Fundamental Analysis

 In this blog you let's learn about the technique of fundamental analysis.

Table of contents

• Introduction
• Economic Analysis
• Industry Analysis
• Company Analysis
• Conclusion 

Introduction

Fundamental analysis is one of the most important tools used by long-term investors. Every company has its own real value (intrinsic value). If the market price of the share of the company is greater than intrinsic value then the stock is said to be overvalued. In such a situation, if you have shares of any company then it's time to sell the shares. If the market price of the share of the company is less than intrinsic value then the stock is said to be undervalued. It's time to buy the share of such a company as per your capacity. similarly, if the market price of the share of the company is equal to the intrinsic value then the stock is said to be correctly valued. It's time to hold the shares.

In the short term though the market will fluctuate due to fear and greed of the shareholders, In the long term it will follow its own intrinsic value. so, those who will invest in the company by doing fundamental analysis will ultimately win.

Long-term investors who invest in the company by performing fundamental analysis are called value investors. Benjamin Graham is also called the father of value investors. 

Fundamental analysis is one of the non-speculative methods of analysis. Generally, three types of analysis are conducted in fundamental analysis which is economic, industry, and company analysis. so while doing fundamental analysis you have to study each and every factor such as directors of the company and their qualification and interview, a salary of the top management of the company and other different aspects.

Economic Analysis

The economy of the nation is the major factor that will decide whether the market will be bearish or bullish. There is a direct relationship between the economy and the share market. If the economy of the country is growing then the share market of such country will also grow and If the economy of the country is declining then the share market of the country will also decline. If there is the establishment of more industries and factories in the country, employment opportunities will be generated. when the people will be employed, per capita income will be increased. when the per capita income increases, savings will also be increased. when the savings increase, the share market is the right place to invest such money saved by the people. when such money is invested in the share market, the demand for the shares will be high and the price of the share will rise. When income increases, expenses also increases. when expenses increases, the demand for product increases, and ultimately the profit of the company increases. When the profit of the company increases, the price of the stock also increased. while doing economic analysis both national and international economic analysis shall be done. economic growth rate, budget, inflation, monsoon, budget deficit, monetary policy, fiscal policy, and other different factors fall under economic analysis.

Industry Analysis

Economic analysis tells about the macroeconomics of the country. But Industry analysis is related to the analysis of the specific sector. If you want to invest in the hotel sector you have to do an overall analysis of the hotel industry. similarly, if you want to invest in the banking sector you have to do an overall analysis of the banking industry. under this analysis, industry analysis is done concerning the past, present, and future of a specific industry. you have to do a SWOT analysis of the industry where you are planning to invest. you have to know what are the strength, weaknesses, opportunities, and threats of that industry. similarly, you must know the regulatory body of such an industry. the central bank of every country is the regulatory body of the banking industry. The insurance board is the regulatory body of the insurance companies. policy issued by such regulating body may have a positive or negative impact. Sometimes due to abnormal situation arises like COVID-19 due to which some sector become paralyzed and it's very difficult for them to be at breakeven point. The hotel sector is paralyzing due to COVID-19. so while doing industry analysis you have to look at the challenges and opportunities of that specific sector. an investor should be farsighted while doing an industry analysis. As we all know fossils and fuel are limited in resources. so after 20-30 years, there will be high demand for electric vehicles. fossils and fuels will be very rare to find. so, there is a great potential for hydropower in near future. 

Company Analysis

There can be good company even in the bad industry. Only industry analysis is not enough to identify a good company. so before investing you have to do an analysis of each and every company. while doing company analysis you have to analyze both financial and non-financial aspects. sometimes though the financial status of the company is good its nonfinancial aspects may be worst. the director may have been involved in fraud, forgery, or other different criminal offenses. so you have to invest in such a company where the directors and top management have great vision and their intention is good enough. while doing financial analysis you have to analyze some important ratios such EPS, P/E, ROE, NET WORTH, DIVIDEND HISTORY, PROFIT MARGIN. you should know whether the AGM is conducted in time or not. annual report, quarterly report, balance sheet, profit and loss account, cash flow statement are the elements of financial statements. All those factors are important to analyze while investing in the company. Click here for management and non-financial analysis of the company.

Conclusion 

 Simply, Fundamental analysis means the analysis of fundamental factors of the company. Warren buffet also follows and believes in fundamental analysis. If you want to invest in the company then fundamental analysis is mandatory. In conclusion, what we came to know is that fundamental analysis is like your body where you carry until you are alive. similarly, you do fundamental analysis because you have to carry stocks for a long time. so you have to do research about various factors and then buy the shares and the result will be fruitful.

major ratio for fundamental analysis

Have a precious time ahead

Thank you.