Fundamental analysis is a way of determining the fundamental value of a security by looking at linked economic and financial elements. Fundamental analysts look at everything that might influence the value of a security, from macroeconomic issues like the state of the economy and industry circumstances to microeconomic variables like the company’s management performance. The ultimate aim is to arrive at a figure that can be compared to the present price of an asset to determine whether it is undervalued or overpriced. Fundamental analysis determines a company’s underlying worth and potential for future growth by looking at its revenues, profits, future growth, return on equity, profit margins, and other statistics. The financial accounts of a corporation contain all of this information.
Fundamental analysis is the approach whereby one tries to calculate the intrinsic value of a stock by looking at the basic economic factors, the fundamentals, which would impact its value.
Relevant factors that will be looked at include:
-
Revenues, expenses and income
-
Growth prospects for the company
-
The competitive factors the company faces
-
Expected return on equity or assets in the industry
The goal of this analysis is to establish a value for the stock that would factor in all of these underlying factors. As the approach doesn’t look at short term pricing and trading swings this is considered a long term investment approach, as it may take time for the intrinsic value to be realized. As this factors in forward looking expectations this methodology is considered to build a valuation based on backward and forward looking information.