Posted in Finance, Accounting and Economics Terms, Total Reads: 568
Fundamentals are the basic quantitative and qualitative financial, operating and economic factors that contribute towards the value of a company, economy, currency or security. For a company, its revenues, earnings, cash flows, growth rate, management, demand, supply, etc. are the important fundamentals. By studying the fundamentals, one can assess the strength and valuation of a company.
For example, a company with regular cash flows combined with a decent growth rate is deemed to be financially stable. On the other hand, a company whose supply of products exceeds the demand is concluded to experience some problems. The process of arriving at inferences by studying fundamentals is called the ‘fundamental analysis’.
The concept of fundamentals can be similarly applied to an economy. GDP growth, interest rates and trade balance are few of the macroeconomic fundamentals that signal about the health of the economy.
In security analysis, fundamental analysis is well-known. The billionaire Warren Buffet is said to have employed fundamental analysis in stock market very successfully. Price-to-earnings ratio, earnings per share growth and dividend pay-out growth are some of the relevant fundamentals in this context.