Fundamental analysis is the study of a company‘s ―fundamentals with the aim of calculating exactly what a listed company is worth. Based on that valuation, investors will either buy or sell its share. That sounds straightforward enough – except for the jargon and the
practicalities of how to do it.
We‘ve all heard the word ―fundamentals but it‘s not always clear what it means. Investopedia.com notes that it really means getting down to the basics of what makes a company a good investment.
In its simplest form, fundamental analysis involves looking at any numbers that can show something about what a company‘s worth. That includes the financial statements and ratios derived from those numbers that can give you more insight into whether the company is performing well, indifferently or
Investopedia.com says: ―Fundamental analysis focuses on creating a portrait of a company, identifying the intrinsic or fundamental value of its shares and buying or selling the stock based on that information.‖ That contrasts with
technical analysis, which focuses only on the trading history and share price movements of a particular stock.
Leading from that, it‘s clear that fundamental analysis is the process of looking at a business at the basic or fundamental financial level. Such analysis examines key ratios of a business to determine its financial health and provides you with the tools to calculate it‘s real or ―intrinsic value.
Fundamental analysis is that performed by most professional analysts in either stockbroking (sell side) or asset management (buy side) research teams. There are two broad approaches to fundamental analysis, which will be discussed in more depth over the next two weeks. These are called ―top-down‖ and ―bottom-up investing.
Broadly, top-down investing looks at a company‘s operating environment in addition to its own strategies and likely future performance. (The techniques can be likened to an inverted pyramid.) Taking a top-down approach to a company‘s earnings‘ prospects involves first looking at the broad macroeconomic, social and political environment in which it operates.
The focus of the analysis is then funneled and progressively narrowed to look at industryspecific or regional influences on a company‘s future economic performance. The major benefit of top-down analysis is that it ensures relevant information is included in a consistent way. It will also highlight specific industries attractive for investment.