Do you want to do a Fundamental Analysis of a company, and you want to know how fundamental Analysis works? If any successful person wants to invest his money in the long term, then only after doing a fundamental Analysis does he invest his money in any company. So, whoever is the world's biggest investor, he is the one to do fundamental analysis. In this blog, we will discuss Fundamental Analysis and why it is important
What is a Fundamental Analysis?
Fundamental Analysis is an analysis that helps assess the stock's intrinsic value. It combines-
- Financial statements,
- External influences,
- Events, and
- Industry trends.
It is essential to consider that the fair value of a stock does not change overnight. Therefore, such an Analysis helps you identify key attributes of the company and analyze its actual worth, considering macro and microeconomic factors.
Fundamental Analysis uses three sets of data:
- Historical data
- Publicly known Information
- Information that is not known publicly.
Where Traders buy and sell the shares of that company by looking at the company's price movement, and Investors who are not looking at the company's movement, they do fundamental analysis and invest their money in that company. They also support by looking at the business and taking a good knowledge of a company's business. This is called Fundamental Analysis.
If we understand this in simple words, then Fundamental Analysis means to take information about the Fundamental parameters of a company to understand its business, what business that company is doing, and its profit and loss.
Elements of Fundamental Analysis
Below-mentioned are the elements of Fundamental Analysis related to stock prices-
Objectives of Fundamental Analysis
The objective of Fundamental Analysis is to give an overview of the company. The potential investor uses both past and present data for-
- Stock valuation of the Company
- Projection on its business performance.
- Evaluate the company's management and make internal business decisions
- Evaluate a company's credit risk
- Make a financial forecast.
Importance of Fundamental Analysis
Fundamental Analysis helps you get the fair price of the share; sometimes, the company's share price is not trading at the right price. Also, it is essential to check the correct price before investing in the stock. Fundamental research helps you to know the correct share price of the company.
The purpose of conducting a fundamental Analysis of the stock market is as follows:
- To estimate the future share price of the company.
- Valuation of company assets.
- To assess the business performance of the company.
- Measuring credit risk.
- Evaluating management decisions.
- To find the intrinsic value of the property.
Benefits of Fundamental Analysis
It helps in identifying the Best Stocks.
One of the most significant benefits of fundamental Analysis is that it helps you learn about the various complexities of the stock market. Thus, it allows an investor to identify goods stock having good business models and future prospective while avoiding bad stocks.
We can say that a reasonable investor, through fundamental Analysis, can avoid the landmines of stock markets which are nothing but fundamentally poor stocks.
Solid Base for Investment
Fundamental Analysis is a solid base for Investment. In other words, when you are spoilt for choice and have plenty of stocks to buy, then fundamental Analysis can help identify the best stock out of many good stocks.
Best decision-making during a panic situation
In a panic situation, Fundamental Analysis, when everyone is selling stocks, an investor who has done a fundamental analysis of their portfolio holdings will never panic because, in the worst situation, every stock falls, whether it's good or bad. Still, in the case of fundamentally strong stocks, they recover quickly whenever stock markets recover. So, the Fundamental Analysis is just like an umbrella that saves you from bad weather, which keeps happening during the panic in stock markets.
Disadvantages of Fundamental Analysis
Below mentioned are the disadvantages of Fundamental Analysis.
- Takes a Long time Frame
No Assurance of Profit
How to do fundamental Analysis?
Fundamental Analysis is a method to evaluate the financial data of a company to arrive at its intrinsic value by examining various quantitative and qualitative factors affecting that stock.
In other words, it includes all the qualitative, quantitative, macroeconomic, microeconomic, and other financial and non-financial data in determining the company's fair value. This fair value of the company is then used to identify whether the company is overvalued or undervalued. For Instance, If the current market price is lower than the Intrinsic value, the company is undervalued and vice versa.
There are many ways of doing Fundamental Analysis by which a person can check the company's fundamentals. But today, we are going to discuss in very simple words how can you do a Fundamental Analysis of any company.
We will learn through some steps how to do a fundamental analysis of any company and how you can do fundamental research of any company; you can do a fundamental analysis of any company using these steps.
Understand the company
The first step to doing the fundamental analysis is understanding the company you intend to invest in. It will give you further information about how the company is performing, whether the company is taking informed decisions towards its future goal, and whether you should hold or sell the stock. One of the ways to fundamental analysis is to keep a check on its website, knowing about the company, its management, its promoters, and its products. It will help in analyzing the financial position of the company. Also, Study the financial reports of the company.
Once you are done understanding the company, a person can start analyzing its financials, such as-
- Balance sheet,
- Profit-loss statements,
- Cash flow statements,
- Operating cost,
- Expenses etc.
Also, you can evaluate the company's compounded annual growth rate (CAGR) and sales and check if the net profit of the company has been increasing for the last five years. It helps in reflecting that the company is in good situation.
Check the debt
Debt is one of the essential factors that can lower a company's performance. A company cannot perform well and reward you if it has considerable debt. Therefore, it is always advisable that you can avoid companies having high debt. Always try to find a company to invest in, which has a Debt equity ratio of less than 1.
Compare and analyze Company's Peers
There is a possibility that the company you want to invest must be one of the best among its peers. Try to find a company performing better than the other competitive companies. It should have better prospects, upcoming projects, new plants, etc.
Analyze the prospects
Fundamental Analysis is most effective when you want to stay invested long term. So, invest in those companies whose products will still be helpful 15-25 years down the line.
Consider all the aspects from time to time
Do not invest in a company and forget about it. Stay updated about the company you have invested in. You should be updated about all its news and financial performance. Sell the security if there is a problem in the company.
Fundamental Analysis is one of the key factors to know more about the company. You can take reference of some books on fundamental analysis
to increase your knowledge and master's in it. All you need to do is to follow the steps given to do fundamental analysis properly. Also, You have various options of choosing among fundamental analysis to invest according to your need, expertise, and ease of understanding.