What is Fundamental Analysis?

Today I got a query from one of my reader that he wants to know about fundamental analysis, and then I thought of posting the same answer on my site, so that others will also get benefited.

Fundamental analysis is the key and very prominent factor while buying and selling of stocks and securities. This provides a complete analysis of the company, industry and economy related news to the investors. Fundamental analysis can be best compared with our cloths, because while purchasing our cloths we always look at the quality, price and outlook of the cloth; brand value, goodwill and popularity of the company and finally, we start thinking whether it suits to the current season or not.

Fundamental analysis of shares and stocks is a conservative and non-speculative approach based on the “fundamentals”. A fundamental analyst always looks at a three dimensional analysis instead of analyzing what is happening in the Dalal street. The three important dimensional factors are:

• The Economy
• The Industry
• The Company

The Economy Analysis

The Economy analysis is a major factor stands behind the success of any investor. Economic analysis includes the study and understanding of various economic indicators and their possible impact on the stock market. Following are the economic indicators which has impact on the stock market movements:

• GNP
• Price Conditions
• Economy
• Housing Construction
• Employment
• Accumulation of Inventories
• Personal Disposable Income
• Personal Savings
• Interest Rates
• Balance of trade
• Strength of the Rupee in Forex market
• Corporate Taxation (Direct & Indirect)

The Industry Analysis

Every industry has to go through a life cycle with four distinct phases

i) Pioneering Stage

ii) Expansion (growth) Stage

iii) Stagnation (mature) Stage

iv) Decline StageThese phases are dynamic for each industry.

You as an investor is advised to invest in an industry that is either in a pioneering stage or in its expansion (growth) stage. Its advisable to quickly get out of industries which are in the stagnation stage prior to its lapse into the decline stage. The particular phase or stage of an industry can be determined in terms of sales, profitability and their growth rates amongst other factors.

The Company Analysis

There may be situations where the industry is very attractive but a few companies within it might not be doing all that well; similarly there may be one or two companies which may be doing exceedingly well while the rest of the companies in the industry might be in doldrums. You as an investor will have to consider both the financial and non-financial aspects so as to form a qualitative impression about a company. Some of the factors are

• History of the company and line of business
• Product portfolio's strength
• Market Share
• Top Management
• Intrinsic Values like Patents and trademarks held
• Foreign Collaboration, its need and availability for future
• Quality of competition in the market, present and future
• Future business plans and projects Tags - Like Blue Chips, Market Cap - low, medium and big caps
• Level of trading of the company's listed scripts
• EPS, its growth and rating vis-à-vis other companies in the industry.
• P/E ratio
• Growth in sales, dividend and bottom line.