Traditional fundamental analysis is based on an analysis of the actual economic conditions in the national economy and in the companies as well as the non-measurable information about the company. This analytical discipline is the indispensable starting point for identifying the direction the market is taking in the long run.

Fundamental analysis is mainly about processing information from the annual report. Also known as quantitative analysis, which involves looking at income, the accrued expenses, assets, liabilities and a whole host of other financial aspects of the business.

Fundamental analysts look at this information to gain insight into the company’s future results.

When talking about equities, fundamental analysis is a method for assessing the values ​​of the individual company with a focus on the underlying factors that may have an impact on a company itself and its future prospects. To an even greater extent, you can use fundamental analysis to assess industries or the entire economy as a whole. The method is thus mainly based on analyzing the economic aspect of a unit as opposed to its price movements.

Fundamental analysis aims to answer:

  • Is the company’s turnover increasing?
  • Is there a real income?
  • Is it able to outperform its competitors in the future?
  • Is it able to repay its debt?
  • Is the management trying to “cook the books”

Of course, the above points are not the only fundamental analysis, but should be considered more as main points of what fundamental analysis is.

You can define fundamental analysis as “studying the fundamental factors”, but it probably does not provide the greater understanding unless you know what the fundamental values ​​are. As mentioned earlier, the biggest problem with defining the fundamental factors is that it can include everything relevant to the financial aspects of the company.E obvious elements that can include are revenue and profit, but fundamental factors can also include everything from the company’s market value to operations.

The different factors can be compared in two categories: quantitative and qualitative. The financial significance of these factors is not so different from their general definitions:

  • Quantitative – could be measured or expressed in numerical form.
  • Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

In our context, quantitative fundamentals are numerical, measurable properties, about a company. It is easy to see how the largest source of quantitative data is the financial statements. You can measure revenue, profits, assets and more with great precision.

In terms of qualitative fundamentals, it’s the less tangible factors that surround a business – things such as the quality of a company’s board members and central management, and its company name, recognition, patents or proprietary technology.

Quantitative versus qualitative

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many analysts consider the qualitative factors associated with the hard, quantitative factors.
Take for example Microsoft, upon closer examination of the stock, an analyst can look at the annual dividend payouts, earnings per share, P / E ratio and many other quantitative factors. But no analysis of Microsoft would be complete without taking into account the company’s marketing value (brand).

Anyone can start a business that sells sugar and water, but few companies in the world are recognized by billions of people. It’s hard to pinpoint exactly what the Windows brand is worth, but you can be sure that it’s an essential ingredient contributing to the continued success of the company.

The concept of intrinsic value

Before we move on, we need to address the issue of intrinsic value. One of the primary preconditions for fundamental analysis is that the price of the stock exchange does not fully reflect the “real” value of a stock. After all, why should you do stock analysis if the stock market was always correct? In financial jargon, this true value is known as the intrinsic value.

For example, we can say that a company’s shares had a turnover of USD 20. After doing extensive homework on that company, you find out that it is really worth USD 25. In other words, you determine the real value of the company’s. to be USD 25. This is clearly relevant because an investor wants to buy shares that are traded significantly below its intrinsic value.

This brings us to one of the second important prerequisites for fundamental analysis: in the long run, the stock market will reflect fundamental values. There is no point in buying a stock based on intrinsic value if the price never reflects that value. No one knows how long the “long run” really is. It could be days or years.

That’s what fundamental analysis is all about. By focusing on a particular business, an investor can assess the real value of a business and thus find options where he or she can buy at a discount. If all goes well, the investment will pay off over time as the market discovers the fundamental values.

The big unknown is:

1) You do not know if your assessment of intrinsic value is correct, and
2) You do not know how long it will take for it that intrinsic value will be reflected in the market.

Criticism of fundamental analysis

The main criticisms of fundamental analysis come mainly from two groups: the proponents of technical analysis and believers of “effective market hypothesis”.

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