Fundamental analysis aims to determine the "true" value of securities from fundamental company data. By comparing the current stock price with the "true" value determined in the analysis, it is possible to see whether an investment appears promising or not.
The analysis takes into account both past, actual and forecast data and is both quantitative and qualitative. Key figures play an important role – such as the P/E ratio (price-earnings ratio).
Fundamental analysis is a basic form of company analysis. Unlike chart analysis, which is geared to price trends, it is based on the so-called fundamental data of a company, such as z. B. balance sheet ratios, incoming orders or profit margins. Fundamental analysis plays an important role in active investment strategies, where the aim is to identify stocks with above-average potential for value growth. This is the case, for example, with value or growth strategies.
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The philosophy of fundamental analysis
Fundamental analysts believe that there is an objective value of a company-the "true," "intrinsic," or "fair "value-that can be derived from the company’s operating activities. Fundamental analysis is ultimately nothing more than the valuation of a company based on its business data and taking into account the economic environment. A single share of the company represents the smallest divisible portion of the company’s value. According to fundamental analysts, stock market prices always tend toward the intrinsic value, but regularly fluctuate around this value over time due to irrational over- or undervaluations. Current stock market prices therefore only reflect the true value of a company to a limited extent. Since it usually takes a long time to reach the fair value of a company, a large number of analysts use the tool of fundamental analysis.
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How does the fundamental analysis proceed?
Fundamental analysis is based on existing data and information generated by the company and its environment. Not only actual and historical data are considered. The analysis also takes forecasts into account. The value of a share is determined to a large extent by future expectations. The following fields of analysis play a role:
- Quantitative company analysis
In quantitative company analysis, the company value is determined on the basis of published financial and balance sheet data. These come from annual financial statements, interim reports and other number-based corporate information. This is the so-called "classic" balance sheet analysis. The determination of key ratios allows comparisons with other companies.
- Qualitative company analysis
In this area, an attempt is made to gain an assessment of the prospects and further development of the company. Management reports, annual reports and other published information can serve as a source of information, as can personal discussions with the management board or with employees. The objective is to evaluate the company’s business policies and strategy in terms of their impact on value. Qualitative analysis places special demands on analysts, but is particularly challenging due to its often subjective evaluation standards.
- Sector analysis
The industry analysis looks at the company’s industry environment. What does the individual industry structure look like?? How competitors are positioned? Which factors determine supply and demand? How cyclical is the industry? What influence do industry-relevant political decisions have?? Answers to these questions are analyzed with regard to their impact on the company value.
- Global analysis
Global analysis examines the macroeconomic factors relevant to the company’s development. This involves the possible effects of monetary or fiscal policy, the impact of interest rate decisions or developments in exchange rates and international trade. These factors can also have a positive or negative impact on the company’s outlook and value.
Important ratios in fundamental analysis
Ratio considerations in relation to the stock price are of great importance in fundamental analysis. Important key figures are u.a.:
is the most important fundamental ratio and is defined by dividing the current share price by the earnings per share (P/E = current share price/earnings per share).Conversely, the P/E ratio shows how much profit a company generates per share. A low P/E ratio is therefore an indicator of a favorable valuation of the company.
- KCV (price-to-cash flow ratio): is often used as a substitute for the P/E ratio, as cash flow is less susceptible to balance sheet politics.
- KUV (price/sales ratio): Is also interpreted in a similar way to the P/E ratio, but is not suitable as an appropriate indicator for every company and, against this background, sometimes has only limited informative value.
- KBV (price-to-book ratio): puts the stock market value of a company in relation to its balance sheet value and provides information on how high or low the stock market values the company in comparison to its "substance.
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