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In finance and investing, “equity” refers to shares of stock. Therefore, equity fundamental analysis and stock fundamental analysis essentially mean the same thing. Equity fundamental analysis is a technique used by investors to determine a Stock’s intrinsic value—the stock’s true worth. This analysis helps investors identify whether a stock is undervalued, overvalued, or fairly valued. Whether you are an experienced investor or just starting, performing an equity fundamental analysis is crucial to avoid poor investment decisions. In this guide, we will explore all the essential aspects of equity fundamental analysis to assist you in making well-informed investment decisions.
What is Equity Fundamental Analysis?
Equity Fundamental Analysis, where fundamental refers to those important factors that influence the value and performance of a financial asset, these fundamental factors are essential for understanding the asset’s true worth. Fundamental analysis is not only applied to equity/stocks rather it is also applied to evaluate bonds, mutual funds, real estate, and other investment vehicles. In each case, the goal of fundamental analysis is to understand the real value and potential of an investment to make smart decisions.
Equity fundamental analysis is an approach used to evaluate the intrinsic value of a stock, which represents a stock’s true worth. This method is primarily used by investors rather than traders, especially for long-term investment decisions. It involves a comprehensive examination of a company’s financial statements, business model, financial ratios, and economic factors to determine the stock’s true worth, whether it is undervalued, overvalued, or fairly valued.
Investors use fundamental analysis to assess a company’s financial health and growth potential. By analyzing these fundamental factors, they aim to identify stocks that are undervalued and have the potential to deliver higher returns over time. This method helps investors make informed decisions by focusing on the company’s long-term prospects rather than short-term market fluctuations.
In short, equity fundamental analysis involves examining key factors that help investors choose the right stock at the right time to maximize their returns on investment. This process includes evaluating a company’s financial health, earnings potential, and overall business environment to make informed investment decisions. By performing the equity fundamental analysis properly investors can achieve higher returns on their capital over a period of time.
Components of Equity Fundamental Analysis
Equity Fundamental analysis is categorized into two types: Quantitative analysis and Qualitative analysis. To gain a comprehensive understanding of a company, investors should conduct both qualitative and quantitative analysis. This combined approach provides a more complete and accurate picture of the company’s performance and potential.
♦ Quantitative analysis: It refers to examining a company’s financial data using numbers and statistics. Its components include:
1. Financial Statement: Financial statements are essential for evaluating a company’s financial health, offering a snapshot of its performance. It includes:
- Income statement: An income statement, also called a profit and loss statement, is a financial report that provides a summary of a company’s revenues, expenses, and profits or losses over a specific period of time.
- Balance sheet: A balance sheet, also known as a statement of financial position, is divided into three main sections: Assets, Liabilities, and Shareholders’ Equity. It provides a detailed snapshot of a company’s assets, liabilities, and shareholders’ funds at a specific point in time. This report is essential for evaluating the company’s financial stability and liquidity.
- Cash flow statement: A cash flow statement is a financial report that provides a detailed summary of a company’s cash inflows and outflows over a specific period. It tracks how cash is generated and used in operating, investing, and financing activities, giving insight into the company’s liquidity and financial flexibility.
2. Financial ratios: Financial ratios are numerical indicators used to assess a company’s financial performance and condition. Derived from the company’s financial statements, these ratios provide valuable insights into different aspects of the company’s operations, such as profitability, liquidity, efficiency, and solvency. They assist investors, analysts, and management in making informed decisions by offering a clearer understanding of the company’s financial health. Some of the important financial ratios are:
1. Profitability ratio – Profitability ratios are used to evaluate a company’s ability to generate profits in relation to its revenue, assets, equity, and other financial factors. These ratios help investors in analyzing how efficiently a company is utilizing its resources to generate profits. Key profitability ratios are:
- Return on assets (ROA): It measures the percentage of profit a company generates by using its assets. A higher ROA signifies that the company is effectively utilizing its assets to generate profit, while a lower ROA suggests less efficient use of its assets.
Formula: Net profit/total assets * 100
Net profit = The total amount of a company’s profit after all expenses, taxes, and interests.
