are the most commonly used valuation models:

Discounted Cash Flow (DCF) Model

The DCF model is a widely used approach to estimate a company’s intrinsic value by calculating the present value of its expected future cash flows. You would need:

Free Cash Flow (FCF): Cash flow available to the company after necessary expenses.
Growth Rate of FCF: Projected growth rate in FCF.
Discount Rate (Weighted Average Cost of Capital, WACC): Reflects the opportunity cost of capital.
Terminal Value: Estimated future value beyond the forecast period, typically calculated as the last FCF value growing at a perpetual rate.

Once this data is entered, ChatGPT can walk you through calculating the present value of projected FCF and the terminal value to derive the company’s total intrinsic value.

Dividend Discount Model (DDM)

For dividend-paying companies, the DDM calculates intrinsic value based on expected future dividends:

Expected Dividend: Next year’s dividend payment.
Dividend Growth Rate: Expected rate of growth in dividends.
Required Rate of Return: Investor’s expected rate of return.

ChatGPT can help you calculate the fair market price using the formula:Fair Market Price=Expected DividendRequired Rate of Return – Dividend Growth Rate\text{Fair Market Price} = \frac{\text{Expected Dividend}}{\text{Required Rate of Return – Dividend Growth Rate}}Fair Market Price=Required Rate of Return – Dividend Growth RateExpected Dividend

Comparative Analysis

A simpler approach is to compare the company’s financial ratios (e.g., P/E, P/B, and P/S) with industry peers. ChatGPT can interpret these ratios and suggest adjustments for differences in growth rates, risk, and profitability to assess whether the stock is undervalued or overvalued.

5. Other Factors Affecting Company Value and Fair Share Price

In addition to financial metrics, there are qualitative factors and external variables that affect a company’s valuation:

Industry Conditions: Market demand, competition, and technological advances.
Macroeconomic Factors: Interest rates, inflation, and economic cycles.
Management Quality: The track record and strategy of company leadership.
Regulatory Environment: Industry regulations or potential legal issues.
Market Sentiment: General investor sentiment and market conditions.
Growth Potential: Market expansion opportunities and innovation.

6. Example Workflow Using ChatGPT for Analysis

Collect Financial Data: Enter data from the company’s latest financial statements.
Calculate Ratios: Ask ChatGPT to help you calculate key financial ratios.
Select Valuation Model: Choose DCF, DDM, or comparative analysis.
Interpret Results: Have ChatGPT analyze the calculated metrics and compare them to industry benchmarks.
Consider External Factors: Discuss the qualitative and macroeconomic factors that may affect the company’s future.
Determine Intrinsic Value: Use ChatGPT to compute an estimated fair share price.
Use the Prompts below: Scroll down to

7. Tips for Effective Analysis with ChatGPT

Provide Complete Information: The more data you input, the more accurate the analysis.
Use Recent Data: Ensure data is up-to-date for accuracy.
Ask Follow-Up Questions: Explore why certain metrics look unusual or how industry-specific factors may impact the valuation.
Combine Models: For a more robust analysis, compare results from different valuation models.

By following this guide and entering relevant data, ChatGPT can assist in calculating fundamental metrics and analyzing a company’s potential value. Use these insights as a foundation for investment decisions, always considering your personal risk tolerance and investment goals.

Prompts for ChatGTP to Calculate the Share Price

To use ChatGPT for fundamental analysis and company valuation, here are some example prompts to help you input financial data, calculate metrics, and interpret results:

1. Setting Up the Analysis

“I have financial data from [Company Name]. Can you help me analyze its fundamentals and determine a fair market share price?”

2. Entering Financial Data and Calculating Ratios

These prompts guide ChatGPT to use your financial data to calculate important ratios:

Income Statement Analysis:
- “The company’s revenue is [amount], COGS is [amount], and operating income is [amount]. Can you calculate the gross profit margin and operating margin?”
- “Here are the company’s net income and EPS values: [Net Income] and [EPS]. What’s its Price-to-Earnings (P/E) ratio at a current share price of [amount]?”
Balance Sheet Analysis:
- “The company has total assets of [amount], total liabilities of [amount], and equity of [amount]. Can you calculate the debt-to-equity ratio and return on equity?”
- “With current assets at [amount] and current liabilities at [amount], what’s the company’s current ratio and quick ratio?”
Cash Flow and Dividends:
- “The company’s free cash flow is [amount], and its dividend per share is [amount]. Can you help me calculate the dividend yield at a share price of [amount]?”

3. Intrinsic Value Calculation Prompts

To estimate the intrinsic value, you can prompt ChatGPT with details for the Discounted Cash Flow (DCF) Model, Dividend Discount Model (DDM), or Comparative Analysis:

DCF Model:
- “I have data for the company’s free cash flow of [amount], expected growth rate of [percentage], and a discount rate of [percentage]. Can you guide me through a Discounted Cash Flow analysis?”
- “Can you calculate the terminal value for a DCF model using a perpetual growth rate of [percentage] and discount rate of [percentage]?”
Dividend Discount Model (for Dividend-Paying Stocks):
- “The company pays a dividend of [amount] and has a dividend growth rate of [percentage]. If the required rate of return is [percentage], can you calculate the fair value of the stock using the Dividend Discount Model?”
Comparative Analysis:
- “The company’s P/E ratio is [amount]. How does this compare to the industry average, and what does it suggest about the company’s valuation?”
- “I have data on the company’s P/B ratio, P/S ratio, and industry benchmarks. Can you help me analyze if it’s overvalued or undervalued?”

4. Qualitative and External Factors

Consider prompting ChatGPT with questions about factors beyond financials, which can affect a company’s value:

“How can macroeconomic factors like inflation and interest rates impact the valuation of [Company Name]?”
“What role does management quality and strategy play in the long-term valuation of a company like [Company Name]?”
“Can you explain how competitive positioning within its industry may impact the company’s growth potential?”

5. Interpretation and Decision-Making Prompts

After calculating metrics, ChatGPT can help interpret results and assess the investment’s potential:

Interpretation of Results:
- “Based on these ratios and metrics, can you help me assess the company’s profitability, liquidity, and leverage?”
- “Given this analysis, what are the signs that [Company Name] is a good or poor investment?”
Investment Decision Support:
- “Given the intrinsic value estimates, do you think [Company Name] is currently undervalued or overvalued compared to its market price?”
- “Based on growth prospects and valuation metrics, should an investor consider holding or selling shares in [Company Name]?”

Using these prompts, you can effectively analyze a company’s financial fundamentals, valuation, and growth potential, making ChatGPT a valuable tool for informed investment decisions.