Fundamental analysis is a method of evaluating the intrinsic value of an asset and analyzing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends.
Key Concepts in Fundamental Analysis
1. Earnings Per Share (EPS)
EPS is one of the most important indicators of a company’s profitability and is often considered the “bottom line” in earnings reports. It’s calculated by dividing net income by the number of outstanding shares.
2. Price to Earnings Ratio (P/E)
The P/E ratio is a valuation ratio, calculated by dividing the market value per share by the earnings per share. It provides a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.
3. Return on Equity (ROE)
ROE is a measure of financial performance, calculated by dividing net income by shareholders’ equity. It measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.
Pros and Cons
Like any investment strategy, fundamental analysis has its pros and cons. On the positive side, it provides a thorough understanding of the company’s financial health and long-term prospects. On the downside, it can be time-consuming and requires a deep understanding of financial statements.
Fundamental analysis is a powerful tool for any investor. It provides a deep understanding of a company’s financial health and future prospects. While it can be time-consuming and requires a deep understanding of financial statements, the insights gained can be invaluable in making informed investment decisions.