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  4. What Is Fundamental Analysis?

    Fundamental analysis is the evaluation of a stock based on the fundamental and financial status of a company. This type of analysis takes into consideration various factors such as the financial health of a company, management efficiency, and market competition. By evaluating these factors, the analyst can determine whether a company is fundamentally strong or not. During this analysis, the macroeconomic conditions and the company’s specific conditions are taken into consideration.

    The main idea of this analysis is to know whether buying, selling, or holding a company’s stock or security is viable and advisable. Fundamental analysis can be based on historical data or current data. This analysis helps to find the intrinsic value of a stock and predict the company’s future growth.

    After the completion of the analysis, there should be answers to questions such as:

    1. Is there a growth in the company’s revenue?

    2. Is the company strong enough to sustain competition?

    3. Can the company meet its financial obligations such as paying debts on time?

    4. Is the management efficient in the administration of the company’s activities?

    5. What is the credit risk of the company?

    As highlighted above, the major factors given highest consideration by fundamental analysis include growth, value, quality, and income. A stock’s value in the stock market is a great determinant when making a buy or sell decision. However, it is not easy to define the value of a stock. Some analysts have a different view of the term “value”. In the same vein, growth is a crucial factor when using this analysis. Analysts analyzing a stock using fundamental analysis consider growth at reasonable price (GARP) as another critical factor.

    Some of the tools used to do fundamental analysis of a stock include Price to Earnings Ratio (P/E), Earnings per Share (EPS), Price to Sales (P/S), Projected Earnings Growth (PEG), Price to Book (P/B), Book Value, Return on Equity, Dividend Yield, and Dividend Payout Ratio.

    These numbers and ratios can be found at online financial sites and in the company’s financial statements. The ratios are believed to give insightful and meaningful information about the value of a company’s stock.

    There is a school of thought that claims fundamental analysis does not provide an advantage. They reason that all the required information is available to the public.

    Although value and growth may differ from different analysts’ perspectives, fundamental analysis is one of the essential strategies for stock market investing and trading.