Fundamental Analysis

Fundamental analysts aim to estimate an investment's intrinsic value, what it is really worth, and compare it with its market price. If the intrinsic value is higher than the price, the investment may be undervalued and worth buying; if lower, it may be overvalued.

For a company, fundamental analysis typically involves examining revenue growth, profitability, cash flow, debt levels and competitive position. Analysts read annual reports, study industry trends, assess management quality and use valuation methods such as discounted cash flow analysis or price-to-earnings comparisons.

For example, an analyst might conclude that a retailer's shares, trading at 30, are worth 40 based on its expected cash flows, strong brand and improving margins, and recommend buying them.

Fundamental analysis is also used at a broader level, examining economic indicators, interest rates and government policies to judge the prospects of entire markets or sectors.

It contrasts with technical analysis, which focuses on price patterns and trading volumes rather than underlying business performance. Fundamental analysis tends to suit longer-term investors, although markets may take a long time to recognise an investment's true value.