Fundamental analysis is examination of the underlying forces that affect the well being of examination of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast and profit from future price movements. INTERPRETATION
Most fundamental information focuses on economic, industry, and company statistics. The typical approach to analyzing a company involves three basic steps: 1. Determine the condition of the general economy.
2. Determine the condition of the industry.
3. Determine the condition of the company.
The economy is studied to determine if overall conditions are good for the stock market. Is inflation a concern? Are interest rates likely to rise or fall? Are consumers spending? Is the trade balance favorable? Is the money supply expanding or contracting? These are just some of the questions that the fundamental analyst would ask to determine if economic conditions are right for the stock market.
It is the study of industries which are on the upswing. The ideal investment is the investment in the growing industries. It is often said that a weak stock in a strong industry is preferable to a strong stock in a weak industry. In order to make productive investments the investor should know the industry classification used in the economy. It is also enviable to know the characteristics, problems and practices in different industries.
After determining the economic and industry conditions, the company itself is analyzed to determine its financial health. This is usually done by studying the company's financial statements. From these statements a number of useful ratios can be calculated. The ratios fall under five main categories: profitability, price, liquidity, leverage, and efficiency. While performing ratio analysis of a company, the ratios should be compared to other companies within the same or similar industry to get a feel for what is considered "normal." Phase Fundamental Analysis: -
|Phase |Nature of analysis |Purpose |Tools & Techniques | |First |Economic Analysis |To assess the general economic situation both |Economic indicators – lead, lag and | | | |within the country and internationally |coincidental indicators | | | | | | |Second |Industry Analysis |To review prevailing conditions within a |Performance indicators – aggregate demand | | | |specific industry and its segments |& supply position, internal & external | | | | |competition, government policies | |Third |Company Analysis |To analyze the financial & non-finance aspects |Non-financial aspects analysis like | | | |of a company to determine whether to buy, sell,|promoters, management, vital product | | | |or hold onto the shares of a company |quality, corporate image, etc. financial | | | | |aspects like EPS, sales, profitability, | | | | |dividend record, asset growth |
BENEFITS OF FUNDAMENTAL ANALYSIS
Long-term trends: Fundamental analysis is good for long-term investments based on long-term trends. Value Spotting: Sound Fundamental Analysis will help identify companies that represent good value. It can help discover companies with valuable assets, a...