What is Fundamental Analysis

Fundamental Analysis is a very old and successful approach for investing in any shares. It is a method of calculating intrinsic value of security. It can be defined as an analysis of a business’s financial statements considering macroeconomic factors such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices etc. along with microeconomic factors such as total sales, price levels, the effects of competing products, foreign competition etc.

For all those investors who want to invest for long term, Fundamental analysis of the stock is must, because over the long term, the stock prices of a fundamentally strong company tend to appreciate, thereby creating wealth for its investors.

There are many companies which have delivered on an average over 20% compounded annual growth return (CAGR) year on year for over 10 years with good financials.

How to do Financial Analysis?

There are some basic steps of financial analysis are as follows:

1.      Annual report of the company – Go through the complete annual report of the company, and important ratios such as P/E ratio, debt to equity ratio, further dividend declared by the company, cash flows of the company etc.

2.      Macroeconomic factors such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices etc. which can be accessed through news or through different websites.

Yes with these two simple tools you can do a very effective fundamental study but these two are not as simple as it seems.

So this was a small introduction to fundamental analysis tool, further we will be discussing in details each tools.