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Name: Mohammad Ali

ID: 132 0334 030.


Sec -20 Course: Fin254

Fundamental Analysis Basics:


Fundamental analysis attempts to determine the value of a company by analysing the financial
data from the annual report and using other qualitative data about the company and the
environment in which they operate. This value is often called 'intrinsic value'.
Fundamental analysis assumes that over the long term, a stock price will reflect the company's
intrinsic value.

Definition: A sound fundamental definition comes from Investopedia. They define


fundamental analysis as:
A method of evaluating a security that entails attempting to measure its intrinsic value by
examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts attempt to study everything that can affect the security's value, including
macroeconomic factors (like the overall economy and industry conditions) and company-specific
factors (like financial condition and management).

Quantitative analysis
Fundamental factors that are capable of being measured or expressed in numerical terms form
the quantitative measures component of fundamental analysis.
Fundamental analysts focus on the underlying business of the company being evaluated and
specifically look at quantitative measures such as:

Revenues
Earnings
Assets
Debts

These financial measures are often combined to produce fundamental or financial ratios that
analysts can use to compare the company they are analyzing to:

other companies in the same industry


the overall market
previous periods results for the same company.

Ratios that you may be familiar with include:

Dividend yield
Price to earnings ratio (PE)
Return on equity (ROE)

Qualitative analysis
Qualitative information that cant be expressed in numbers but relates to the nature of the
company itself is also very important in assessing the future performance of a company.
Types of qualitative information may include:

management performance and experience


competitive advantage
business model
branding.

Pros & cons


Let's explore the advantages of fundamental analysis:
Uses sound mathematical and statistical principles to
produce ratios so that there is no room for personal
bias.
Markets are usually driven by fundamental factors over
Long term
the long term. Fundamental analysis can look at longfocus
term economic, demographic, technologic or consumer
trends.
By determining an intrinsic value, fundamental
Value
analysts can determine appropriate buy prices that
represent 'good value'.
Research into fundamentals provides the investor with
Increased
understanding a better understanding of the company and its business.
Sleep at night Investors know that they are investing in fundamentally
sound companies because they have done their 'due
factor
dilgence' analysis.
Objectivity

Now let's look at some of the disadvantages of fundamental analysis:


Time
consuming

Fundamental analysis can be hard work and be overly


complicated. Given the time and difficulty contraints,
it may be difficult to get an edge.

Market
sentiment

Timing

Based on
assumptions

In the short term, markets will not always move in the


same direction as fundamental value meaning that
often short term momentum will overide the
fundamentals.
Six monthly issuing of financial information may mean
a company's fundamentals have significantly changed
and means a time lag for investment decisions. This
appplies especially to a lack of opportunity to react
quickly to exit stocks.
Fundamental analysis for future estimated value can
only be based on assumptions so a best and worst case
valuation model may need to be considered.
No valuation model can take into account any
unexpected negative economic, political or legislative
changes.
Another important point to consider is that most
information considered in fundamental analysis comes
from the company itself and assumptions have to be
made that the company is providing accurate and true
information.

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