Fundamental analysis (FA) is a method of measuring a security’s intrinsic value by examining related economic and financial factors. Fundamental analysts study anything that can affect the security’s value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company’s management.
Understanding Fundamental Analysis-
It is usually done from a macro to micro perspective in order to identify securities that are not correctly priced by the market. Fundamental analysis uses revenues, earnings, future growth return on equity, profit margins, and other data to determine a company’s underlying value and potential for future growth. All of this data is available in a company’s financial statements.
Components of Fundamental Analysis-
Economic analysis
Industry analysis
Company analysis
Fundamental analysis is an extremely comprehensive approach that requires a deep knowledge accounting, finance and economic. For example, fundamental analysis requires the ability to read financial statements, and understanding of macroeconomic factors and valuation techniques. It primarily relies on public data, such as company’s earnings, profit margins, future project growth.
Types of Fundamental Analysis-
Qualitative analysis-
Management
Business model
Corporate governance
Quantitative analysis-
profit & loss statements
balance sheet
cash flow statements
What Are the Steps in Fundamental Analysis?
Broadly speaking, fundamental analysis evaluates individual companies by looking at the firm’s financial statements and examining various ratios and other metrics. This is used to estimate a company’s intrinsic value based on its revenues, profit, costs, capital structure, cash flows, and so forth. Company metrics can then be compared with industry peers and competitors. Finally, these can be compared to the broader market or larger economic environment.
Who Uses Fundamental Analysis?
Fundamental analysis is used largely by long-term or value investors to identify well-priced stocks and those with favourable prospects. Equity analysts will also use fundamental analysis to generate price targets and recommendations to clients (e.g., buy, hold, or sell). Corporate managers and financial accountants will also use financial analysis to analyse and increase a firm’s operating efficiency and profitability and to compare the firm against the competition. Warren Buffett, one of the world’s most renowned value investors, is a promoter of fundamental analysis.
Does Fundamental Analysis Always Work?
No. Like any other investment strategy or technique, fundamental analysis is not always successful. The fact that fundamentals show a stock to be undervalued does not guarantee that its shares will rise to intrinsic value any time soon. Things are not so simple. In reality, real price behaviour is influenced by a myriad of factors that may undermine fundamental analysis.
But in longer run fundamental analysis work well. But only corporate issue makes it change
