Investment School: What is Fundamental Analysis?

What is Fundamental Analysis?

When it comes investing in stocks, there are two schools of thoughts - Fundamental Analysis and Technical Analysis. Fundamental analysis focusses on company economic factors to make an investment decision whereas technical analysis focus on stock price movements to determine the investment. Let us get started with fundamental analysis and what are the various factors affecting fundamental analysis.

     Fundamental analysis of a stock should answer the following questions related to the stock.

1. How is the company growing in terms of revenues and earnings over the past?
2. Has the company been able to maintain healthy profit consistently over the past?
3. How good is the company placed with respect to its competitors?
4. How good is the management of the company?
5. How transparent are the company's operations and decisions?

      These are only few , more questions on the similar note needs to be answered to fulfill a fundamental analysis of the company.

Factors affecting Fundamental Analysis:

             Quantitative factors - The factors which can be measured in numeric terms like net profit growth,revenue growth, equity:debt ratio, EPS, P/E Ratio etc.
              Qualitative factors - Quality of management of the company, brand value of the company etc.

          Both these factors are equally important and should be considered in conjunction while choosing a stock. For eg, Coke has a good track record of financials and also a great brand value which also contributes to its sales. Some of Warren Buffet's(Richest person on earth) investment are shining examples of fundamental analysis. He invested in coke for a simple reason that people will not ditch coke no matter how many times they drink it, coz it has a brand value associated with it. 

          Fundamental analysis will help in identifying the "intrinsic value" of the company.  For eg a company trading at Rs 100 may have a intrinsic value of 200 rs which can be identified by fundamental analysis. In the long run stock markets will reflect the fundamentals of the company.
           Lets look into the factors affecting fundamental analysis in deep in the coming posts.

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