Total assets = The total value of assets owned by the company, including cash, accounts receivable, inventory, and fixed assets.
Example: ABC Ltd.
Net profit: 2,00,000
Total assets: 10,00,000
Calculation: 2,00,000/10,00,000 * 100 = 20%
ROA above 5% is generally considered good. Therefore, ABC Ltd generated 20% ROA which is good.
- Gross profit margin: Gross profit margin refers to the percentage of profit a company generates from its total revenue after subtracting the cost of goods sold (COGS).
Formula: Gross profit/Revenue * 100
Gross profit = Gross profit is the amount of profit a company earns from its goods or services before subtracting the costs incurred to generate that revenue, like administrative costs, interest, and taxes.
Revenue = The total amount of goods and services a company sells.
Example: ABC Ltd.
Gross profit: 3,00,000
Revenue: 21,00,000
Calculation: 3,00,000/21,00,000 * 100 = 14.28%
A gross profit margin above 40% is considered high. Therefore, ABC Ltd’s gross profit margin is 14.28% which is low.
- Net profit margin: It measures the percentage of revenue remaining after subtracting all expenses, including salaries, taxes, interests, etc. A higher net profit margin means that a company is efficiently controlling its costs and turning a greater share of its revenue into profit.
Formula: Net profit/Revenue * 100
Net profit = The total amount of profit remaining from the revenue after subtracting all the expenses.
Example: ABC Ltd.
Net profit: 5,00,000
Revenue: 30,00,000
Calculation: 5,00,000/30,00,000 * 100 = 16.66%
A net profit margin above 15% is considered favorable. Therefore, ABC Ltd. is achieving a net profit margin of 16.66%, which is favorable.
- Return on equity (ROE): The Return on Equity ratio measures how efficiently a company uses shareholders’ investments to generate profits. In simple terms, it indicates the percentage of profit the company earns for each rupee of shareholders’ equity over a financial year. A higher ROE indicates that a company is efficiently using equity capital to generate profits.
Formula: Net profit/shareholder’s equity * 100
Shareholder’s equity = Shareholders’ equity is the value remaining after subtracting a company’s total liabilities from its total assets. It represents the owners’ claim on the company’s assets.
Example: ABC Ltd.
Net profit: 1,00,000
Shareholder’s equity: 9,00,000
Calculation: 1,00,000/9,00,000 * 100 = 11.11%
A Return on Equity (ROE) above 15% is considered good. Therefore, ABC Ltd. has generated an ROE of 11.11% which indicates modest performance.
2. Liquidity ratio: Liquidity ratios help investors assess the company’s financial health and its capacity to cover short-term liabilities without needing to sell long-term assets or seek extra funding. Key liquidity ratios are:
- Current ratio: The Current ratio measures a company’s ability to pay its short-term liabilities using its short-term assets (Current assets). A ratio above 1 indicates that a company has more current assets than its current liabilities.
Formula: Current assets/Current liabilities
Current assets = It refers to assets that can be converted into cash within one year, including cash, accounts receivable, and inventory.
Current liabilities = It refers to debts or obligations that a company is required to settle within one year.
Example: ABC Ltd.
Current assets: 5,00,000
Current liabilities: 4,00,000
Calculation: 5,00,000/4,00,000 = 1.25
A current ratio of around 1.5 to 2.0 is generally considered good. Therefore, ABC Ltd’s current ratio is 1.25 which is acceptable but slightly below the ideal range.
- Quick ratio: It is also known as acid test ratio, it measures a company’s ability to cover its short-term liabilities using its current assets, excluding inventory. It provides a more precise assessment of liquidity compared to the current ratio by focusing on assets that can be quickly converted into cash.
Formula: Current assets – Inventory/Current Liabilities
Inventory = It refers to the goods and materials a company holds for sale or use in production. It consists of completed products, raw materials, and goods that are still being worked on.
Example: ABC Ltd.
