Fundamental analysis is one method to analyze the value of a company and to determine the intrinsic price of the Stock of that particular company. Fundamental analysis takes into account the original business of the company, its financials including the assets and liabilities and other important aspects to come up with the proper evaluation of the company position in the market. This fundamental analysis guide details the major components of fundamental analysis.
Fundamental analysis guide explains Fundamental analysis which is also used to compare the stocks of different companies and how each company is the price when compared to its peers in the same industry. Industry analysis is another important thing in the fundamental analysis which helps in identifying the industry which has high probability to grow in the coming future and hence gives maximum returns to the shareholders holding the shares of companies in that particular industry.
All the macro and micro components which can affect the business and the share price are analyzed in fundamental analyzed. Factors such as the state of the economy, the industry conditions, and the management of the company etc. are analyzed.
This investment strategy of fundamental analysis is completely different from technical analysis. Fundamental analysis is most successful for long term investing and will give fruitful results if used all the tools and indicator properly. Technical analysis in a contract is successful mostly for short term trades.
Whenever a company is analysed in the stock market, the primary motive is to find out if the current price of the company is the actual representation of the company or if the price of the company is a discount or at a premium. And also to find out the probability of the business to grow and how that is going to affect the stock price of the company. When you find out these details, then you can take a proper trade decision based on fundamental analysis such as to buy the stock or to exit from the already existing stocks.
Now to come up with this, you have to analyze the overall state of the economy. For example, the state of the economy during the Pandemic is struggling. Hence even if the company fundamentals are strong as the economy is falling, the company share price is supposed to fall. hence the most important thing in fundamental analysis is to understand the economic condition, not just the present economic condition, But also predict how the economy will be in the coming future.
The data for this fundamental analysis is the available public data. For example to understand about the company you have to refer to the company public data which the company will submit to stock exchanges. The reports such as the financial statements, any major management changes and also any major project updates all are updated by the company first to the stock exchanges. This is a mandatory rule that is set by the exchange that all the details are first informed to the stock exchanges so that all investors can access it and provide equal access to information. You can look at the revenue, Profits and profits growth, Return on equity, assets growth and liabilities of the company and other things which are the major components of fundamental analysis.
A stock market analyst will always use these publicly available data and then predict their growth projection and based on which he will expect the movement in the stock price in the coming future.
For example, if the analyst believes that the present price of the stock is very less( price is at discount) when compared to the intrinsic value of the company, then he expects the price to move up in the coming days and hence gives a buy signal on the stock. And in a similar manner from the fundamental analysis if the analyst believes that the stock price is at overvaluation when compared to the actual intrinsic value of the company, then he expects the price of the stock to fall in the coming days and hence gives a SELL signal on the stock.
Quantitative vs Qualitative
Within the fundamental analysis, there are two different branches which have a different way of approaching and human judgement. these are qualitative and quantitative fundamental analysis. These two are used to understand the economic well being of the company and also the future growth of the company.
Qualitative fundamental analysis in the sense it measures the qualitative factors which cannot be measured. Factors such as the Management, the Brand value of the company and other. These factors are analyzed and are purely human judgement based on the understanding of these factors. There is no numerical representation or measurable representation of these factors.
Quantitative fundamental analysis on the other hand analyses the quantitative factors that can be numerically measured. Factors such are the revenues of the company, the revenue growth of the company, the profits and loses, the assets and liabilities and other quantitative factors. These factors involve less human judgement and complete numerical and measurable results.
The following are the different qualitative factors in fundamental analysis guide.
The business model of the company. What exactly the business or the company does and how it generates its revenue and what is the profit percentage form these revenues. How reliable is this business plan in the long run and how much growth is expected in the revenue in the segment in which the business is operating.
Competitive advantage: Analyse the competition of the company and how well placed the company is when compared to its competitors and what is its market share. How the brand value of the company will help in capturing the market and other details.
Management of the company: understanding the management of the company is an important aspect of Fundamental analysis. It is the management that takes a key decision and usually, all successful companies have management with good qualifications, proven track record and experience.
The following are the different quantitative factors in fundamental analysis guide.
The balance sheet of the company: balance sheets gives details about the details such as the assets of the company and the liabilities of the company and how they are growing when compared to the previous periods. This helps us understand if the company is on the growth path of the degrading path.
Income Statement: it explains the income of the company and how it is growing concerning the previous periods.
Cash Flows of the company: What are the sources from which the company is generating its cash and where the company is spending its cash will be explained in this statement.
Intrinsic Value of the company from Fundamental analysis
Fundamental analysis relies on the assumption that the price of the company determined from the fundamental analysis is close to the actual price of the company. And also the assumption that the market price of the company will not always reflect the correct price of the company arrived from the publicly available data by using fundamental analysis guide.
This value of the company which is arrived upon based on the fundamental analysis is termed as the true value of the company or the intrinsic value of the company. Based on this true value of the company in comparison to the present market price of the share of the company, the movement of the stock price in the coming future is assumed and based on this a BUY or a SELL signal is arrived upon.
For the fundamental analysis to work, we also have to assume that in the long run, the price of the stock price will move such that to represent the intrinsic or true value of the company.
Fundamental analysis is the most reliable one for long term investing and analysts always keep on observing the publicly available data to all from the stock exchanges. For long term investor and value investors, fundamental analysis is most reliable than the technical analysis.