Fundamentals analysis is an analysis carried on a company’s economic and financial situation, gathering info from its books, reports and balance sheets, in order to find its current situation and performance and also forecast profits and cash flow, and then deciding on whether that company is a good option for trading in a stock exchange. The analysis uses the data and information from the company’s main financial figures, like net assets, results, cash flow and more. Moreover, macroeconomics and its consequences for the company should be also an object for that analysis.
Through the analysis, one can say whether a company is making money or not, how it is doing that, if it has debts and can pay them or not, and if a company is generating cash enough to maintain operations. The analysis also finds whether profits are being reinvested or not, and if shares are being priced at a fair level or not, or they are over or undervalued. Besides, fundamentals analysis can compare companies and sectors, to find the most attractive opportunities and identifying the most profitable companies, or those which get competitive advantages over the competitors. Also, the analysis might be used with past data, in order to find the company’s historical performance.
Fundamentals analysis is widely used by famous investors like Warren Buffet. The key premise for using this analysis is quite simple: to become a shareholder in a company, looking for long term profits. However, before we decided to become a “partner” in a company, we need to find whether it is a good company to invest or not, and that’s the fundamentals analysis role. By using it, we can find the true value for a company’s share, dividends paid and their frequency, and how long we must wait for getting the invested money back, among various other information..