What is Fundamental Analysis?
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Stock Market Trading | October 12

What is Fundamental Analysis?

In the past few years, the interest of people towards the stock markets has grown significantly. After demonetisation, it has been seen that many people are turning towards the stock markets or mutual funds to invest their savings. The reason that attributes to people’s interest in stock market is higher returns. The sky is the limit when it comes to making good returns in the stock market.

Along with the ability to make good money at the stock markets, there is a good probability that the investor may end up making losses. Thus, utmost care should be taken before investing in any particular stock. A wrong investment can prove to be fatal and take away all the hard earned earnings. Therefore, analysis of the stock is very important. One such method of analysis is studying the fundamentals of the company.

Meaning of Fundamental Analysis

Fundamental analysis is the analysis of a company in which the investor sees the future profitability and growth of the company based on the environment in which it is functioning and its financial performance. The man aim of fundamental analysis of the stock is to find the intrinsic value i.e. the real value of the stock in comparison to the price of stock traded on the exchange.

The fundamental analysis of a company can be done in two ways. Let us understand it in detail.

Methods of Fundamental Analysis

The fundamental analysis of a company can be divided into two parts. They are;

·         Qualitative Analysis

·         Quantitative Analysis

Qualitative Analysis

Qualitative analysis involves an understanding of the financial performance of the company with the numerical data available. By analysing the data, comparisons can be drawn with various other similar businesses and performance can be evaluated.  The qualitative analysis comprises of the following.

·         Ratio Analysis:

In this approach, the comparison and analysis of basic ratios are done. It helps in understanding the performance of the company. It gives the idea of how the company is performing in comparison to peers. The ratios include liquidity ratio, profitability ratio, solvency ratio, efficiency ratio, etc.


·         Projected Earning Analysis:

In this approach, the future projected earnings are evaluated. Based on the expected future earnings and current trading price, the benefit in appreciation in the price of the stock is determined. Also, the amount of dividend that will be distributed among the shareholders holds importance. Overall, the growth in form of sales and ultimately revenue of the company is analysed to determine the projected earnings of the company.


·         Other Numerical Data:

Apart from the above numerical data, there are some figures that also must be looked into. It involves price to book value, price to sales, dividend yield, book value, etc.

The next type of analysis is quantitative analysis

Quantitative Analysis

Quantitative analysis involves analysis of a company other than in terms of numbers. The analysis is more subjective. The judgement of in case of quantitative analysis can vary from one investor to another. The following aspects form part of the quantitative analysis.

·         Type of Business

Understanding the type of business of a company is very important. It helps to know what can be expected from its future. It informs the investors about the growth in the sector and competition among the companies. A business with good growth model will attract more investors.


·         Assets and Liabilities

Analysis of the assets held by the company and its liabilities gives an overview of the health of the company. The overall debt scenario and the ability of the company to repay it determines whether the company is worth investing or not. Also, its ability to replace and maintain its asset timely must be considered.


·         Earnings

Earnings of the company forms an important prospect for any value investor. It is essential that the future earnings of the business comes from its core operations and not from other sources. The expenses and revenues should be in balanced proportions in terms of the business.


·         Corporate Governance

Corporate governance is a practice that a company follows to safeguard the interest of the shareholders and stakeholders. A proactive management is important to ensure that the corporate governance practice is rightly followed.  The company must appoint a board of directors to look into it and conduct an audit at regular intervals to ensure that accounts of the business are rightly maintained.

By doing the above analysis, one can evaluate the fundamentals of the company. Based on such analysis the investor can take a well-informed decisions regarding his investments.

Indira Securities provides various financial services. The services range from equity investment to currency trading. Our clients can deal in commodities and futures and options as well. We provide research reports on different stocks based on fundamentals analysis. The recommendations help the investors to pick value stocks and make profits. Open a demat account with us to avail our hassle free services. For any information or query, you can reach us via email or phone.

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