Current assets: 10,00,000
Inventory: 4,00,000
Current liabilities: 3,00,000
Calculation: 10,00,000 – 4,00,000/3,00,000 = 2
A quick ratio above 1 is considered good. Therefore, ABC Ltd’s quick ratio is 2, indicating that the company has twice as many liquid assets as needed to cover its short-term liabilities.
- Cash ratio: Cash ratio measures a company’s ability to cover its short-term liabilities (Current liabilities) using only its most liquid assets: Cash and Cash equivalents. A cash ratio above 1 indicates that a company has more cash and cash equivalents than its current liabilities.
Formula: Cash + Cash equivalents/Current liabilities
Cash equivalents = It refers to highly liquid investments that are easily convertible into cash with little risk of value change. It includes Commercial paper, marketable securities, T-bills, etc.
Example: ABC Ltd.
Cash: 1,00,000
Cash equivalents: 1,50,000
Current liabilities: 2,00,000
Calculation: 1,00,000 + 1,50,000/2,00,000 = 1.25
A cash ratio of around 0.5 to 1 is considered good. Therefore, ABC Ltd’s cash ratio is 1.25 indicates a very strong liquidity position, suggesting that the company has more than enough cash to cover its short-term liabilities.
3. Efficiency ratio: It is used to assess how well a company utilizes its assets and manages its operations to generate revenue. These ratios measure how effectively a company converts its resources into sales and profits, indicating the efficiency of its operations and resource management. Key efficiency ratios are:
- Inventory turnover ratio: It measures how efficiently a company manages its inventory by indicating how often inventory is sold and replaced over a specific period. It helps evaluate how effectively a company turns its inventory into sales.
Formula: Cost of goods sold (COGS) / Average inventory
COGS = The total cost of goods that are sold in a financial year by the company.
Average inventory = The average value of inventory during the period, typically calculated as Inventory at the beginning of the period + Inventory at the end of the period / 2.
Example: ABC Ltd.
Cost of goods sold (COGS): 6,00,000
Beginning inventory: 1,00,000
Ending inventory: 1,50,000
Calculations: 1,00,000 + 1,50,000/2 = 2,50,000 / 2
Average inventory = 1,25,000
Inventory turnover ratio = 6,00,000/1,25,000 = 4.8
An inventory turnover ratio of 5 to 10 is usually seen as strong. With an inventory turnover ratio of 4.8, ABC Ltd. indicates reasonable inventory management, though there is some potential for enhancing efficiency.
- Accounts receivable turnover ratio: It measures how effectively a company collects its accounts receivables. A high accounts receivable turnover ratio indicates that a company is effectively collecting its receivables and has efficient credit and collection processes.
Formula: Net credit sales / Average account receivables
Net credit sales = The total sales made on credit, excluding returns and discounts, during the period.
Average account receivables = Account receivables refers to the payments which a company receives from its customers for the credit sale, during the period. Average account receivables can be calculated by: Account receivables at the time of beginning of the period + at the end of the period / 2.
Example: ABC Ltd.
Net credit sales: 6,00,000
Average account receivables: 1,50,000
Calculation: 6,00,000/1,50,000 = 4
An accounts receivable turnover ratio between 5-7 is typically considered good. Therefore, ABC Ltd’s ratio is 4 which is acceptable but indicates to improve it.
- Asset turnover ratio: The Asset Turnover ratio assesses how well a company utilizes its assets to produce sales revenue. A higher ratio suggests that the company is efficiently utilizing its assets to produce sales.
Formula: Net sales/Average total assets
Net sales = Total amount of revenue generated from selling goods and services, excluding returns and discounts.
Average total assets = The average value of total assets during a period, typically calculated as Total assets at the beginning of the period + Assets at the end of the period / 2.
Example: ABC Ltd.
Net sales: 6,00,000
Average total assets: 4,00,000
Calculation: 6,00,000/4,00,000 = 1.5
An Asset Turnover Ratio above 1 is viewed as favorable. Hence, with a ratio of 1.25, ABC Ltd. is efficiently managing its assets.
