Fundamental Analysis Explained

Fundamental analysis is a comprehensive approach to study any business. It is extremely essential to understand the various perspectives of a business if an investor wants to invest in a business for the long term.

To assess the intrinsic value of a security by examining economic, financial and other quantitative and qualitative factors, fundamental analysis is done. The health and performance of an underlying company are determined by the fundamental analysis.

For evaluation of a security’s value, real and public data is used by the fundamental analysts. In order to determine company’s value and growth potential for the future, analysts use revenues, future growth, earnings, profit margins, return or equity and other financial data.

Warren Buffet is a person who is considered as one of the most famous and successful fundamental analysts. He is popularly known as the “Oracle of Omaha”.

Objectives of Performing Fundamental Analysis

Fundamental analysis is performed with the goal of making financial forecasts. Following are the possible objectives of performing fundamental analysis:

• to find out the intrinsic value of the share.

• to predict company’s probable price evolution by conducting stock valuation of the company.

• to know the performance of business.

• to evaluate management and to make internal business decisions.

• to calculate company’s credit risk.

Tools of Fundamental Analysis

Following tools are required for performing fundamental analysis of a business:

• Company’s annual report

All the relevant information which is required for fundamental analysis is present in the annual report of the company. This report should be available on the company’s website, from where one can download it for free.

• Access to news

Staying updated with the latest news will help in getting aware of the latest developments that are happening in the industry. It is very important to stay connected with the latest news so that you can perform your fundamental analysis very precisely.

• Industry related data

Industry data is also needed to see how the company is performing under consideration with respect to the market. This data is available on company’s websites.

• MS Excel

This is a software which is generally used for analysis purpose. It will be extremely helpful for performing fundamental analysis.

Primary Factors in Fundamental Analysis

While conducting fundamental analysis, one should consider these primary factors:

• What is the company’s revenue?

• Is it a growing company?

• Is the company making any profit?

• What is the company’s turnover rate?

• Is the company increasing indebtedness or is paying off its debts?

Strengths of Fundamental Analysis

Long-term Trends

Fundamental analysis is basically done for long-term investments based on long-term trends. It will benefit patient investors in the long-term if they pick the right companies.

Business Acumen

Fundamental analysis helps in building the thorough understandings of the business. Investors become familiar with key revenue and profit drivers behind a company, after performing this deep research and analysis. Fundamental analysis helps investors avoid shortfall companies. It also helps them in understanding the key value drivers of a company.

Value Spotting

Fundamental analysis helps in identifying those companies which represent a good value. It helps in uncovering those companies which have valuable assets, a strong balance sheet, staying potential and stable earnings.

Weaknesses of Fundamental Analysis

Time Consuming

There is no doubt that fundamental analysis is an excellent way of getting in depth knowledge of a business and the company, but it is also true that this process takes a lot of time and effort.

Industry/Company Specific

Techniques for evaluating different companies vary depending upon the type of industry or group. For this, different techniques are required for different industries and companies. This method is quite time consuming and due to this the amount of research that can be performed gets less.

Analyst Biases

The majority of information that is used for fundamental analysis comes from the company itself. Many companies have investor relations managers whose prime function is to handle the analyst community and release information. It is common to find analyst biases in the fundamental analysis of a particular company.

The Bottom Line

Fundamental analysis can only be valuable if it is performed with cautions. It is important to be familiar with analyst, if the research is written by a sell-side analyst. Every analyst has some sort of biases and it is totally normal. Even if there is any analyst biases the research performed will be of great value.

Before finalizing any analyst, learn about his ratings and his performance track records. Investors should become skilled readers so that they can find out relevant information and can ignore the unnecessary data and hype.