Fundamental analysis

From Academic Kids

Fundamental analysis is a stock valuation method that uses financial analysis to predict price movement (compare to technical analysis).

Fundamental analysis attempts to analyze the company's operations and the market in which the company is operating to understand the stability and growth potential of a company. It is presumed that this will be reflected in the stock price. Another application of fundamental analysis presumes that the market is indeed somewhat efficient, but some stocks (perhaps because they are small and therefore not closely watched) are either over- or undervalued. This use of fundamental analysis can be viewed as a type of arbitrage.

Sometimes earnings multiples, such as the P/E ratio, are used to determine value, where cash flows are relatively stable and predictable. The obvious caveat is that the P/E ratio is ultimately not an objective measure, because it must be interpreted. A high P/E ratio might be an overvalued stock, or it might be a company with high potential for growth. Other techniques include discounted cash flow, book value, and dividend yield analysis.

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