Fundamental Analysis of Stocks

Q1. What is fundamental analysis?

Answer: Fundamental analysis is the detail evaluation and analysis of the entity’s financial statement. It provides the information regarding the entity’s operation. With the help of financial analysis tools, one can easily forecast the company’s future. It gives the bird’s eye view of the performance and growth of an organization.

Q2. What is a fundamental analysis of the stock?

Answer: Apart from the technical analysis as we have discussed earlier, fundamental analysis is the detailed study of both macroeconomic and microeconomic factors that affect the company’s share price in the secondary market (i.e. stock exchanges). 

In order to determine the fair value of the shares, we have to calculate the intrinsic value of the shares. Various fundamental analytical tools help an investor to determine the intrinsic value of the stocks.

Q3. What are the major components of the fundamental analysis?

Answer: Fundamental analysis has three main components. They are company analysis, industry analysis, and the economic analysis. Under company analysis, we look and analyze the company financials such as profits ratio, growth, Net worth, Stability, performance indicators, cash flows, etc.

Similarly, under industry analysis, we compare the company’s data with the corresponding data in the industry to which the company belongs. This helps an investor to analyze the company’s progress and performance among its other competitors who belong to the same industry. Its also reflects the organization performance whether it is outperforming or whether it is under performing.

Apart from this, the third main component is the economic analysis. Under economic analysis, we go through the detailed study of various economic factors like GDP, Per capita income, Interest rate, monetary policies, employment rate, productions, foreign currency reserves, etc.

Q4. Who uses the fundamental analysis tools?

Answer: Fundamental analysis is mostly used by the long-term investor. The long-term investor doesn't make their buy or sell decisions based on the short-term fluctuation like that of Intra-day traders. Whereas Intra-day traders use the technical analysis for their trade decisions, Inter-day traders use fundamental analysis for their decisions regarding the long-term investments. ( To know more about Inter day and Intra day traders, click here)

In short, they are the value investors. They are generally the one who is not influenced by the short-term market sentiments. They analyze the company’s value based on the detailed analysis of the company financials and finally invest in that value through stocks.

Q5. What are the various fundamental analysis tools?

Answer:  
Fundamental analysis tools mainly focus on earnings, growth, and value in the markets.       Some of the major fundamental analysis tools are:

• P/E (Price Earning) ratios,
• EPS (Earning Per Share)
• Dividend yield ratios
• BVPS (Book Value Per Share)
• ROE (Return On Equity)
• ROI (Return On Investment)
• Dividend Pay Out Ratio
• IVPS (Intrinsic Value Per Share)

Q6. Long-Term Investment Strategy based on Fundamental analysis.

Answer: The main purpose of the fundamental analysis is to determine the stronger and the weaker companies or industries. With the help of the fundamental analysis, an investor can calculate the intrinsic value of the shares. The intrinsic value of the shares means the fair value of the stocks.

If the intrinsic value of the shares is higher than the market price of the shares then the investors go long (i.e. they buys and holds the stocks for long-term return). It is not a better idea to buy the stocks for long-term when its market value is more than its intrinsic value.

We’ll discuss the various fundamental analysis tools in detail in our next article. Till then
“Stay Hungry Stay Foolish” – Steve Jobs

Also see Technical analysis of the stock, Beginner's guide for trading in equities, Company analysis for investment decisions.