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Fundamental Analysis Definition and Quiz

A long-practiced active management approach where practitioners compare a company's intrinsic value to market value to identify values.
  1. Define - Define fundamental analysis of investments.
  2. Context - Use fundamental analysis in a sentence.
  3. Quiz - Test yourself.
face pic by Paul Alan Davis, CFA
Updated: February 17, 2021
Since every business is unique, every financial statement is unique. The fundamental analyst must standardize and assimilate this objective and subjective data in order to arrive at an investment thesis. Learn more about the challenges below.

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The Fundamental Analysis Process


Fundamental Analysis is the process of reviewing financial statements, business prospects, management quality and corporate strategy with the goal of deriving the current value of a company or security. This sometimes involves using discounted cash flows to derive an intrinsic value. It is often associated with adaptive, subjective and artistic approaches to security selection.

Synonym: valuation analysis

For context, it's important to consider that public company filings which comply with regulatory and GAAP or IFRS standards can be hundreds of pages long. To illustrate, in the U.S., many 10-Ks exceed 200 pages. So the time it takes to review these and all of the information available about a company and its competitors is significant.

So a fundamental analyst may only have time to follow a few dozen companies. In the end however, the fundamental analyst should have more conviction than a quantitative analyst who summarizes a company using widely available ratios.

The difference between the two can be summarized as depth versus breadth. The fundamental analyst benefits from depth, but can only follow a limited number of securities with high conviction. The quantitative analyst benefits from breadth, by following a lot of companies, but with less conviction.

In a Sentence

Kay:  How would you characterize your position? Top-down or bottom-up?
Ann:  Hmm, I assume you mean the direction of our fundamental analysis.


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Click box for answer.

Fundamental analysis, to many, is the most subjective of the four broad investment philosophies. | True or False?

True, relative to Passive, Quantitative and Technical

An intrinsic value should be the same for every investor. | True or False?

False. All investors have their own unique subjective view.

Questions or Comments?

Still unclear on Fundamental Analysis? Check out the financial modeling course in Excel with 27 videos, called Quant 101.

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