What is Fundamental Analysis?
Fundamental analysis is a method of determine the intrinsic value of an asset and analyzing the asset’s “fair market value”. This form of analysis is based on external events and influences, as well as financial statements and industry. Fundamental Analysis is one of the major method to analyze the stock with the other being Technical Analysis
Mostly, Investors choose the fundamental analysis to analyze any stock before invest in them.
How to do Fundamental Analysis?
- By reading balance sheet of the company: A company’s Balance sheet is a financial statement which reveals the firm’s assets, liabilities and owners’ equity (net worth). It is the insight of Income Statement and Cash Flow Statement.
- Its peer comparisons growth story: It is the most common method of fundamental analysis among the investors. Peer Comparison helps the investor to compare the company’s Valuation, Growth, RoE, PE, etc.
- Future revolution or growth of the company
- Company’s Management: Company’s Management Analysis helps the investors to trust the company’s Board i.e, Promoter(s) of the company, Director(s) of the company. By this investor get to know about the background of the company’s management like educational qualifications while others may focus on the family background, however, investors should focus on the past management decisions of the promoters.
Ratios you must focus on fundamental analysis?
- Price to Earnings (P/E)
- Working Capital Ratio
- Quick Ratio
- Earnings per Share (EPS)
- Price to Book (P/B)
- Debt-Equity Ratio
- Dividend Yield Ratio
- Return on Equity
Why fundamental analysis important?
Fundamental Analysis is important because if you are going to invest in the company and don’t know anything about the company then you are doing biggest blunder mistake.
Fundamental analysis seeks to understand the value of an asset, so that traders can take a much longer-term view of the market. Once the trader has determined a numerical value for the asset, they can compare it to the current market price to assess whether the asset is over or under- valued. The aim is to then profit from the market correction.