5 Mantras To Know About Fundamental Analysis

5 Mantras To Know About Fundamental Analysis

1. Intrinsic Value: The main goal of fundamental analysis is to evaluate a company’s financials and arrive at a number that can tell you what each share of the company should be worth. The value of the company divided by the number of outstanding shares is the intrinsic per share value of the company. This price is then compared with the market price of the share to determine if the stock is undervalued or overvalued.

2. Top-Down vs. Bottom-Up: The top-down approach to investing starts with macro variables such as GDP and economy and works its way down to the company level. Whereas, in Bottom-down investing, analysis is done from the company or sector level.

3. Quantitative & Qualitative: Fundamental analysis looks primarily at quantitative data such as numbers and company financials. But there is also focus on qualitative data, such as the quality of management, quality of the product or service offered by the company, and other such factors.

4. Long-term Outlook: Fundamental analysis is generally used to determine investments that are more long term in nature. It allows investors to find companies that are good investments from a value and growth perspective. It is ideal for investors using the buy and hold strategy and for value investors.

5. Procedure: Fundamental analysis starts with reading the company’s annual reports, understanding its business, and identifying growth factors. Then, it moves on to understanding financial statements like the P&L account, Balance Sheet, and Cash flow statements. Based on this, analysts can assume a growth rate to forecast future earnings. Then these future earnings are discounted back to the present and combined to arrive at the value of the company. Several financial ratios such as P/E, P/S and P/B ratios are calculated and compared to peers, industry average, and the firm’s own historical average to determine whether the prevailing market price is overvaluing or undervaluing the company.