4. Solvency ratio: The solvency ratio is used to assess a company’s ability to meet its long-term debts and stay financially stable. In simple terms, it shows what fraction of a company’s total assets are funded by its total liabilities. It measures a company’s financial stability and long-term health by evaluating its ability to cover long-term debts with its assets and equity. Key solvency ratios are:
- Debt to equity ratio: It measures the proportion of a company’s financing that comes from debt versus equity. A lower ratio is seen as favorable because it suggests the company relies less on debt.
Formula: Total Debt/Shareholder’s equity
Total liabilities = Total liabilities represent the total amount of debts and obligations a company owes to external parties. It includes both current liabilities (short-term) and Non-current liabilities (long-term).
Shareholder’s equity = It represents the funds owned by the company’s shareholders. It’s the remaining amount for shareholders after selling the company’s assets and paying off its liabilities.
Example: ABC Ltd.
Total liabilities: 5,00,000
Shareholder’s equity: 4,00,000
Calculation: 5,00,000/4,00,000 = 1.5
A Debt-to-Equity Ratio of around 0.5 to 1.0 is generally considered favorable. Therefore, ABC Ltd. A ratio of 1.25 signifies a higher level of debt compared to equity, which is unfavorable.
- Interest coverage ratio: It is used to determine how easily a company can pay interest on its outstanding debt. It measures a company’s ability to meet its interest obligations from its earnings before interest and taxes (EBIT). A higher interest coverage ratio indicates that the company can easily cover its interest payments with its earnings, suggesting strong financial health.
Formula: Earnings before interest and taxes (EBIT) divided (/) by interest expense
EBIT = The company’s profits before deducting interest and taxes from it.
Interest expense = The total interest payments the company must make on its outstanding debt.
Example: ABC Ltd.
EBIT: 10,00,000
Interest expense: 5,00,000
Calculations: 10,00,000/5,00,000 = 2
An Interest Coverage Ratio of around 2 to 3 is generally considered acceptable. Therefore, ABC Ltd’s ratio is 2 which is acceptable.
- Debt ratio: It measures the proportion of a company’s total assets that is financed through debt. In simple words, it shows how much of the company’s assets are funded by borrowings rather than equity. A higher debt ratio indicates a greater proportion of assets are financed by debt, whereas a lower debt ratio suggests a smaller proportion of assets are financed by debt.
Formula: Total liabilities/Total assets
Example: ABC Ltd.
Total liabilities: 5,00,000
Total assets: 15,00,000
Calculation: 5,00,000/15,00,000 = 0.33
A Debt Ratio of around 0.5 is considered good. Therefore, with a Debt Ratio of 0.33, ABC Ltd. has a lower level of debt relative to its assets, which is good.
- Equity ratio: The Equity Ratio measures the proportion of a company’s total assets that are financed by shareholders’ equity. In simple terms, it shows how much of the company’s assets are funded by the owners’ investment rather than by borrowing.
Formula: Shareholder’s equity/Total assets
Example: ABC Ltd.
Shareholder’s equity: 4,00,000
Total assets: 6,00,000
Calculation: 4,00,000/6,00,000 = 0.66
An Equity ratio above 0.6 indicates that a larger portion of a company’s assets are financed by equity.
5. Valuation ratio: Valuation ratios are used to determine the value of a company’s stock by comparing its price to financial metrics like earnings or assets. They help investors assess whether a stock is undervalued, overvalued, or fairly valued. Key valuation ratios are:
- Price to earnings (P/E) ratio: The P/E Ratio is used to evaluate a company’s stock price in relation to its earnings. The value of the PE ratio indicates how much investors are paying for each rupee of the company’s earnings. This ratio helps investors determine whether a stock is overvalued, undervalued, or fairly valued.
Formula: Share Price / Earnings per share
Share price = Current share price of the company.
Earnings per share: It shows the portion of a company’s profit allocated to each share. Formula for EPS: Net income – Dividend on preferred stock/ Average outstanding shares
Example: ABC Ltd.
Share price: 50
Earnings per share (EPS): 5
Calculation: 50/5=10
ABC Ltd.’s P/E ratio is 10, which means investors are paying 10 rupees for each 1 rupee of the company’s earnings.
