Fundamental Analysis

Fundamental analysis is described as a method of security valuation in which it involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt and competition. The fundamental analysis is also applied to futures and forex whereby it focuses on the overall state of the economy, interest rates, production, earnings, and management. The fundamental analysis is the cornerstone of investing.

A fundamental analysis approach is a method which attempts to determine whether the company is financially sound and will continue to earn money. The fundamental analysis as a process is performed on the historical and present data for making financial forecasts. It is all about using the real data to evaluate a security's value. Let us consider an example. An investor is able to perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings.

It is important to note that fundamental analysis considers only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data. There are four objectives of performing fundamental analysis. First is to conduct a company stock valuation and predict its probable price evolution. The second objective is to make a projection on its business performance. Third is to evaluate its management and make internal business decisions. And the last objective is to calculate its credit risk.

Fundamental analysis is a conservative approach to stock selection than technical analysis. Technical analysis refers to the idea in a manner as how the price of the stock has performed over time and attempts to predict what it will do in the future. The price earnings ratio is easy to calculate because the price of each share of the stock divided by the earnings per share.

Questions

• What is fundamental analysis?
• What are the objectives of fundamental analysis?