Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis.
The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental analysts look at this information to gain insight on a company's future performance.
Fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. On a broader scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements.
Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:
· To conduct a company stock valuation and predict its probable price evolution,
· To make a projection on its business performance,
· To evaluate its management and make internal business decisions,
· To calculate its credit risk.
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"?
Quantitative and Qualitative
The big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. Obvious items include things like revenue and profit, but fundamentals also include everything from a company’s market share to the quality of its management. The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn’t all that different from their regular definitions.
The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental analysts look at this information to gain insight on a company's future performance.
Fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. On a broader scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements.
Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:
· To conduct a company stock valuation and predict its probable price evolution,
· To make a projection on its business performance,
· To evaluate its management and make internal business decisions,
· To calculate its credit risk.
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"?
Quantitative and Qualitative
The big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. Obvious items include things like revenue and profit, but fundamentals also include everything from a company’s market share to the quality of its management. The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn’t all that different from their regular definitions.
- Quantitative – capable of being measured or expressed in numerical terms.
- Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.
In our context, quantitative fundamentals are numeric, measurable characteristics about a business. It’s easy to see how the biggest source of quantitative data is the financial statements. You can measure revenue, profit, assets and more with great precision. Turning to qualitative fundamentals, these are the less tangible factors surrounding a business - things such as the quality of a company’s board members and key executives, its brand-name recognition, patents or proprietary technology.
Financial reports are required by law and are published both quaterly and annually.
Management discussion and analysis (MD&A) gives investors a better understanding of what the company does and usually points out some key areas where it performed well.
Auditied financial reports have much more credibility than unaudited ones.
The balance sheet lists the assets, liabilities and shareholders' equity.
For all balance sheets: Assets = Liabilities+ Shareholders equity. The two sides must always be equal to each other (or balance each other).
The income statement includes figures such as revenue, expenses, earnings and earnings per share.
Auditied financial reports have much more credibility than unaudited ones.
The balance sheet lists the assets, liabilities and shareholders' equity.
For all balance sheets: Assets = Liabilities+ Shareholders equity. The two sides must always be equal to each other (or balance each other).
The income statement includes figures such as revenue, expenses, earnings and earnings per share.
For a company, the top line is revenue while the bottom line is net income.
The income statement takes into account some non-cash items, such as depreciation.
The Cash flow statement strips away all non-cash items and tells you how much actual money the company generated.
The cash flow statement is divided into three parts: cash from operations, financing and investing. Always read the notes to the financial statements. They provide more in-depth information on a wide range of figures reported in the three financial statements.
Whenever you’re thinking of investing in a company it is vital that you understand what it does, its market and the industry in which it operates. You should never blindly invest in a company.
One of the most important areas for any investor to look at when researching a company is the financial statements. It is essential to understand the purpose of each part of these statements and how to interpret them.
The income statement takes into account some non-cash items, such as depreciation.
The Cash flow statement strips away all non-cash items and tells you how much actual money the company generated.
The cash flow statement is divided into three parts: cash from operations, financing and investing. Always read the notes to the financial statements. They provide more in-depth information on a wide range of figures reported in the three financial statements.
Whenever you’re thinking of investing in a company it is vital that you understand what it does, its market and the industry in which it operates. You should never blindly invest in a company.
One of the most important areas for any investor to look at when researching a company is the financial statements. It is essential to understand the purpose of each part of these statements and how to interpret them.
1 comment:
really useful article for finance people
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