- Price to book (P/B) ratio: The P/B ratio is used to compare a company’s current share price with its book value per share. It assists investors in determining if a stock is overvalued or undervalued. Essentially, the P/B ratio reflects how much investors are willing to pay for each rupee of the company’s net assets. A P/B ratio below 1.0 may indicate that the stock is undervalued or that the company might be facing financial challenges. Conversely, a ratio above 1.0 suggests that the stock may be priced higher than its book value, potentially due to expectations of strong future growth.
Formula: Share price/Book value per share
Book value per share = The value of a company’s assets minus its liabilities, divided by the number of outstanding shares.
Example: ABC Ltd.
Share price: 50
Book value per share: 15
Calculation: 3.33
A P/B ratio of 3.33 suggests that the stock is valued higher than its book value. This could indicate that investors expect significant future growth of the company.
- Dividend yield ratio: The Dividend Yield Ratio shows the percentage of a dividend an investor will receive relative to the company’s stock price, over a financial year.
Formula: Annual dividends per share/ Price per share * 100
Annual dividends per share: The total dividend amount a company pays out to shareholders for each share every financial year.
Example: ABC Ltd.
Annual dividends per share: 10
Share price: 450
Calculations: 10/450 * 100 = 2.22%
This means the company pays an annual dividend of 2.22% per share, amounting to INR 10.
3. Economic indicators: Economic indicators provide insight into the broader economic environment in which a company operates. Key indicators include:
- Gross Domestic Product (GDP): It measures the total value of goods and services produced within a country. A growing GDP indicates a healthy economy, which can positively affect company profits.
- Inflation rates: Inflation rates indicate how quickly the overall price level of goods and services is increasing. High inflation can erode purchasing power and affect a company’s costs and pricing strategies.
- Interest rates: Interest rates, set by the RBI, represent the cost of borrowing money. Higher interest rates can raise a company’s cost of capital and reduce profitability, while lower rates can boost economic growth.
♦ Qualitative analysis: It includes non-numeric elements that can affect a company’s performance. These include:
1. Business model: Analyzing a company’s business model is essential for understanding how it functions and makes money. It includes revenue streams, costs, market position, distribution channels, partnerships, target customers, etc.
2. Innovation and R&D: Assess the company’s focus on innovation and its investment in research and development. Companies that invest in R&D may have a competitive advantage through new products or technologies.
3. Management and Governance: The quality of a company’s management and governance can significantly influence its performance.
- Management experience: Evaluate the experience, background, and effectiveness of the company’s executives and board members.
- Corporate Governance: Review the company’s governance practices, including board structure, shareholder rights, and executive compensation.
4. Corporate Culture and Values:
- Organizational Culture: Examine the company’s internal culture, including employee morale, values, and work environment.
- Social Responsibility: Consider the company’s commitment to social and environmental responsibility, including sustainability practices and community involvement.
5. Growth Strategies: Review the company’s plans for expansion, such as entering new markets, launching new products, or making acquisitions.
6. Industry and Market Analysis: Understanding the industry and market conditions is crucial for evaluating a company’s performance. Consider factors such as:
- Industry trends: Industry trends involve analyzing technological progress, changes in regulations, and shifts in consumer behavior. Such factors offer insights into industry evolution and help evaluate a company’s potential performance.
- Comparative analysis: This includes assessing a company’s market position, competitive advantages, and strategic positioning. This helps investors understand how well a company performs compared to its peers.
Why is Fundamental Analysis important?
Equity fundamental analysis is essential for investors planning to invest in stocks, as it provides a comprehensive view of a company’s financial health and performance. This analysis helps investors determine whether a stock is a worthwhile investment by revealing key insights into the company’s overall financial condition. Here’s a breakdown of its importance:
- Determining Intrinsic Value: Equity fundamental analysis helps investors find the intrinsic value of a stock by evaluating key financial and business metrics. This intrinsic value represents the actual worth of a company’s stock, based on its financial health, performance, and future growth potential. Comparing the intrinsic value to the current stock price allows investors to determine if a stock is undervalued, overvalued, or fairly valued.
