Fundamental Analysis

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Stock Analysis:

  • Stock Analysis is the evaluation of a particular trading instrument, an investment sector, or market as a whole.
  • Stock Analysis attempts to determine the future activity of an instrument, sector or market.
  • Stock Analysis is a method for investors and traders to make buying and selling decisions.
  • By studying, evaluating past and current data, investors and traders attempt to gain an edge in the markets by making informed decisions.
  • Fundamental Analysis and Technical Analysis are the most important types of Stock Analysis

Definition of Fundamental Analysis

  • Fundamental Analysis is a method of evaluating a security in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors.
  • Fundamental Analysis is a stock valuation methodology that uses financial and economic analysis to predict the movement of stock prices.
  • It is a holistic approach to study a business. It attempts to study everything that can affect the security’s value, including macroeconomic factors (like overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies).

Objectives of Fundamental Analysis

  • The main objective of fundamental analysis is to determine the ‘intrinsic value’ of a stock.
  • Intrinsic value or True value is the calculated value of a company, where the market price of  the stock tends to revert. Therefore it is also known as ‘Price target’.
  • To project the business performance.
  • To make a right Buying/Selling decision.

Quality and Quantitative Analysis

Fundamental Analysis involves Qualitative Analysis  & Quantitative Analysis of a Business.

  • Qualitative is related to quality of a company’s  management, it’s brand recognition, patents or proprietary technology. Etc.
  • Quantitative is anything which is measurable. Quantitative data of financial statements, revenue, profit, assets, ratios etc.

Two approaches of Fundamental Analysis

There are two approaches the fundamental analysis

  1. Top-down approach
  2. Bottom-up approach

In the Top-down approach Macroeconomics of the Market is studies first. Followed by Industry/ Sector analysis is done in which the company under analysis . The analysis of Company is done in the end.

The bottom-up approach is exactly the reverse of the Top-down approach.

Top-down approach in fundamental analysis.

Typical Analysis of the stock has three steps

1) Macroeconomic environment analysis

  • Initially the firm’s macroeconomic environment is analyzed to project the future employment, inflation, income regulation, taxes etc.
  • The macro analysis is done not only for the domestic market but also for the international markets that affects the firm’s operations.

2) Industry Analysis

  • Industry/ Sector analysis in the next step Top-down approach of Fundamental analysis after Macroeconomics of the environment is analyzed properly
  • Every sector/industry has a different level of sensitivity towards the changes in the macroeconomics aspects.

3) Company Analysis

  • Only after a thorough analysis of the macroeconomic environment and the industry in which the company is operating, analysts proceed with Company Analysis.
  • A SWOT analysis of a company, financial health determination etc, estimation of growth, management performance etc. is carried out using different tools.

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