There are many people who will tell you, in fact, probably most people will tell you that unless your investing strategy includes fundamental analysis, you aren’t really investing.
Instead, you are just guessing.
In fact, fundamental analysis is the backbone of investment analysis.
Simply put, fundamental analysis is the use of a business’ core numbers to determine the health of a company.
The trouble with fundamental analysis is that it is a broad topic and is difficult to encapsulate within a simple discussion or explanation.
Making matters worse, there are elements of fundamental analysis within practically every investment strategy.
It doesn’t matter whether your goal is to be an analyst for a stock brokerage firm or just want to manage your own portfolio better.
Having a good grasp of the concepts involved in fundamental analysis is key to getting your understandings straight.
In its more skeletal form, fundamental analysis is a careful evaluation of a company’s primary financial statements.
Which is basically a qualitative examination of a company’s balance sheet, income statement, and equity statement of a company.
Financial analysts look to these documents that account for a company’s past in their efforts to project the prospects for the future.
It is important to understand that fundamental analysis is much more than just fancy number crunching.
Just being able to look at numbers is not enough if you intend to base an investment on them.
Instead, you must learn what the numbers mean, how they arrived at it, what influences–inside as well as outside of the company–will impact that company’s financial health, and what these different influences will mean to the company.
You need to understand how the financial statements work together to give you the information you need to make informed decisions.
What is Value?
In a real sense, stock prices have little to do with the company’s health.
Instead, stock prices are the reflection of the consumer’s confidence in the health of a company and its prospects for success.
It is for this reason that the basic financial information that is obtained from a company or other sources only serves to determine the actual value of a company.
This understanding includes company growth, actual profit or loss, prospect of competing effectively with others in the same industry, the ability to repay debt, and indicators that management has not “cooked the books.”
These questions and many more can lead potential investors to a much more educated decisions on whether a company is worth investing in.
It is only after a thorough examination of these answers can an investment be evaluated as a wise one or not.
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