level-1"> (Top) 1 The two analytical models 2 Use by different portfolio styles 3 Top-down and bottom-up approaches 4 Procedures 5 Automated analysis 6 Criticisms 7 See also 8 References 9 External links Toggle the table of contents Fundamental analysis 41 languages العربية Azərbaycanca বাংলা Català Cebuano Čeština Dansk Deutsch Ελληνικά Español Euskara فارسی Suomi Gaeilge עברית हिन्दी Hrvatski Bahasa Indonesia Italiano 日本語 한국어 Lietuvių Latviešu Bahasa Melayu नेपाली Nederlands Norsk bokmål Polski Português Română Русский Simple English Slovenčina Svenska தமிழ் ไทย Українська Tiếng Việt 閩南語 / Bân-lâm-gí 粵語 中文 Edit links Article Talk English Read Edit View history Tools Tools move to sidebar hide Actions Read Edit View history General What links here Related changes Upload file Permanent link Page information Cite this page Get shortened URL Print/export Download as PDF Printable version In other projects Wikidata item Appearance move to sidebar hide From Wikipedia, the free encyclopedia Analysis of a business's financial statements, health, and market This article needs additional citations for verification. 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Find sources: "Fundamental analysis" – news · newspapers · books · scholar · JSTOR (July 2014) (Learn how and when to remove this message) Part of a series on Financial markets Public market Exchange · Securities Bond market Bond valuation Corporate bond Fixed income Government bond High-yield debt Municipal bond Securitization Stock market Common stock Growth stock Preferred stock Registered share Shareholder Stock Stockbroker Stock certificate Stock exchange Watered stock Other markets Derivatives (Credit derivative Futures exchange Hybrid security) Foreign exchange (Currency Exchange rate) Commodity ETF Money Mutual fund Option Real estate Reinsurance Structured product Swap (finance) Alternative investment Private equity Private credit Leveraged buyout Venture Growth Secondaries SPAC Carried Interest Leveraged finance Over-the-counter (off-exchange) Forwards Options Spot market Swaps Trading Participants Regulation Clearing Related areas Asset management Banks and banking Bulls and Bears Diversification ESG Climate finance Eco-investing Impact investing Sustainable finance Greenwashing Financial technology Investment management Market risk Market trend Speculative attack v t e Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health;[1] competitors and markets. It also considers the overall state of the economy and factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management. There are two basic approaches that can be used: bottom up analysis and top down analysis.[2] These terms are used to distinguish such analysis from other types of investment analysis, such as technical analysis. Fundamental investors use a bulk of financial statements data to get insights for their own investing decision making. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives: to conduct a company stock valuation and predict its probable price evolution; to make a projection on its business performance; to evaluate its management and make internal business decisions and/or to calculate its credit risk; to determine if the intrinsic value of the share. The two analytical models [edit] There are two basic methodologies investors rely upon when the objective of the analysis is to determine what stock to buy and at what price: Fundamental analysis. Analysts maintain that markets may incorrectly price a security in the short run but the "correct" price will eventually be reached. Profits can be made by purchasing or selling the wrongly priced security and then waiting for the market to recognize its "mistake" and reprice the security. Technical analysis. Analysts look at trends and price levels and believe that trend changes confirm sentiment changes. Recognizable price chart patterns may be found due to investors' emotional responses to price movements. Technical analysts mainly evaluate historical trends and ranges to predict future price movement.[3] Investors can use one or both of these complementary methods for stock picking. For example, many fundamental investors use technical indicators for deciding entry and exit points. Similarly, a large proportion of technical investors use fundamental indicators to limit their pool of possible stocks to "good" companies. The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works". For explanations of these paradigms, see the discussions at efficient-market hypothesis, random walk hypothesis, capital asset pricing model, Fed model, market-based valuation, and behavioral finance. Fundamental analysis includes: Economic analysis Industry analysis Company analysis The intrinsic value of the shares is determined based upon these three analyses. It is this value that is considered the true value of the share. If the intrinsic value is higher than the market price, buying the share is recommended. If it is equal to market price, it is recommended to hold the share; and if it is less than the market price, then one should sell the shares. Use by different portfolio styles [edit] Investors may also use fundamental analysis within different portfolio management styles. Buy and hold investors believe that latching on to good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find "good" companies, so they lower their risk and the probability of wipe-out. Value investors restrict their attention to under-valued companies, believing that "it's hard to fall out of a ditch". The values they follow come from fundamental analysis. Managers may use fundamental analysis to correctly value "good" and "bad" companies. Managers may also consider the economic cycle in determining whether conditions are "right" to buy fundamentally suitable companies. Contrarian investors hold that "in the short run, the market is a voting machine, not a weighing machine".[4] Fundamental analysis allows an investor to make their own decision on value, while ignoring the opinions of the market. Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks. Managers may include fundamental factors along with technical factors in computer models (quantitative analysis). Top-down and bottom-up approaches [edit] Investors using fundamental analysis can use either a top-down or bottom-up approach. The top-down investor starts their analysis with global economics, including both international and national economic indicators. These may include GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. They subsequently narrow their search to regional/ industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then do they refine their search to the best business in the area being studied. The bottom-up investor starts with specific businesses, regardless of their industry/region, and proceeds in reverse of the top-down approach. Procedures [edit] The analysis of a business's health starts with a financial statement analysis that includes financial ratios. It looks at dividends paid, operating cash flow, new equity issues and capital financing. The earnings estimates and growth rate projections published widely by Thomson Reuters and others can be considered either "fundamental" (they are facts) or "technical" (they are investor sentiment) based on perception of their validity. Determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the future: dividends received by the investor, along with the eventual sale price; (Gordon model) earnings of the company; or cash flows of the company. The simple model commonly used is the P/E ratio (price-to-earnings ratio). Implicit in this model of a perpetual annuity (time value of money) is that the inverse, or the E/P rate, is the discount rate appropriate to the risk of the business. Usage of the P/E ratio has the disadvantage that it ignores future earnings growth. Because the future growth of the free cash flow and earnings of a company drive the fair value of the company, the PEG ratio is more meaningful than the P/E ratio. The PEG ratio incorporates the growth estimates for future earnings, e.g. of the EBIT. Its validity depends on the length of time analysts believe the growth will continue and on the reasonableness of future estimates compared to earnings growth in the past years (oftentimes the last seven years). IGAR models can be used to impute expected changes in growth from current P/E and historical growth rates for the stocks relative to a comparison index. The amount of debt a company possesses is also a major consideration in determining its financial leverage and its health. This is meaningful because a company can reach higher earnings (and this way a higher return on equity and higher P/E ratio) simply by increasing the amount of net debt. This can be quickly assessed using the debt-to-equity ratio, the current ratio (current assets/current liabilities) and the return on capital employed (ROCE). The ROCE is the ratio of EBIT divided by the "capital employed", i.e. all the current and non-current assets less the operating liabilities, which is the real capital of the company no matter if it is financed by equity or debt. Automated analysis [edit] The advancement of artificial intelligence and machine learning has introduced new possibilities for automating fundamental analysis, making it more accessible to individual investors. While earlier automated tools focused on screening for quantitative metrics (such as P/E ratios or revenue growth), modern platforms can also process and interpret qualitative, unstructured data from sources like quarterly earnings reports, news articles, and press releases.[5] Criticisms [edit] Economists such as Burton Malkiel suggest that neither fundamental analysis nor technical analysis is useful in outperforming the markets.[6] See also [edit] Financial forecast Intermediated research Lists of valuation topics Mosaic theory Piotroski F-score Security analysis Stock selection criterion Stock valuation John Burr Williams#Theory References [edit] ^ "Technical Analysis vs. Fundamental Analysis". Market Technicians Association. Archived from the original on 12 March 2015. Retrieved 6 March 2015. ^ "An Introduction to Fundamental Analysis and the US Economy". InformedTrades.com. 2008-02-14. Archived from the original on 2009-07-21. Retrieved 2009-07-27. ^ Murphy, John J. (1999). Technical analysis of the financial markets : a comprehensive guide to trading methods and applications (2nd ed.). New York [u.a.]: New York Institute of Finance. ISBN 0735200661. ^ Graham, Benjamin; Dodd, David (December 10, 2004). Security Analysis. McGraw-Hill. ISBN 978-0-07-144820-8. ^ Li, Yinheng; Wang, Shaofei; Ding, Han; Chen, Hang (8 July 2024). "Large Language Models in Finance: A Survey". arXiv:2311.10723 [q-fin.GN]. ^ "Financial Concepts: Random Walk Theory". Investopedia. External links [edit] MIT Financial-Management course notes Fundamental Analysis Works v t e Financial markets Types of markets Primary market Secondary market Third market Fourth market Types of stocks Common stock Golden share Preferred stock Restricted stock Tracking stock Share capital Authorised capital Issued shares Shares outstanding Treasury stock Participants Broker Floor broker Inter-dealer broker Broker-dealer Market maker Trader Floor trader Proprietary trader Quantitative analyst Investor Hedger Speculator Arbitrager Scalper Regulator Trading venues Exchange List of major stock exchanges Over-the-counter (off-exchange) Alternative trading system (ATS) Multilateral trading facility (MTF) Electronic communication network (ECN) Direct market access (DMA) Straight-through processing (STP) Dark pool (private exchange) Crossing network Liquidity aggregator Stock valuation Alpha Arbitrage pricing theory (APT) Beta Buffett indicator (Cap-to-GDP) Book value (BV) Capital asset pricing model (CAPM) Capital market line (CML) Dividend discount model (DDM) Dividend yield Earnings yield EV/EBITDA Fed model Net asset value (NAV) Security characteristic line Security market line (SML) T-model Trading theories and strategies Algorithmic trading Buy and hold Contrarian investing Dollar cost averaging Efficient-market hypothesis (EMH) Fundamental analysis Growth stock Market timing Modern portfolio theory (MPT) Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory (PMPT) Random walk hypothesis (RMH) Sector rotation Style investing Swing trading Technical analysis Trend following Value averaging Value investing Related terms Bid–ask spread Block trade Cross listing Dividend Dual-listed company DuPont analysis Efficient frontier Financial law Flight-to-quality Government bond Greenspan put Haircut Initial public offering (IPO) Long Mandatory offer Margin Market anomaly Market capitalization Market depth Market manipulation Market trend Mean reversion Momentum Open outcry Order book Position Public float Public offering Rally Returns-based style analysis Reverse stock split Share repurchase Shareholder value Short selling Short squeeze Slippage Speculation Squeeze-out Stock dilution Stock exchange Stock market index Stock split Stock swap Trade Tender offer Uptick rule Volatility Voting interest Yield Authority control databases International GND National United States Czech Republic Israel Other Yale LUX Retrieved from "https://en.wikipedia.org/w/index.php?title=Fundamental_analysis&oldid=1355763203"