Fundamental Analysis: Definition, Types, Benefits, and How To Do It?

What is Fundamental Analysis?

Fundamental analysis is a crucial method for evaluating the intrinsic value of a stock. It encompasses a comprehensive evaluation of financial statements, external influences, events, and industry trends.

This analysis provides insights into a company’s key attributes and its actual worth, considering macro and microeconomic factors.

Data Utilized in Fundamental Analysis

Fundamental analysis relies on three primary sets of data:

• Historical data to assess past performance
• Publicly known information about the company, including management announcements
• Non-public information such as leadership crisis management strategies

What are the Different Types of Fundamental Analysis?

Fundamental analysis comprises two main types:

• Qualitative Analysis: This involves assessing brand value, management decisions, and financial performance.
• Quantitative Analysis: This is a numerical analysis based on financial statements to deduce share prices.

Furthermore, fundamental analysis employs two distinct approaches:

• Top-down Approach: Begins with macroeconomic factors before focusing on specific companies.
• Bottom-up Approach: Analyzes individual companies first, then considers the impact of macroeconomic factors.

What are the Basics of Fundamental Analysis?

Before conducting fundamental analysis of a stock, certain basic factors need consideration:

• Company’s structure and revenue
• Profits and revenue growth over the years
• Debt structure and corporate governance
• Rate of turnover

Analysts assess these factors to determine a security’s intrinsic value.

How to Do Fundamental Analysis of a Stock?

Conducting fundamental analysis involves several essential steps:

1. Understand the company’s operations and business model.
2. Utilize financial ratios for initial screening.
3. Analyze the company’s financial reports.
4. Study competitors and compare their performance.
5. Assess the company’s debt in comparison to rivals.
6. Evaluate the company’s future prospects.

Importance and Benefits

Fundamental analysis plays a pivotal role in:

• Determining a stock’s fair price.
• Predicting long-term market trends.
• Identifying companies with strong growth potential.
• Cultivating business acumen for investment analysis.

Example of Fundamental Analysis

Take the Coca-Cola Company as an example. Analysts examine the economy, sector, and industry using various metrics and reports.

They gather financial data from the company’s reports and databases to assess its value. By comparing growth rates, ratios, and metrics to industry standards, analysts determine whether the company is valued correctly.

Fundamental Analysis (FA) vs. Technical Analysis (TA)

Distinguishing between fundamental and technical analysis is crucial:

• Fundamental analysis evaluates a company’s intrinsic value based on economic factors.
• Technical analysis focuses on internal market data, identifying trends and patterns.

Fundamental Analysis FAQs

What Is Fundamental Analysis and Its Objective?

Fundamental analysis uses publicly available financial information and reports to determine whether a stock and the issuing company are valued correctly by the market.

What Are the Types of Fundamental Analysis?

There are two types of fundamental analysis, qualitative and quantitative.

What Are the 3 Layers of Fundamental Analysis?

When conducting an analysis, you start with economic analysis, then analyze the industry, then the company.

Why Is Fundamental Analysis Important?

Fundamental analysis allows you to see what the market value for a company should be, providing insights into its financial performance and potential for growth.

What Are the Tools for Fundamental Analysis?

Analysts use various tools, including financial reports, ratios, spreadsheets, charts, graphs, government agency reports, and market reports.

Resources

• Fundamental Analysis: Principles, Types, and How to Use It (investopedia.com)
• Fundamental Analysis – Overview, Components, Top-down vs. Bottom-up (corporatefinanceinstitute.com)
• Resources for Fundamental Analysis | Trading Lesson | Traders’ Academy | IBKR Campus

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