Fundamental Analysis
Introduction
Fundamental analysis is a method of evaluating a security in an attempt to assess its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security's value, including macroeconomic factors such as the overall economy and industry conditions, and microeconomic factors like the company's financial condition and management. The end goal is to produce a quantitative value that an investor can compare with a security's current price, thus indicating whether the security is undervalued or overvalued.
Macroeconomic Analysis
Macroeconomic analysis involves the study of the behavior and performance of an economy as a whole. It includes regional, national, and global economies. Macroeconomists seek to understand the structure and decisions of companies and households in order to better understand how the whole economy functions. They also try to predict how various economic factors will influence the economy in the future.
Industry Analysis
Industry analysis is a method that facilitates a company's understanding of its position relative to other companies that produce similar products or services. Understanding the forces at work in the overall industry is an important component of effective strategic planning. Industry analysis enables small business owners to identify the threats and opportunities facing their businesses, and to focus their resources on developing unique capabilities that could lead to a competitive advantage.
Company Analysis
Company analysis refers to the process of evaluating a company’s profitability, profile and products or services. It is also known as 'fundamental analysis,' and it is conducted by professionals who prepare reports that are used by traders to make buy, sell and hold decisions. Company analysis involves the interpretation of financial statements and financial ratios to assess a company's performance and prospects.
Financial Statement Analysis
Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value. It is used by a variety of stakeholders, such as credit and equity investors, the government, the public, and decision-makers within the organization. These stakeholders have different interests and apply a variety of different techniques to meet their needs.
Ratio Analysis
Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by comparing information contained in its financial statements. Ratio analysis is a cornerstone of fundamental analysis.
Valuation
Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.
Conclusion
Fundamental analysis is a critical component in long-term investing strategies. While short-term investors and day traders may find fundamental analysis to be less useful, it’s beneficial to those seeking long-term investments. The goal of fundamental analysis is to produce a value that an investor can compare with a security's current price in hopes of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).