Fundamental analysis attempts to determine the value of a company by analysing the financial data from its annual report and using other qualitative data about the company and the environment in which they operate.
This value is often known as 'intrinsic value'. Fundamental analysis assumes that, over the long term, a stock price will reflect the company's intrinsic value. Fundamental analysis can examine the economy in its entirety – the investigation of an industry, or that of an individual organisation. A combination of this data can help you determine if a stock is undervalued or overvalued, and may enable you to determine the potential future value of a stock.
Quantitative analysis of fundamentals
Quantitative analysis refers to the use of mathematical equations to analyse markets and investments. Investors who use quantitative analysis use different mathematical methods, such as probability, game theory, statistics and calculus. Regardless of the method, the goal is to develop a mathematical model that replicates real-world behaviours and results.
Fund managers may use quantitative analysis to minimise risk and potentially maximise returns on large portfolios. Traders can use quantitative analysis to determine the best time to buy and sell securities, options or commodities. Other investors may look for under-priced securities to purchase and hold.
Examples of quantitative analysis are calculations to determine net present value, break even points, earnings per share and debt to equity ratio. Algorithmic trading and portfolio stress-testing can also be considered types of quantitative analysis. While quantitative analysis can be a good way to make investment decisions, investors can also use qualitative analysis to make investment decisions by incorporating their personal experience.
Qualitative analysis of fundamentals
Qualitative analysis uses subjective judgement which describes the non-mathematical study used by investors and business managers to make investment and business decisions. Qualitative analysis can take years to master, as you need to know how businesses operate. Some investors believe subjective assessment about the integrity, trustworthiness and business skills of a company management is the best way to judge whether or not a company is a good investment.
Qualitative analysis also involves monitoring the companies’ employees to rate their enthusiasm – asking the company vendors what it’s like to work for them and noticing if the public view the company favourably. Investors can use both quantitative and qualitative analysis in their trading, where qualitative analysis is a check on the numbers performed by quantitative analysis.