Fundamental analysis is a term for designating methods for forecasting the market (exchange) value of a company based on an analysis of its financial and production performance.
Fundamental analysis is used by investors to assess the value of the company (or its shares ), which reflects the state of affairs in the company, the profitability of its activities. At the same time, the financial indicators of the company are analyzed: revenue , EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization), net profit , net worth of the company, liabilities, cash flow , amount of paid dividends and production indicators of the company.
The "intrinsic value" in most cases does not coincide with the company's share price, which is determined by the ratio of supply and demand in the stock market . Investors who use fundamental analysis in their activities are primarily interested in situations where the "intrinsic value" of the company's shares exceeds the price of the shares on the exchange. Such shares are considered undervalued and are potential investment items. When buying undervalued stocks, investors expect that in the face of market inefficiencies, the price of stocks on the stock market will tend to “intrinsic value,” that is, in the case of undervalued stocks, it will increase. This statement is the reverse of the postulate of technical analysis , which states that all material information is immediately and fully reflected in the market value of the securities . And this principle negates the idea of fundamental analysis.
The American school of fundamental analysis is based on the classic work of Benjamin Graham and David Dodd “Analysis of Securities” ( English “Security Analysis” ), published by them in 1934 . Graham himself used fundamental analysis in practice and was a successful investor. One of Graham's most famous followers using fundamental analysis is Warren Buffett .
Fundamental analysis is based on macroeconomic indicators and business activity indices .
For example, a fundamental analysis of the market value of gold is based on the assertion that “as you know, gold is a counter-cyclical commodity that rises in price during periods of low rates and becomes cheaper in periods of rising rates” [1] , usually, an increase in the rate of the US Federal Reserve and a stronger dollar world currencies causes a drop in the exchange value of gold, similarly reduces the cost of gold the absence of global risks (gold always grows on fears of war and conflict) [2] .
Criticism
The criticism of fundamental analysis as a whole boils down to two statements: that, firstly, it is not feasible, and secondly, even if it is still feasible, it is redundant and therefore not needed.
The impracticability of fundamental analysis is argued by the fact that the formation of prices is influenced by a huge number of factors, including random and unpredictable ones, and it is impossible to take into account all factors in principle, all the more so since it is not known in advance what effect an event may have on the price (for example, spontaneous disaster , on the one hand, causes damage to the national economy , which should lead to a depreciation of the national currency , and on the other hand, it is an incentive for the economy, since disasters will new jobs were created, orders were made, etc., and this contributes to the growth of the rate).
The assertion that the fundamental analysis is unnecessary is mainly directed against the assertion that the fundamental analysis reveals the prevailing trend (market trend : if the price is prone to rise or fall, this is already evident from the stock charts, but if there is no trend at the moment, then fundamental analysis is useless.
It is impossible to assess the quality of the fundamental analysis of the market situation, because if the fundamental forecast is justified, it may simply be the result of random luck, just as the erroneous forecast can be the result of accidental bad luck.
Notes
- ↑ "Copper" year of gold " Russian Newspaper" - Federal issue No. 7163 (295) dated 12/27/2016.
- ↑ “Goldmine: when to buy cheaper gold” rbc.ru dated July 24, 2015
Links
- Fundamental analysis // Big Russian Encyclopedia : [in 35 vols.] / Ch. ed. Yu.S. Osipov . - M .: Great Russian Encyclopedia, 2004—2017.