What is Fundamental Analysis?

By Stock Research Pro • September 1st, 2008

Fundamental analysis is the practice of studying the fundamentals of a company to determine if a business is a good investment. Fundamental analysis is a type of stock selection discipline that many consider to be the cornerstone of investing. Think of fundamental analysis as conducting a medical examination on a company to see how healthy it is. The analysis is performed on historical and present data with the goal of making financial forecasts.

Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power. It serves to answer questions, such as: Is the company’s revenue growing? Are they carrying too much debt? The practice enables you to make your own decision on value and ignore the market.

The Elements of Fundamental Analysis

The elements of the research include financial statements, ratios and valuation measures, among others. Company factors to consider might include dividends paid, the way a company manages its cash, the amount of debt a company has, and the growth of a company’s revenues, expenses and earnings. The fundamental analysis of a business involves analyzing these financial statements and health, its management and competitive advantages, and its competitors and markets. Thorough fundamental analysis helps you find ‘good’ companies and lower your risk and probability of losses.

The Goal of the Investor

The goal of this analysis is to determine the true value of a security, and, if the market price of the stock deviates from this value, to take advantage of the difference by acquiring or selling the stock.

Fundamental analysis is primarily utilized to address the long term future share price of a company as it cannot account for short term stock volatility. It is an invaluable tool for those who run businesses or are looking to invest in one.

Fundamental analysis is usually viewed as a more conservative approach to stock selection than technical analysis, the forecasting of future financial price movements based on an examination of past price movements.

More information on fundamental analysis


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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