Fundamental analysis involves examining the economic, financial, qualitative and quantitative factors in order to identify the intrinsic value of a security. It is also known as quantitative analysis. It involves into analyzing financial statements of the company like profit and loss account and balance sheet. This is very important analysis which decides the future of various investors. For the fundamentalist, the market price of a stock tends to move towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would purchase the stock because he knows that the stock price would rise and move towards its “intrinsic or real value”. If the intrinsic value of a stock was below the market price, the investor would sell the stock because he knows that the stock price is going to fall and come closer to its intrinsic value in the near future.
Various fundamental factors can be grouped into two categories such as;
Quantitative factors are capable of being measured or expressed in numerical terms
Qualitative factors are related to or based on the quality or character of something, often as opposed to its size or quantity.
Quantitative fundamentals are numeric, measurable characteristics about a business. It helps to measure revenue, profit, and assets
Fundamental analysts use different tools in order to find the value of a security. These tools focus on earnings, growth, and value in the market. Only a single number i.e. the result of these cannot be the deciding factor for buying or selling of stocks. They can act only as benchmarks to decide the potential investments. These are the most important tools for fundamental analysis.
Earnings per Share
Price to sales
Price to book
Dividend payout ratio
Return on equity
It helps in giving complete knowledge about the company. Since businesses change rapidly and also the revenue mix changes, investors must keep track time to time of these changes to avoid any kind of risk.
Forecasting company’s future
The thorough understanding of a business will help investors in deciding the company’s growth. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-oriented (high yield).
Drawbacks of Fundamental analysis
Following are the chief strengths of fundamental analysis;
Fundamental analysis may give valuable insights but it is very much time consuming. They usually come up results that are contradictory to the prevailing price in the market. This creates a lot of confusion in the minds of investors.
Industry or company specific
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