Fundamental Analysis is the study of any data that might be expected to impact the price or perceived value of an investment product, other than analyzing the trading patterns of that stock itself.
Fundamental analysis is also the study of a company and the economical factors that could play a role in the performance of this company. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. Fundamental analysis is a technique that is used by traders to identify stocks that are ‘undervalued’ by the market, that is,they are selling at a price that is lower than the stock’s intrinsic value at the time.
Fundamental analysis is primarily utilized to address the long term future share price of a company as it cannot account for short term stock volatility.Fundamental analysis is the cornerstone of investing.
Fundamental analysis is used not only in in the stockmarket, but can be also play a useful part of any financial planning or forecasting in other areas such as Forex. Fundamental analysis is now made a lot easier by automatic downloading of the basic fundamental information which is available from Yahoo, Asx etc.
Fundamental analysis can also be very effective at forecasting economic conditions, but not necessarily exact market prices.This is one method, in which you study the company’s current management and position in the market. Fundamental analysis is also good for long-term investments based on long-term trends.
This is also used to gauge the price of a stock based on the fundamental attributes of the stock, such as price/earnings ratio, Return on investments, and associated economic statistics. For this reason any financial data/news that is released that affects rates of interest or inflation is of great importance to a trader, as it will offer trading opportunities as the market re-values itself.
Price.
Price/Book is a company’s price-to-book ratio (P/B ratio) is ascertained by taking the company’s per share stock price and dividing by the company’s book value per share.
Price-to-book ratio is usually of more interest to value investors than to growth investors. Price/Sales Ratio as with earnings and book value, you can then quite easily determine how much the market is valuing a company by equating the company’s price to its annual sales.
Earnings
It is often said that earnings are the “bottom line” when it comes to valuing a company’s stock, and indeed fundamental analysis places very much emphasis upon a company’s earnings.
A company’s earnings are important to an investor because they give you an indication of the company’s expected dividends and its potential for growth and capital appreciation.
Earnings Per Share,Comparing total net earnings for various companies is usually not a good idea, since net earnings numbers don’t take into account how many shares of stock are outstanding (in other words, they don’t take into account how many owners you have to divide the earnings among).
Market Expectations can be potent drivers of share prices. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company’s underlying value and potential for future growth.
Other fundamental factors are taken into consideration such as :- Profitability ratios, such as rate of return, return on assets, and the gearing of the company’s earnings. Market performance ratios, such as dividends per share, dividend cover, dividend yield, earnings per share, discounted cash flow, the price-to-sales ratio and the price/earnings ratio.
The problems with Fundamental Analysis, is that when it is used in isolation, it has a number of serious drawbacks:This is because there are an multitudinous number of factors that can affect the earnings of a company, and its stock price over time.This is where Technical analysis comes into play. But that’s another story.
