Fundamental Analysis
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Fundamental Analysis: Introduction
Investopedia Staff, (Investopedia.com)
So, you want be a stock analyst? Perhaps not, but since youre reading this well assume that you at least want to understand stocks. Whether its your burning desire to be a hotshot analyst on Wall Street or you just like to be hands-on with your own portfolio, youve come to the right spot.
Fundamental analysis is the cornerstone of investing. In fact, some would say that you arent really investing if you arent performing fundamental analysis.Because the subject is so broad, however, its tough to know where to start. There are an endless number of investment strategies that are very different from each other, yet almost all use the fundamentals.
The goal of this tutorial is to provide a foundation for understanding fundamental analysis. Its geared primarily at new investors who dont know a balance sheet from an income statement.While you may not be a “stock-picker extraordinaire” by the end of this tutorial, you will have a much more solid grasp of the language and concepts behind security analysis and be able to use this to further your knowledge in other areas without feeling totally lost.
The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental analysts look at this information to gain insight on a companys future performance. A good part of this tutorial will be spent learning about the balance sheet, income statement, cash flow statement and how they all fit together.
But there is more than just number crunching when it comes to analyzing a company. This is where qualitative analysis comes in – the breakdown of all the intangible, difficult-to-measure aspects of a company. Finally, well wrap up the tutorial with an intro on valuation and point you in the direction of additional tutorials you might be interested in.
Fundamental Analysis: What Is It?
In this section we are going to review the basics of fundamental analysis, examine how it can be broken down into quantitative and qualitative factors, introduce the subject of intrinsic value and conclude with some of the downfalls of using this technique.
The Very Basics
When talking about stocks, fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a companys actual business and its future prospects. On a broader scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements.
Fundamental analysis serves to answer questions, such as:
Is the company’s revenue growing?
Is it actually making a profit?
Is it in a strong-enough position to beat out its competitors in the future?
Is it able to repay its debts?
Is management trying to “cook the books”?
Of course, these are very involved questions, and there are literally hundreds of others you might have about a company. It all really boils down to one question: Is the company’s stock a good investment? Think of fundamental analysis as a toolbox to help you answer this question.
Note: The term fundamental analysis is used most often in the context of stocks, but you can perform fundamental analysis on any security, from a bond to a derivative. As long as you look at the economic fundamentals, you are doing fundamental analysis. For the purpose of this tutorial, fundamental analysis always is referred to in the context of stocks.
Fundamentals: Quantitative and Qualitative
You could define fundamental analysis as “researching the fundamentals”, but that doesn’t tell you a whole lot unless you know what fundamentals are. As we mentioned in the introduction, the big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. Obvious items include things like revenue and profit, but fundamentals also include everything from a