What is Fundamental Analysis?
Fundamental analysis in the stock market is the process of evaluating a company's true value to make investment decisions. This method focuses on the company's business and financial factors to determine whether its stocks are correctly valued.
Fundamental analysis is suitable for investors with long-term thinking and vision. This method helps investors avoid the need to monitor stock charts and boards every day. Long-term investors trust in the potential of stocks and expect them to bring significant profits in the future based on growth prospects. Short-term fluctuations do not significantly affect those who apply fundamental analysis.
Here are some important aspects of fundamental analysis:
- Balance Sheet Factors include assets (including fixed and current assets) and liabilities (including short-term and long-term debts).
- Cash Flow Statement Factors include business operations, which determine the ability to generate cash from core business activities, and financial activities, which monitor the company's investments and finances.
- Income Statement Factors: Such as revenue to calculate total income from sales or services and gross and net profits to compare the difference between revenue and expenses.
- Important Financial Ratios: For example, the P/E (Price-to-Earnings) ratio compares stock price with company earnings, and the P/B (Price-to-Book) ratio calculates stock price relative to the company's book value.
- Management and Business Strategy: Assessing leadership performance and strategy, as well as industry and market, to determine the growth potential of the industry and target market.
- Future Predictions: These include growth forecasts to determine the company's future growth potential and risks and opportunities to assess factors that may affect the business.
The advantages of fundamental analysis include:
- Understanding the Business: Fundamental analysis helps investors understand the business, business model, and factors affecting profitability.
- Based on Financial Data and Actual Business Operations: Helps investors make decisions based on solid grounds.
- Long-Term Focus: Fundamental analysis often focuses on the long term, reflecting long-term trends of the business.
- Detailed Information: Provides detailed information about the financial situation and management of the business, giving investors a comprehensive view
- Assessing True Value: This service helps investors assess a company's true value based on financial indicators and business performance.
The disadvantages of fundamental analysis include:
- Not Always Reflecting Short-Term Changes: Only sometimes can short-term market fluctuations and dynamics be accurately reflected.
- Historically Focused: Relying on historical data, fundamental analysis may not accurately reflect rapidly changing business environments.
- Dependence on Published Information: Fundamental analysis heavily relies on published information, and if there are errors or fraud, evaluations may be affected.
- Not Assessing Psychological Factors: It does not evaluate psychological and market behavior factors, such as fluctuations due to crowd psychology.
- Not Flexible in Highly Volatile Markets: In highly volatile market periods, fundamental analysis may not be flexible enough to respond to rapid changes.
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