Fundamental analysis is a method of evaluating securities by analysing the intrinsic value of a company. This approach involves studying various factors that could affect the value of a security, such as macroeconomic factors, industry conditions, and company financials. The goal of fundamental analysis is to determine the true value of a security and identify investment opportunities that are undervalued or overvalued.
Cash flow statement: The cash flow statement shows how changes in balance sheet accounts and income affect cash and cash equivalents. It helps investors understand a company’s ability to generate cash.Ratio analysis is a key part of fundamental analysis. Ratios help investors evaluate a company’s financial performance and health. Some common ratios used in fundamental analysis include:
ROE: Return on equity measures a company’s profitability by showing how much profit a company generates with the money shareholders have invested.In addition to financial statements and ratios, fundamental analysis also considers qualitative factors. These include: Management quality: The quality of a company’s management team can have a significant impact on its performance. Fundamental analysis looks at factors such as management experience, track record, and strategic vision.Fundamental analysis uses various valuation techniques to determine the intrinsic value of a security. Some common valuation methods include:
Asset-based valuation: Asset-based valuation calculates the value of a company based on its assets and liabilities. It is often used for companies with significant tangible assets, such as real estate or equipment.Economic analysis is an essential part of fundamental analysis. It involves studying macroeconomic factors such as GDP growth, inflation, interest rates, and unemployment. These factors can have a significant impact on the performance of companies and industries.