Fundamental Analysis

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Definition: Fundamental Analysis


Fundamental Analysis

Quick Summary of Fundamental Analysis


A method of security valuation which involves examining the company’s financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, and competition. Fundamental analysis takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data.



Video Guide For Fundamental Analysis




What is the dictionary definition of Fundamental Analysis?

Dictionary Definition


Fundamental analysis attempts to find the actual value of a stock — ie, its ability to generate future cash flows — to make investment decisions. Fundamental analysis thus focuses on a company’s financial results. Specifically, fundamental analysis emphasizes forecasts of a company’s earnings and revenue growth rates, valuation ratios like price to earnings, and financial ratios like profit margins. Fundamental analysis also looks to conditions in the industry sector(s) in which the company operates and the broader economic outlook. Fundamental analysis stands in stark contrast to technical analysis, which ignores company fundamentals and looks only at the movement of stock prices and market activity. Both fundamental analysis and technical analysis have their doctrinaire adherents who consider the opposing approach useless. Most market pros, however, recognize that both fundamental analysis and technical analysis have their role in forecasting stock prices.


Full Definition of Fundamental Analysis


Investors who use fundamental analysis look at factors such as a company’s financial statements, management, industry, competitive advantages, and risks to figure out the stock’s intrinsic value.

At one point or another, you may have heard an analyst say that before buying a stock, you should always “check the company’s fundamentals.” Much like a mechanic needs to check under the hood to verify the health of a car, fundamental analysts must examine several important details when trying to figure out the true value of a stock.

Unlike those who practice technical analysis or momentum investing, fundamental analysts try to size up a company’s condition and prospects by digging through its cash flow statement, balance sheet, and income statement, as well as its management, industry, competitive advantages, and risks. They’ll look at factors such as sales, earnings, and cash flows, and then process all of this information to determine the stock’s supposed true worth or intrinsic value. Their belief is that even though this number might be very different from the stock’s current price, the market will eventually realize this discrepancy, and as a result, it will correct the stock price to reflect this intrinsic value.

It’s for this reason that a $0.50 stock could be very “expensive,” whereas Google shares were a dirt-cheap giveaway at $100. If you’ve checked a company’s fundamentals and found that its current share price is a lot lower than the intrinsic value you’ve calculated, you may have a bargain on your hands.

Of course, an estimate of intrinsic value is simply that: an estimate and not something set in stone. But investors such as Warren Buffett have proved that it can be a very effective (read: profitable) way of valuing a business.

There are various ways to analyze the trading market. Few of the most important of these analysis systems include technical analysis, fundamental analysis, and market sentiment analysis. Fundamental analysis is one of these ways. Fundamental analysis allows you to know the market by analyzing social, economic, and political forces that are affecting the supply and demand of an asset. You can easily understand the supply and demand rule that sets the price.

Supply and Demand Rule as Indicator

Fundamental analysis involves a number of indicators that help you determine how the economy of any particular country is working. One of these indicators is the supply and demand rule. You can use the supply and demand rule to predict the movement of price like you can identify where the price is heading. However, the difficult part is to analyze all the factors that impact the supply and demand rule.

Factors Affecting The Economy

There are certain factors that drive the economy. So it is important to you to look at the factors that affect the economy and make it move up or down. You have to fully understand the reasons how and why certain important events affect the economy of a country that ultimately affects the level of demand for the currency of that country.

The Purpose of Fundamental Analysis

The basic purpose of fundamental analysis is to find out if the current and future economic outlook of a country is good and if its currency is strengthened. The better the shape of the economy of a country, the more foreign investors will come to that country to invest. It shows that you should buy the currency of that country to obtain those important assets. For example, the U.S. dollar has gained strength as a result of the improvement in the U.S. economy.

Due to the improvements in the economy, it becomes necessary to raise interest rates in order to keep growth and inflation in control.

Higher Interest Rates

Due to higher interest rates, the dollar-denominated financial assets become more attractive. Traders and investors buy the greenbacks first in order to secure these lovely assets. As a result, the value of the dollar increases.

Economic Data And Currency Prices

This type of analysis will also help you to learn which economic data determines the currency prices moves and why it happens. You will also get to know about how the retail sales data affects the economy or vice versa.

On the whole, fundamental analysis is just another way of analyzing the strength and weaknesses of a country through the currency of that country. It is always recommended to you to use all the big ways of analysis in the forex market to be on the safe side. It is because you can’t get success with only one type of analysis.


Examples of Fundamental Analysis in a sentence


Our fundamental analysis had found things that we were not aware of but were very glad to know about now.

The fundamental analysis relied on an in-depth analysis of the financial statements to fully assess the company in question.

He was tasked with completing a fundamental analysis of the company to try and understand what their strengths and weaknesses were, and how they could improve.


Related Phrases


Book value
Economic moat
Warren Buffett
Liquidation value
Momentum investing
Random Walk Theory
Technical analysis
fundamentals
price
model
random walk theory
forex signal system
fundamental research
technical analysis
fundamentalist


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Definition Sources


Definitions for Fundamental Analysis are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 22nd November, 2021 | 0 Views.