Definition of fundamental analysis
Fundamental analysis is a method of stock valuation that uses financial and economic analysis to predict stock price movements.
Background information analyzed may include company financial statements and non-financial information such as estimates of growth in demand for competitive products, industry comparisons, and changes across the economy.
Fundamentalists General Strategy
For fundamentalists, the market price of a stock tends toward its intrinsic value. If the intrinsic value of a share is above the current market price, the investor will buy the share, and if the intrinsic value of the share is below the market price, the investor will sell the share.
To begin with, the fundamentalist examines the present and future overall health of the economy as a whole. In this step you should try to determine the direction and level of interest rates.
Once you have analyzed the overall economy, analyze the companies individually. You should analyze the factors that give a firm a competitive advantage in its sector such as managerial experience, performance history, growth potential, cheap manufacturer, etc.
Expressions of fundamental analysis
To begin with, I describe some terms of fundamental stock analysis that are more important:
# 1- EPS: (earnings per share)
Part of the company’s profits allocated to each remaining share of ordinary shares. The amount is calculated by dividing net earnings by the number of ordinary shares issued. For example, a corporation that earned $ 10 million last year and has 10 million shares would report earnings per share of $ 1.
# 2- P / E ratio: (Price / EPS)
Also called “multiple earnings,” a share price divided by earnings per share. The P / E ratio can either use the reported earnings from the last year or use the analyst’s earnings forecast for the following year. P / E gives investors an idea of how much they are paying for the company’s earnings.
It is important to note here that the P / E ratio is ultimately not an objective measure; a high P / E ratio may indicate an overvalued inventory or may reflect a company with great growth potential.
# 3- Dividends
Dividend is the amount of profit that a company pays to people who own shares in the company. When a company earns, part of that money is usually reinvested in the business and called retained earnings, and part can be paid to shareholders as a dividend.