Fundamental analysis is a technique that helps determine the value of a stock by focusing on the underlying factors that affect a company’s performance and growth prospects. It can also be carried out on an industrial sector or entire economy. Fundamental analysis gives an insight on a company’s revenues and ability to make profit, as well a company’s ability to repay its debts and its position in the markets relative to its competitors.
Fundamental analysis can be broken down into quantitative and qualitative factors. Quantitative fundamentals can be calculated and expressed in numerical terms to help investors make decisions on stocks.
Qualitative fundamentals are the less tangible factors that affect a business such as brand name recognition, patents and competence of a company’s executives and board members. A company’s financial statements are the most reliable source of quantitative data and one can determine revenue, profit, assets, liabilities, and performance related ratios more precisely.
Fundamental analysis assumes that markets do not always price stocks correctly and that a stock’s price on the stock market does not fully reflect its real value. The real value of a stock is known as intrinsic value, and fundamental analysis assumes that in the long run the markets will catch up with fundamentals and reflect this value on stocks. Investors look to invest in stocks that are trading below their intrinsic value.
Qualitative factors considered in fundamental analysis include:
- A company’s business model
- Competitive advantage, operational effectiveness, and strategic positioning
- Management, education background, employment history and achievements of company executives.
- Corporate governance of a company including financial and information transparency, shareholder rights
- Structure of board of directors
- Customer base of company
- Market share
- Industry growth
- Competition
- Regulation