“In the business world, the rearview mirror is always clearer than the windshield.”
What is fundamental analysis
Fundamental analysis is the evaluation and examination of a company for its intrinsic value, it is the cornerstone of investing. The ultimate goal of fundamental analysis is to discover a profitable and strong based company that will continue to provide return to its investors. The fundamental investors hold the belief that, a company that is growing positively over time will have its value reflect on its share price over time (i.e. the share price will rise with accordance to its increasing value)
A fundamental investor generally analyzes a stock by studying the balance sheet, profit and loss statement and cashflow statement of the corresponding company. The investor will look into the financial status of a company, including its revenue, net profit, expenses, asset and liability. Financial ratios like P/E ratio, Return on asset, Earning per share are also an important indicator that derived from the financial statements, these ratio plays an important role for investors while carrying out the fundamental analysis. Fundamental analysis can be further includes quantitative analysis which looks more into numeric and measurable data, and qualitative analysis which looks into a less tangible factors like management quality, brands and patents.
In a nutshell, Fundamental analysis examine the core value of a company and its growth over time, it is not the speculative art that just predict the price movement from chart or news.
Why use Fundamental analysis
Since to invest in stock meaning that to own a part of the company, analyze and get a clear understanding of the company that you invest in is essential before your investing decision. There’s a famous quote of Warrant buffet: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”. It is nice to make sure the company that you invest with your hard-earned money is the business that is doing well and can bring you lots return.
The benefit of Fundamental Analysis:
Opportunity in bad times
Just like you can only find out who is swimming naked when the tide goes up, bad stocks aren’t obvious when it’s a good time, and good stocks aren’t obvious, by analyze the fundamental of a company, you know that which company have their share price undervalued in bad times and which company has its price over valued during the bullish market. This helps you to accumulate or dispose certain stocks and build up a portfolio that can make you rich.
Long term Investment
Technical analysis is for short to mid-term investment, however, for long term investment you need to look into a company prospect and its value, companies that profit over time and have the ability to pay out dividend are more likely to excel in the long term. Thus, fundamental analysis is no doubt, important when you are going to buy and hold a stock for years.
Deal with market volatility
In volatile market today, traders need to act faster than ever in order to cope the faster pace of the market. Fundamental analysis, in this case, can provide a sound reason for investor to invest without merely follow the price movement. This produces sound investment decision and the investor not easily to being affected by the market sentiment.
Fundamental analysis helps you to find out:
- Is the company’s revenue growing?
- Is the company actually making a profit?
- Is the company strong-enough position to beat out its competitors in the future?
- Is the company able to repay its debts?