Fundamental Analysis

The Fundamental Analysis of a Stock involves several aspects. An understanding of the Financial Statements, determining a valuation and the assessment of external factors impacting the Company.

In performing a Fundamental Analysis on a Company, the goal is to determine a “Market Value” for the quoted Shares, which could be above or below the current Share Price. There are three aspects in Fundamental Analysis. The first involves an in-depth analysis of the Company’s three financial statements. An understanding of the Profit and Loss Statement, the growth and stability in Sales and the Operating Expenses. Then on to the Balance Sheet, how the Company is financed, the leverage ratio, and is the Company in a solid position in terms of Cash Flow. Once completed, a 2-year forward projection for the key data points in the P&L, Sales, Net Income, EPS, DPS and CPS can be done.

The second aspect involves assessing the Market Value or a Fair Value for the Share Price. The valuation can be based on Ratio Analysis, for example the PE Ratio which is then compared to the Stock’s historic PE Ratio, then against the Sector PE and the PE of the Major Index, for example the S&P 500. Another approach could be based on an Intrinsic Valuation, the discounting of future earnings to give a Present Value for the Share Price. Then finally, an assessment of the external forces the Company must face including economic factors, sectorial or industrial influences, and the assessment of Management.