Fundamental Analysis:
- The practice of evaluating the information contained in financial statements, industry reports, and economic factors to determine the intrinsic value of a firm.
- The underlying theme in fundamental analysis is that the “true value” or the “economic value” of the firm can be related to its financial characteristics — its growth prospects, risk profile and cash flows. Any deviation from this true value is a sign that a stock is under or overvalued.
- Fundamental analysis involves three analysis namely economic analysis, Industry analysis and company analysis. Economic level analysis is a macro level analysis for the country. Industry level studies look into the companies of particular industry as a comparative study. Company analysis is a micro level study of one company in particular.
- Fundamental analysis serves to answer questions, such as:
- Is the company’s revenue growing?
- Is it actually making a profit?
- Is it in a strong-enough position to beat out its competitors in the future?
- Is it able to repay its debts?
- Is management trying to “cook the books”?
“Price is what you pay and value is what you get.”
– Warren Buffet