For any investor the most important questions are: Which security to buy and how long to hold the security? Though there are several tools available to zero in on a particular security. While few tools are very simple to understand but others are a bit complex. Fundamental analysis is a very comprehensive approach to decide upon the intrinsic value of a security.
In this series of Fundamental Analysis we will try understand various aspects of a company and economic analysis which any rational investor should look into before taking any investment decision.
What is Fundamental Analysis?
While taking any investment decision, fundamental analysis consist of set of rules which determine the inherent value of a security while trying to analyze a company’s business model, financials and future prospects. Simply put, fundamental analysis is a study of anything that can affect a company’s value including macro and micro economic conditions.
Basic idea behind fundamental analysis is to use the various tools to decide whether a security is undervalued or overvalued and earning capacity of a company.
We try to answers following questions.
- Is a company making profit?
- Revenue trends of a company.
- Current ratios to decide if a company has enough working capital.
- Non-Current ratios to decide is company can remain solvent over longer period.
- Management of a company.
- Inventory Management
- Investment in up gradation of technology
- Investment in Research and Development
How to do Fundamental Analysis?
Fundamental analysis specifies the overall financial health of a company by looking into key financial ratios; while comparing it with competitors. So with fundamental analysis we segregate fundamentally strong and week companies. Fundamental analysis can broadly be divided into categories which we would study in detail in the following articles.
- Factors affecting a company: To determine financial health of a company we study financial statements, business model and management of a company.
- Factors affecting the industry: Understanding of overall industrial growth, number of players in a given industry and market share of each player within industry; are few of the very important questions which are to be answered before making investment decision.
Fundamental analysis can be done with the help of publicly available data.
- Balance sheet
- Income Statement
- Cash Flow Statement
- Financial fillings with Income Tax department
Above mentioned financial statements help us to look into key financial ratios.
This series on Fundamental analysis would try to answer questions which every investors has while taking investment decisions. From next chapter onward we would look into every aspect of fundamental analysis in detail.