Definition

Fundamental analysis is a method used to evaluate the intrinsic value of a financial asset, such as stocks, bonds, or currencies, by analysing the underlying factors that affect its value.

What is a fundamental analysis?

It involves studying the fundamental economic, financial, and qualitative factors that can influence the asset’s price over the long term.

Key aspects of fundamental analysis include:

1. Financial statements: Analysing the financial statements of a company, such as the income statement, balance sheet, and cash flow statement, to assess its financial health, profitability, and overall performance.

2. Economic indicators: Examining economic indicators and data, such as GDP growth, inflation rates, unemployment figures, and consumer sentiment, to understand the broader economic environment and its potential impact on the asset.

3. Industry analysis: Evaluating the industry or sector in which the asset operates. This involves understanding industry trends, competitive dynamics, and factors that could affect the asset’s performance within its sector.

4. Company performance: Assessing the company’s management team, competitive advantages, market share, growth prospects, and overall business strategy.

5. Valuation methods: Using various valuation methods, such as price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, discounted cash flow (DCF) analysis, and others, to estimate the asset’s fair value.

6. Qualitative factors: Considering qualitative factors like brand reputation, market positioning, regulatory environment, and geopolitical influences that could impact the asset’s value.

Fundamental analysis is often used by long-term investors who aim to identify assets that are undervalued or overvalued based on their intrinsic characteristics. By assessing the fundamental factors, investors seek to make informed decisions about buying, holding, or selling assets. It is important to note that while fundamental analysis provides a comprehensive understanding of an asset’s value, it doesn’t provide insights into short-term price fluctuations, which can be influenced by market sentiment, news events, and other factors.

Example of fundamental analysis