Fundamental Analysis

The definition of Fundamental Analysis

Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices.

The fundamental information that is analyzed can include a company’s financial reports, and non-financial information such as estimates of the growth of demand for competing products, industry comparisons, and economy-wide changes.

Main Strategy

To a fundamentalist, the market price of a stock tends to move towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would purchase the stock, and if the intrinsic value of a stock was below the market price, the investor would sell the stock.

To start a fundamentalist makes an examination of the current and future overall health of the economy as a whole. In this step you should attempt to determine the direction and level of interest rates.

After you analyzed the overall economy then analyze firms individually. You should analyze factors that give the firm a competitive advantage in its sector such as management experience, history of performance, growth potential, low cost producer, and etc.

Some expressions of Stock Fundamental Analysis

For beginning I describe some stock fundamental analysis expressions that are more important:

#1- EPS: (Earnings Per Share)

The portion of a company’s profit allocated to each outstanding share of common stock. The amount is computed by dividing net earnings by the number of outstanding shares of common stock. For example, a corporation that earned $10 million last year and has 10 million shares outstanding would report earnings per share of $1.

#2- P/E Ratio: (Price/EPS)

Also called its “earnings multiple”, Price of a stock divided by its earnings per share. The P/E ratio may either use the reported earnings from the latest year or employ an analyst’s forecast of next year’s earnings. P/E gives fundamentalist investors an idea of how much they are paying for a company’s earning power.

An important notice here is that the P/E ratio is ultimately not an objective measure; a high P/E ratio might show an overvalued stock, or it might reflect a company with high potential for growth.

#3- Dividend

Dividend is an amount of the profits that a company pays to people who own shares in the company. When a company earns a profit, some of this money is typically reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend.

#4- Book Value

The book value of an asset or group of assets is sometimes the price at which they were originally acquired ( historic cost ), in many cases equal to purchase price.

#5- Growth Stocks

Growth Stocks in finance, are stocks that appreciate in value and yield a high return on equity (ROE). Analysts compute ROE by taking the company’s net income and dividing it by the company’s equity. To be classified as a growth stock, analysts expect to see at least 15 percent ROE.

Why Fundamental Analysis is needed?

One of defects in Technical Analysis is that it’s a little slow.

It means that the increasing trend of a stock started before, but after some tardiness (maybe after some days) signals of purchase appear in Technical Analysis method. Or for example on the ground of news that company publishes, you could distinguish decreasing trend of stock is starting (with Fundamental Analysis) but decreasing trend’s signals appear with some tardiness in Technical Analysis.

In Technical Analysis, with notice to the past of stock you could forecast its future.

Suppose that a new company who enter in the stock market, There is no past to help us to forecast its future, so you should get helps from Fundamental Analysis.

Sometimes, you find a stock in the stock market that it’s good to buy with Technical Factors but when you analyze it with Fundamental Factors you find that the price of this stock is too far from its real value and its price is increased like a bubble and maybe there are some manipulations in the stock.