- Informed Investment Decision: By providing a detailed view of a company’s financial situation, business model, and market conditions, equity fundamental analysis enables investors to make well-informed decisions.
- Evaluating Financial Health: Fundamental analysis involves examination of a company’s financial statements – such as income statement, balance sheet, and cash flow statement, through which an investor gets access to a company’s profitability, liquidity, and financial stability.
- Long-term Growth Potential: Equity fundamental analysis assesses long-term growth potential by examining a company’s growth metrics, including revenue, earnings, and market opportunities. By understanding these elements, investors can identify companies with promising long-term growth opportunities and strong performance potential.
- Risk Management: Evaluating a company’s financial health, industry position, and economic factors helps investors manage risk by providing a clear understanding of the potential challenges and uncertainties a company may face. It allows investors to make more informed decisions and avoid high-risk investments.
When to Perform Fundamental Analysis
Fundamental analysis is typically conducted at various stages throughout the investment decision-making process, as stated below:
- Initial investment evaluation: Before investing, investors should apply equity fundamental analysis to assess a company’s financial health, growth potential, and intrinsic value of the stock. This involves examining financial statements, growth metrics, and market conditions to determine whether investing in the company is a sound decision.
- Periodic review: Even after investing, fundamental analysis should be conducted periodically to monitor the company’s performance. Regular evaluations help investors stay informed about changes in financial health, management effectiveness, and market conditions that could impact the investment’s performance.
- Market changes: During significant market events, equity fundamental analysis helps investors reassess the potential impact on their investments. It enables them to make more informed decisions about whether to hold, adjust, or liquidate their positions. Major events such as economic downturns, regulatory changes, shifts in consumer behavior, and other significant developments can influence investment outcomes.
- Exit strategy: Before selling an investment, equity fundamental analysis is essential for an investor to determine whether the company still meets their investment criteria or if it is time to exit due to changes in its financial condition or growth outlook.
Equity Fundamental Analysis - Process
Here’s a step-by-step approach to performing an equity fundamental analysis:
1. Define your goals: First, define your investment goals—whether you seek long-term growth, dividend income, or other objectives. Your specific goals will guide the analysis process.
2. Collect financial data: Collect the company’s financial statements – Income statement, Balance sheet, and Cash flow statement. Use reliable sources such as the company’s official website, authorized Broker’s applications, trusted financial platforms, etc.
3. Analyze financial statements: Calculate key financial ratios, including profitability, liquidity, efficiency, solvency, and valuation ratios. These metrics will assist in assessing the company’s overall financial health and performance.
4. Evaluate economic and industry conditions: Analyze economic indicators and industry trends to understand the external environment:
- Economic indicators: It includes GDP growth, inflation rates, interest rates, etc.
- Industry analysis: Examine industry growth rate, competitive landscape, and regulatory conditions.
5. Consider other qualitative factors:
- Business model: Understand the company’s business model and competitive advantage.
- Innovation: Evaluate the company’s commitment to innovation and R&D.
- Management experience: Evaluate the experience of the company’s key executives and board members.
- Corporate governance: Review the company’s governance practices, including board structure, shareholder rights, and executive compensation.
- Growth strategies: Review the company’s plans for expansion, such as entering new markets, launching new products, or making acquisitions.
6. Comparison with peers: Compare the company’s financial ratios with those of its industry peers and relevant market benchmarks. This comparison helps evaluate how well the company performs relative to others in the same sector.
7. Formulate your investment strategy: Develop your investment strategy based on your analysis. Determine whether the company represents a buy, hold, or sell opportunity by comparing its intrinsic value to the current market price.
8. Monitor and review:
- Ongoing Monitoring: Continuously monitor the company’s performance and market conditions.
- Review: Regularly update your analysis with new financial data and developments.
Advantages & Drawbacks of Fundamental Analysis
Advantages
- Comprehensive evaluation: Equity fundamental analysis offers investors a detailed insight into a company’s financial health, business model, and overall performance by analyzing financial statements, ratios, and qualitative factors.
