What Is Fundamental Analysis?
Fundamental analysis is a method of measuring a company’s valuation by evaluating its financial statements, environment, health, competitors, and market. The analysis also considers its host country’s economy, growth, interest rates, employment, manufacturing, housing, and exports.
The historical data and present data are being used for the fundamental analysis, with a goal for the forecast of the company’s financials.
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Why Investors Use Fundamental Analysis?
- Fundamental analysis helps investors to value a company’s stock and help them to know if the stock price is giving consistent returns or not. it helps investors to find a growth stock or an income-oriented stock.
- It helps investors to forecast the industrial and business growth of a certain company and its future projections.
- Fundamental analysis is being used to evaluate a company’s management and their efficiency while using a company’s resources.
- This Analysis also helps the investors to find out the intrinsic value of the stock and prediction of its future value.
Top Tools For Fundamental Analysis
The first things you should look for while doing the fundamental analysis is the company’s earnings, its balance sheet, and the cash flow statement. You can find the company’s earnings from the profit and loss statement of the company and using a balance sheet you can calculate various ratios, that work as the fundamental analysis tool.
Earning of a company is very important, but in order, to proper analysis you need certain tools to measure a company’s efficiency, its health, and standards. You can use these figures to compare its competitor and find a better stock to invest in.
There are various fundamental analysis tools out there, but here are some top fundamental analysis tools used by professional investors.
Earnings Per Share (EPS)
Earnings Per Share (EPS) is a widely used ratio, that helps investors to calculate the per-share earnings of the company. EPS can be calculated by dividing the net income of a company by its total outstanding shares. EPS tells you, how much profit a company makes with each share.
Price-Earning Ratio (P/E Ratio)
Price-Earning Ratio also knows as the P/E ratio is a financial ratio that compares the stock price of a company relative to its earning per share. The P/E ratio of a company can be calculated by dividing the current stock price by its earnings per share (EPS).
Price to Sales Ratio (P/S Ratio)
Price to sales ratio of a company can be calculated by dividing the current share price by its per-share revenue. The ratio helps investors for a better understanding of the company’s total revenue.
Projected Earnings Growth (PEG)
Projected earnings growth, also known ad the PEG ratio is a financial ratio that compares a company’s stock price, earnings per share, and its EPS growth. The PEG ratio can be calculated by dividing the company’s P/E ratio by the earnings growth rate.
Price To Book Value Ratio (P/B Ratio)
The price to book value ratio compares a company’s book value with its market value. The price to book value ratio (P/B Ratio) of a company can be calculated by dividing the market value per share by its book value per share. It is one of the most important fundamental analysis tools.
Dividend Payout Ratio
The dividend payout ratio is a tool to measure a company’s dividend payout relative to its net earnings. This tool helps investors to find out, how much a company is paying its investors as dividends and its retained earnings. The ratio can be calculated by dividing the total dividend payout by its net income.
This ratio calculates a company’s yearly dividends compares to its stock price. The ratio is expressed in percentage term and helps investors to predict the company’s future dividend amount.
Return On Equity (ROE)
Return on Equity (ROE) is an important ratio to calculates a company’s profitability, by comparison to its shareholders’ equity. You can calculate the ROE of a company by dividing the net income by its shareholders’ equity.
Fundamental Analysis Vs Technical Analysis
There is a lot of debate about fundamental and technical analysis is out there among the investors, but for your information, both of them have separate places and uses. Fundamental analysis is mostly very useful when you analyze a stock for long term investment, while the technical analysis is very useful for shorter terms and trading.
Smart investors use both of them, combined to plan and invests over the medium and longer-term.
As you know the short term price actions are determined by the buying and selling quantities, which are in turn affected by a lot more than the fundamental analysis. So the technical analysis uses the price and volume data, which is helpful for short term trading.
On the other hand, charts and technical indicators cannot be used to determine a stock’s valuation and predict its future performance. Charts mostly reflect the past price action, and its value diminishes its value for a longer time horizon.
The Bottom Line
Many long term investors use strictly the fundamental factors for the analysis of a company and its share price, but some found that they can use a more effective model of valuation and price prediction using a combination of both fundamental and technical analysis.
Their goal is to find out whether the share price justifies the value of it is different from what the fundamental factors are suggesting. If that difference exists, there may be an investment opportunity that exists for the longer-term.