Fundamental Analysis Principles Types and How to Use It

Fundamental Analysis: Principles, Types, and How to Use It

What Is Fundamental Analysis?

Fundamental analysis measures a security’s intrinsic value by examining economic and financial factors. Intrinsic value is based on the issuing company’s financial situation and current market conditions.

Fundamental analysts study factors that impact a security’s value, from macroeconomic factors like the economy and industry conditions to microeconomic factors like management effectiveness.

The goal is to compare a security’s intrinsic value with its current price to determine if it’s undervalued or overvalued.

Key Takeaways:

– Fundamental analysis determines a stock’s real value.

– Analysts look for stocks trading above or below their real value.

– If the real value is above the market price, the stock is undervalued.

– If the real value is below the market price, the stock is overvalued.

– Technical analysts focus on historical price trends for short-term predictions.

Understanding Fundamental Analysis

Fundamental analysis starts with macroeconomic research on the economy, followed by analysis of the industry, and finally, analysis of the company’s financial performance.

Sources for Fundamental Analysis

Publicly available financial data, such as quarterly and annual reports, are used for fundamental analysis. Annual reports are often accessible on company websites.

Quantitative and Qualitative Fundamental Analysis

Quantitative fundamentals involve measurable characteristics, such as revenue and profit, while qualitative fundamentals include factors like management quality and brand recognition.

Qualitative Fundamentals to Consider:

1. Business Model: Understand the company’s core business.

2. Competitive Advantage: Assess the long-term competitive advantage.

3. Management: Evaluate the quality of the company’s leaders.

4. Corporate Governance: Consider the company’s transparency and ethical practices.

5. Industry: Analyze the industry’s growth, competition, and regulations.

Quantitative Fundamentals: Financial Statements

Financial statements, including balance sheets, income statements, and cash flow statements, provide quantitative data for analysis. These statements represent a company’s financial performance.

Example of Fundamental Analysis

Using Coca-Cola as an example, an analyst would examine the economy, sector, and industry using published metrics. They would then analyze reports from Coca-Cola or the SEC’s Edgar filings. Additionally, they may use data from firms like CSIMarket.

Fundamental Analysis FAQs:

– What is fundamental analysis? It uses financial information to determine if stocks are valued correctly.

– What are the types of fundamental analysis? Qualitative and quantitative.

– What are the three layers of fundamental analysis? Economic analysis, industry analysis, and company analysis.

– Why is fundamental analysis important? It helps determine a company’s market value.

– What tools are used in fundamental analysis? Financial reports, ratios, charts, and government agency reports.

The Bottom Line

Fundamental analysis is a valuation tool that considers economic, market, and financial factors to determine a stock’s value. Analysts use financial ratios and reports to evaluate a company’s performance. It’s important to analyze stocks based on your own criteria and create actionable information.