The idea in one sentence
Fundamental analysis tries to answer one question: given its current business, cash and debt, roughly what could this company be worth? Once you have an estimate, you compare it with the price the market trades the share at.
A fundamental analyst reads the financial statements, looks at the sector the company works in, and at economic conditions that may affect it, such as interest rates, inflation and the exchange rate. The focus is not what the share does tomorrow but what the business itself is doing.
Fundamental and technical: two different questions
Technical analysis studies price moves and volume on the chart. Fundamental analysis looks inside the company. They are not rivals; each answers a different question, and many people use both.
- Revenue and profit
- Debt and cash
- Sector and competition
- The chart
- Volume
- Trend and levels
A worked example
Its limits
An estimate rests on assumptions about the future, and assumptions can be wrong. The price can also stay far from the estimate for months or years, because the market is moved by other things too: liquidity, investor mood and news. So fundamental analysis is a tool for understanding, not a promise of an outcome.
The next lessons in this path read the financial statements one by one and compute the ratios that summarize them. We start with the three financial statements and how they connect.
Look at a real company
Open any stock page, look at data such as net profit and share count, and try computing the market value yourself.
Check yourself
1. A company has 50 million shares at EGP 12. What is its market value?
2. Your estimate of a company's value is above its market price. What does that mean?
Summary
- Fundamental analysis looks at the business: its profit, debt, cash and sector.
- It gives an estimate of value to compare with the price, built on assumptions that can be wrong.
- The price can stay away from the estimate for a long time, and no outcome is guaranteed.