- Long-term perspective: Fundamental analysis is focused on long-term investment, making it ideal for investors with a long-term investment horizon.
- Informed decision-making: By analyzing financial metrics and forecasts, investors can estimate a company’s intrinsic value, helping investors make informed decisions.
Drawbacks
- Time-intensive: Gathering and examining financial statements, industry reports, and qualitative data can require a significant amount of time.
- Reliance on historical data: Fundamental analysis heavily relies on historical financial data, such as past income statements, balance sheet, and cash flow statements. Changes in market conditions, technology, or competitive dynamics can alter a company’s prospects, making past performance less relevant.
- Market conditions: Even if an investment is well-researched and seems solid, it can still underperform because of overall market conditions or unexpected events.
Fundamental Analysis Vs. Technical Analysis
| Parameters | Fundamental Analysis | Technical Analysis |
|---|---|---|
|
Focus |
Fundamental analysis focuses on evaluating a company’s intrinsic value by analyzing financial statements, industry conditions, and economic factors. It looks at aspects such as earnings, revenue, growth potential, and overall financial health to determine whether a company’s stock is undervalued, overvalued, or fairly valued.
|
Technical analysis focuses on analyzing price movements and trading volumes through charts and technical indicators. It examines historical price patterns and trends to forecast future price movements and market behavior.
|
|
Time |
Fundamental analysis is employed for long-term investment perspectives and focuses on the factors influencing a company's performance. It involves examining financial ratios, earnings reports, balance sheets, and other key elements to assess a company's overall health and potential. |
Technical analysis is used for short- to medium-term investment strategies and relies on chart patterns and statistical data. It employs tools such as candlestick patterns, moving averages, Bollinger Bands, and the Relative Strength Index (RSI) to forecast future price movements. |
|
Data |
Fundamental analysis depends on financial statements (including the balance sheet, income statement, and cash flow statement), economic reports, industry conditions, and company news. |
Technical analysis relies on historical price data, trading volume, and technical indicators. It also utilizes charts and graphs to identify trends and patterns.
|
|
Objective |
Fundamental analysis helps figure out the real value of an asset to decide if a stock is priced too low (undervalued) or too high (overvalued) compared to its current market price.
|
Technical analysis aims to forecast future price movements and market trends using historical price and volume data.
|
Conclusion
Equity fundamental analysis helps investors figure out a company’s true value by looking at its financial statements, ratios, industry trends, and market conditions. By focusing on earnings, cash flows, and key financial metrics, investors can understand a company’s financial health and growth potential. This approach is useful for finding undervalued stocks and making smart investment choices. It is most effective for long-term investments and is crucial for achieving better returns over time.
FAQs
Q1. Why fundamental analysis is suitable for long-term investments?
A1. Fundamental analysis works for long-term investment because it evaluates a company’s intrinsic value based on its financial health and growth potential, providing insights into its ability to generate sustained profits over time. This approach helps investors identify undervalued stocks that are likely to appreciate as the company grows.
Q2. Where can I get a company’s financial data for performing fundamental analysis?
A2. You can obtain a company’s financial data from various sources, including its official website, financial news sites, stock brokerage platforms, financial books, etc.
Q3. Should we buy a stock below the intrinsic value or above?
A3. You should buy a stock below its intrinsic value. Purchasing below intrinsic value means you’re buying the stock at a lower price than its true worth, potentially leading to higher returns as the market corrects the price over time.
Q4. Who should perform the fundamental analysis?
A4. Equity fundamental analysis is especially valuable for long-term investors. It should be conducted by anyone looking to invest in stocks for the long term, as it helps assess a company’s financial health and growth potential. This analysis aids in making informed investment decisions and identifying undervalued stocks, lowering the chances of bad investments.
Q5. If I perform equity fundamental analysis, can I be assured of achieving higher returns over the long term?
A5. While equity fundamental analysis enhances the likelihood of making informed investment decisions and identifying undervalued stocks, it does not guarantee higher returns. The analysis provides a better understanding of a company’s intrinsic value and potential, but market conditions, unforeseen events, and other factors can still affect investment performance.
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