What is Fundamental analysis?
Fundamental analysis is developing an understanding of a company, its business and the future prospects of the business. The practice involves reading and analyzing reports and consolidated financial statements to get an understanding of the company’s growth prospects, comparative advantages, competitors and the potential market. Further, the procedure of evaluating a stock by way of measuring its intrinsic value by analyzing the associated economic, financial and other functional and non-functional factors is known as fundamental analysis of a stock. If a company is growing at a good pace, has no or fair debts, enough cash and is generating profit, we can say that the company has healthy fundamentals (Wafi, Ahmad. S., 2015).
Define quantitative and qualitative analysis as used in fundamental analysis and give examples of how would you use both quantitative and qualitative analysis in your fundamental analysis.
Fundamental analysis can be categorized as: qualitative and quantitative analysis. According to the MSN Encarta, the two categories are defined as following:
Qualitative: An analysis based on the characteristics or traits of a stock.
Quantitative: An analysis based on the numeric or measurable demographics such as size and quantity.
Quantitative analysis is usually done to measure profits, asset value and overall revenue from a business with great accuracy. The biggest source of conducting quantitative analysis is the annual finance statement of a business. On the other hand, qualitative analysis revolves around analyzing tangible factors associated with a business. These include brand recognition, quality of executives and board members in a company, technology used etc. Neither of the analysis is complete without each other. For example, while examining the stock value of coca-cola, investors might want to look at its net earnings, long-term growth, annual dividend payout of the stocks and other such numeric factors. However, besides these one cannot ignore the excellent brand recognition of coca-cola as a company (Wafi, Ahmad. S., 2015).
In context of stock analysis, fundamental analysis refers to using real-time information about the company and its business to evaluate the true value of a stock. Analyzing a company’s fundamentals is equivalent to judging its business potential which is a critical information for an investor. Investors who are masters in stock markets know every detail about a company, its fundamentals and share price fluctuations (Ou, J. A, and S. Penman., 1989). They prefer to invest in old companies with strong fundamentals and long-term investment opportunities.
What are some of the questions fundamental analysis attempts to answer?
Fundamental analysis helps to know the following:
Profit margins of a company
Net earnings
Return on equity (ROE)
Price to earnings
Price to book
Some of the questions answered by fundamental analysis include:
Are you investing at the right place?
Is the company’s revenue increasing every year?
Will your investment actually earn profits?
Is the able to repay its debts?
Fundamental analysis is “analyzing the fundamentals” of a business and finding out its reliability and feasibility for investment. By analyzing and closely observing the qualitative and quantitative factors of a business, fundamental analysis tends to answer all the questions mentioned above. Fundamental analysis is specific to defining all issues related to the economic well-being of a company.
As part of this study, I analyzed the ONGC stock. The fundamental analysis helped in retrieving facts about the company in general, its political environment, foreign exchange reserves, economic analysis, industry analysis, global ranking, interest rates, inflation, government policies and other such metrics to help in making an investment decision (Kulkarni, S., 2011).
Reference
Ou, J. A, and S. Penman. (1989). Financial statement analysis and prediction of stock returns. Journal of accounting and economics, PP 295-330.
Fundamental Analysis Models in Financial Markets – Review Study ☆
Fundamental Analysis Models in Financial Markets – Review Study ☆
Wafi, Ahmad. S. (2015). Fundamental Analysis Models in Financial Markets – Review Study. Procedia economics and finance, 30 PP 939-947.
Kulkarni, S. (2011). A study of fundamental analysis of ONGC. International journal of multidisciplinary and research, 1 (8)
