Fundamental Analysis | Finance Help
Fundamental Analysis is the foundation stone of investment in any business. This primarily entails investigation of the financial books of the company in tandem with the overall growth of the sector and economy. Fundamental Analysis involves a study of the historical books of the company along with the current data with the aim of making future growth projections and prospects of the company.
This may be performed with the intention of evaluating credit risk, assessing the management which shall aid in making internal business decisions, quantifying future outcrop among several other rationales.
Fundamental Analysis is also known asquantitative analysisthat involves number crunching of the financial terms of its books such asrevenue, expenses, margins, assets and liabilitiesamong others that helps in determining the future prospects of the growth. It requires an in-depth analysis of the company in line with the macroeconomic scenario and any other aspect that has a bearing on the value of the share.
Fundamental Analysis is too comprehensive and there is an innumerable number of investment strategies that delves into the fundamentals of the company. Fundamental Analysis can be employed to value a stock, bond, business, forex among several other segments, all of which imbibes a close scrutiny of all the aspects that has its impact on the value of that particular asset class.
For example, in order to value equity stock, it would look into its financial book heads such as revenue, earnings, expenses, return on equity, margins, and assets among other potential items that shall assist in deriving a true value of the stock. For bonds and forex, it would primarily assess the macroeconomic indicators such as the interest rates, growth and the overall stance of the economy. When we analyze a currency or future contract with the help of fundamental analysis, it involves two basic approaches: the top-down approach and the bottom-up approach.
Thetop-down approachor the EIC, i.e the ECONOMY-INDUSTRY-COMPANY approach initiates with the analysis of the global as well as national economy and its indicators such as the GDP, interest rates, inflation, exchange rate, productivity, demand, supply and energy prices.
Further, it narrows down to the industry analysis which requires estimation of the industry future scenario, total sales, a demand for that particular industry, price competitiveness, availability of substitute products, competition from existing global & domestic players and entry and exit from that industry. Then it moves down to the company analysis of that asset class which includes a look into its financial books. Bottom up approach is the vise-verse of the EIC approach that instigates at the Company level followed by Industry and then finally the Economy.
Fundamental analysis culminates in a resultant value of the share which is compared to the existing market value of the share thereby helping investors to make his/her investment decisions to buy/ sell or hold onto a particular asset. Investment in value stocks with proper fundamental in value stocks with proper analysis has reaped handsome returns for investors over time.ialbooks. global as well as analysis has reaped generous returns for investors over time and even moving ahead it shall endure doing so.