What is fundamental analysis?'
Fundamental Analysis is a technique that aims to determine a security’s value by examining the variables that determine value such as current and future earnings, interest rates and risk variables. After this analysis, if the security’s intrinsic value is determined to be more than the prevailing market price, then it makes sense to purchase the security, believing that over time, the security’s value and market price will converge.
3 main variables to consider when determining a companies 'Fair Price'
Growth Profile
Risk Profile
Relative Value
Fundamental analysis aims to analyse a company and answer the above question.
The first place to start with fundamental analysis is to look at the economy and the various macro-economic factors that would influence the company you are interested in. It is important then, to review the industry within which they operate, taking into consideration factors such as market share, industry growth, competition, and regulation within the industry.
Secondly, from there, the analysis becomes more specific, taking into consideration particularly important factors such as a company’s position within the industry, management skill, shareholder rights and the financial and information transparency.
Finally, fundamental analysis looks at the three important financial statements. They are the balance sheet, the income statement and the cash flow statement. From these statements a large number of financial calculations can be performed that all assist in obtaining a valuation for the company. I will discuss three commonly used financial ratios, and how they can be used to assist in your investment decisions.