fundamental analysis

(noun)

An analysis of a business with the goal of financial projections in terms of income statement, financial statements and health, management and competitive advantages, and competitors and markets.

Related Terms

Examples of fundamental analysis in the following topics:

  • Valuation

    • Valuation, a goal of financial management, often relies on fundamental analysis of financial statements.
    • Valuation often relies on fundamental analysis (of financial statements) of the project, business, or firm, using tools such as discounted cash flow or net present value.

  • Limitations of Financial Statement Analysis

    • Ratio analysis using financial statements includes accounting, stock market, and management related limitations.
    • Ratio analysis using financial statements as a tool for performing stock valuation can be limited as well.
    • While the weak form of this hypothesis argues that there can be a long run benefit to information derived from fundamental analysis, stronger forms argue that fundamental analysis like ratio analysis will not allow for greater financial returns.
    • In another view on stock markets, technical analysts argue that sentiment is as much if not more of a driver of stock prices than is the fundamental data on a company like its financials.
    • These audiences also see limits to ratio analysis as a predictor of stock market returns.

  • Trend Analysis

    • In addition to using financial ratio analysis to compare one company with others in its peer group, ratio analysis is often used to compare the company's performance on certain measures over time.
    • Trend analysis can be performed in different ways in finance.
    • Fundamental analysis, on the other hand, relies not on sentiment measures (like technical analysis) but on financial statement analysis, often in the form of ratio analysis.
    • Creditors and company managers also use ratio analysis as a form of trend analysis.
    • Analyze the benefits and challenges of using trend analysis to evaluate a company

  • Evaluating Financial Statements

    • With a few exceptions, the majority of the data used in ratio analysis comes from evaluation of the financial statements.
    • With a few exceptions, such as ratios involving stock price, the majority of the data used in ratio analysis comes from the financial statements.
    • The evaluation of a company's financial statement analysis is a form of fundamental analysis that is bottoms up.
    • While analysis of a company's prospects can include a number of factors, including understanding the economic situation or the industry or sentiment about the company or its products, ratio analysis of a company relies on the specific company financials.
    • Evaluating financial statements involves getting the numbers in order and then using these figures to perform ratio analysis.

  • Role of Financial Markets in Providing Feedback to Management

    • This may be the result of data-based fundamental analysis or more sentiment-based analysis, meaning that the feedback from the stock market can vary in its usefulness for mangers making short-term and long-term decisions.

  • Expected Dividends, No Growth

    • Value investing involves buying securities with shares that appear underpriced by some form of fundamental analysis.

  • The Efficient Market Hypothesis

    • Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns.
    • This "soft" EMH does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from market "inefficiencies. " However, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock markets to trend over time periods of weeks or longer and that, moreover, there is a positive correlation between degree of trending and length of time period studied (but note that over long time periods, the trending is sinusoidal in appearance).
    • Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns.

  • Announcements, News, and Returns

    • Analysts may research a stock from a fundamental or a technical lens.
    • Fundamental analysis involves analyzing a company's financial statements and health, its management and competitive advantages, and its competitors and markets .
    • A stock's price is essentially determined by the buying and selling decisions of fundamental and technical analysts, who often manage large sums of money and have access to broad pools of data.

  • Balance Sheet Analysis

    • Balance sheet analysis is process of understanding the risk and profitability of a firm through analysis of reported financial information.
    • Financial statement analysis is the foundation for evaluating and pricing credit risk and for doing fundamental company valuation.
    • Two types of ratio analysis are performed: 3.1) Analysis of risk and 3.2) analysis of profitability:
    • Risk analysis consists of liquidity and solvency analysis.
    • Cash flow analysis is also useful.

  • Classification

    • Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
    • Ratio analysis is one of three methods an investor can use to gain that understanding.
    • Financial statement analysis is the process of understanding the risk and profitability of a firm through analysis of reported financial information.
    • Ratio analysis is a foundation for evaluating and pricing credit risk and for doing fundamental company valuation.
    • Financial ratio analysis allows an observer to put the data provided by a company in context.