The difference between the successful and the unsuccessful investor is the accuracy of the information behind their decisions. There are many different methods they can use to get this information. Fundamental analysis is one of the most popular approaches. It’s based on the thorough analysis of financial statements and other official information. These include letters to investors, press releases, analyst reports, etc. The aim is to get a sense of the health and potential of a particular business. This guide will teach you everything you need to know about fundamental analysis. You’ll even learn how to use it to improve your portfolio performance.
What is Fundamental Analysis?
Fundamental analysis is an accounting and financial methodology that focuses on identifying key metrics about a particular company. The goal is to evaluate its viability by looking at its financial statements.
The aim of fundamental analysis is to provide a precise estimation of a particular security’s intrinsic value. Its valuation methodology analyses a variety of different economic and financial factors and the way they affect the performance of the underlying entity. Such factors may include financial metrics regarding assets, liabilities, and earnings, the effectiveness of management, competitors’ performance, macroeconomic indicators such as interest rates, employment levels, GDP forecasts, analyst projections, letters to investors, press releases, news, and more.
The end goal is to find out whether a security is under- or overvalued. For that purpose it examines all relevant data and comes up with a number that investors can compare with its current price. In other words, to provide them with a solid basis to help decide whether or not to invest in a particular asset.
History of Fundamental Analysis
Benjamin Graham is considered the father of fundamental analysis. He’s one of, if not the most important and influential figures in the history of financial markets. In 1934, in the aftermath of the Great Depression, Benjamin Graham and David Dodd, both professors at the Columbia Business School, published a book called “Security Analysis”. The book warned investors against speculative market behavior and urged them to focus on the intrinsic value of a security.
“Astute observers of corporate balance sheets are often the first to see business deterioration” – Benjamin Graham, Security Analysis
It wouldn’t be wrong to say that the most accurate and complete answer to the question “What is fundamental analysis” can be found in this book.
The authors proposed the idea of comprehensive fundamental analysis as an effective way to estimate the real value of a particular asset. They also suggest using it as the basis for determining the short-term trends in its future price. However, it is worth noting that Graham and Dodd didn’t focus particularly on long-term forecasts or trying to guess what the exact price of an asset will be at a certain point.
Over 300 pages of the book are dedicated to methodologies for accurate analysis of financial statements. They include both income statements and balance sheets. The chapters include key terms and accounting principles like depreciation, amortization, special items, unconsolidated