Fundamental analysis is an investment methodology which looks to value securities (i.e. stocks, bonds, etc.) by incorporating all available financial data on a company, its competitors and the broader market as well as economic data about the markets which are relevant for the company.
Looking at the financial data of a company means assessing income statements, balance sheets and cash flow statements in order to estimate what the company’s stock *should* be worth. Typically, this is done by using financial data to calculate and assess key financial ratios (Earnings per Share, Price to Earnings, Price to Sales, Price to Book, Dividend payout ratio, Dividend yield, Return on Equity, Return on Assets, and many more).
For a more refined valuation of the company’s stock, you could also:
Add economic data about the countries in which the company operates, in order to anticipate likely customer / supplier behaviour
Analyse the company’s competitors and their recent financial performance
Forecast the company’s future earnings / cash flows in order to judge likely future performance
Examine other factors such as contractual agreements or intellectual property depending on their importance to the company’s operations
Combining one or more of the above, fundamental analysis provides a theoretical estimate of a company’s share price. By comparing this to the real share price, it might make sense to buy/sell a company’s shares if you conclude they are worth more/less than its current share price.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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