Fundamental Analysis in the simplest of terms can be defined as the analysis of a company’s financial statements, the economy, the competition, and the overall market.

It can have quite a few objectives, depending upon the user. But our focus being the stock market, I’ll talk about the use of fundamental analysis to calculate the intrinsic value of a stock.

Fundamental analysis sharply contrasts technical analysis. The former is more suited for a long term strategy, and uses an analysis of statements. Whereas the latter is more of a short term strategy, and uses past price movements to forecast future ones. It’s more concerned with investor sentiment.

Investors usually use a mixture of both technical and fundamental analysis to pick stocks and make a balanced portfolio. Technical analysis can be used with a fundamental analysis to time entry and exit in the market.

Fundamental analysis uses models like discounted cash flow(dcf) and dividend discount model(ddm)/ Gordon growth model(ggm). Both of these fall under absolute analysis and can be used to arrive at intrinsic values.

We can use ratios like pe ratio, debt equity ratio, and price to book ratio to compare a company with it’s peers in the same industry. This is called relative analysis. It helps to quickly determine whether the company is worth an in depth analysis or not.

In the future posts, I’ll talk in more detail about the absolute models and will also try to provide a step by step guide on how you people can also make your own basic models. Stay tuned!