Fundamental Analysis encompasses everything concerning the company’s economic well-being. It is significant because a stock’s price is directly related to its performance.
The primary goal of fundamental Analysis is to examine a company’s quantitative and qualitative aspects to determine a stock’s “Fair” or “Intrinsic” value.
The fundamental Analysis begins with understanding the overall state of the economy, then the specific industry, and finally, the performance of the individual company.
5 Steps of Fundamental Analysis -
1. Identify the industry’s economic characteristics — Find the processes involved in the conception, production, and distribution of the firm’s goods and services. This step frequently uses tools like Porter’s Five Forces analysis or attribute-based economics.
2. Identify Company Strategies — The nature of the company’s products and services, including their originality, level of profit margins, development of brand loyalty, and cost management, should be considered. It’s also important to consider variables like supply chain integration, geographic diversification, and sector diversification.
3. Examine the firm’s financial statements — Examine the critical financial statements in light of the applicable accounting standards. Factors like recognition, valuation, and classification are crucial when assessing balance sheet accounts. The main question is whether this balance sheet accurately reflects the firm’s economic position.
The fundamental goal of analyzing the income statement is to accurately judge the quality of earnings as a thorough reflection of the firm’s financial performance. Understanding the statement of cash flows’ impact on the firm’s liquidity position throughout the period where the money came from, where it went, and how it affected the firm’s total liquidity — helps one comprehend the firm’s operations, investments, and financial activities.
4. Analyze current profitability and risk — This is the stage in the Analysis of the company and its financial statements where financial experts may genuinely bring value. Key financial statement ratios for liquidity, asset management, profitability, debt management/coverage, and risk/market value are the most often used analysis tools.
Another essential skill is breaking down return measures into their major impact components. The current ratios should be compared to those from earlier periods and those of other companies and industry averages when analyzing financial statement ratios.
5. Value the firm — Although there are several valuation techniques, a discounted cash flow methodology style is the most used. These cash flows could appear as predicted dividends or more complex means, such as free cash flows to the equity holders or on an enterprise-wide basis.
Goals of Fundamental Analysis
Understanding both qualitative and quantitative elements is aided by fundamental Analysis for investors. One can do Fundamental Analysis by using the websites like Tickertape, StockEdge, Screener, etc. Forecasting future value is conducted using historical and current data. They also affect a firm’s prospective worth, so qualitative elements should be equally weighed.
Conclusion
Fundamental Analysis is the most comprehensive research analysis technique for investment purposes. Although time-consuming, it aids in determining the actual value of a share. It aids in predicting the future price of the company’s shares by utilizing financial data.
There is no option for long-term investment other than to conduct a fundamental research analysis. It employs various financial tools to calculate the intrinsic value of a share, with which the current market price must be compared before making an investment decision.
