Fundamental Analysis- Take Better Investment Decisions

Introduction: Fundamental analysis is the very basic aspect of investing. Investing without performing fundamental analysis about the stocks is just throwing away the money. Whether you wish to be a successful stock analyst or you wish to manage your own portfolio, knowing fundamental analysis is a must. It can be said that you aren’t actually investing if you aren’t performing fundamental analysis of the stocks. The biggest part of fundamental analysis would be to understand financial statements. This will involve analyzing revenues, expenses, assets and liabilities and various other financial aspects of a company. This analysis would basically help analysts get insights into future performance of the company.

When it comes to stocks, fundamental analysis helps in determining a stock’s value by considering various underlying factors affecting a company’s actual business prospects. The various fundamental factors used to gauge the performance of a company can be categorized into two groups.

• Quantitative analysis
• Qualitative analysis

Quantitative analysis: Simply put quantitative means something that can be measured or expressed in numerical terms. The biggest source of quantitative data is the company’s financial statements.

Qualitative analysis: Qualitative fundamentals are less tangible factors influencing company’s business prospects such as company’s key executives, board members, brand recognition of the company etc.,

Which is better among qualitative analysis and quantitative analysis?

None of the two is better than the other individually. Many analysts do consider quantitative factors along with qualitative factors for taking better decisions. Take the example of Coca-Cola, when analyzing its stock performance, it is common for any analysts to look at the stock’s annual dividend, P/E ratio, Earning per Share and many other quantitative factors, but the analysis would not be complete unless one considers its brand recognition.  Thus, it’s the combination quantitative and qualitative analysis that makes fundamental analysis a fruitful study.

What is intrinsic value?

One of the basic assumptions of fundamental analysis is that price of a stock on the stock market does not complete reflect real value of the stock. The true value of stock is known as the intrinsic value. Let us say that a stock is trading at Rs. 100. After doing extensive fundamental analysis about the company, it is determined that true value of the stock to be Rs. 120. This true value of the stock is termed as intrinsic value. This helps for an investor in taking decision because investing in a firm trading at a value lower that the intrinsic value would be profitable in the long run.

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