What is Fundamental Analysis (FA)?

Fundamental analysis is an accounting and financial methodology of measuring a security's intrinsic value by examining related economic and financial factors. Fundamental analysts study anything that can affect the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.

The aim of fundamental analysis is to provide a precise estimation of a particular security’s intrinsic value. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

Fundamental and technical analyses are the two basic pillars of investment philosophy and leading schools of thought when it comes to financial markets theory. Both are very different and often oppose each other, which is why there is an everlasting debate between fundamental and technical analysts.

While both analysis methods are intended to help investors research and project the future price of a particular asset, they differ from each other in terms of how they’re applied and the tools they use to come to a conclusion.

Investors can use one or both of these complementary methods for asset picking.

Investors who base their trading decisions on the intrinsic value of an asset (long-term investors, value investors, etc.), usually prefer fundamental analysis as the primary research methodology. Day-traders, speculators, arbitrage traders, or short-term investors, on the other hand, prefer technical analysis. It gives them a quick and timely forecast of the short-term price movements they’re interested in. Some market participants, on the other hand, try to combine both methodologies to make a more accurate forecast of long-term opportunities

There are two types of fundamental analysis; qualitative and quantitative. The qualitative type of fundamental analysis involves things like the brand of a company, decisions made by management and performance of the company among other things. The quantitative part on the other hand deals with numbers, drawing conclusions from the financial statements of the company.

There are also two processes of fundamental analysis which are labelled top-down and bottom-up approach.

The top-down approach is an investment analysis approach that analyses first the macro factors of the economy, such as GDP, employment, taxation, interest rates, etc. before examining micro factors such as specific sectors or further yet companies. This approach prioritises macroeconomic, national, or market-level factors.

The bottom-up approach is an investment approach that focuses on the analysis of individual stocks and de-emphasises the significance of macroeconomic cycles and market cycles. In bottom-up investing, the investor focuses his attention on a specific company and its fundamentals, rather than on the industry in which that company operates or on the greater economy as a whole.

There are some primary factors to consider when attempting to perform fundamental analysis for a company’s stock:

To start fundamental analysis you first need to thoroughly understand the company. Next is to use financial ratios. You also need to look through the annual final reports and statements of the company. The next step is to look through the financial report of competitors and compare debt structures. Finally, the last step is to analyse the company’s prospects.

Generally, fundamental analysis can be derived from reports and financial statements of companies but there are some particular tools that are used for analysing a company.

Fundamental analysis is a vital ingredient of the financial markets’ reality. Today, the days of romantic long-term investing seem to be gone. Instead, investors are seeking short-term profits and ways to exploit momentum trading opportunities. Fundamental analysis still plays a crucial role in the strategies of the most successful investors. In the end, learning the tricks of fundamental analysis is worth it, even if it takes you more time. If you aren’t sure if this method works, just look at Warren Buffet’s net worth