Fundamental analysis is the study of economic, industry, and company conditions in an effort to determine the value of a company's stock. The typical approach to apply fundamental analysis to a company involves following basic steps: analyze the economy, analyze the industry, and analyze the company.
To determine economic conditions, a fundametalist may ask questions like following. Is inflation a concern? Are consumers spending? Are interest rates likely to rise or fall? How is GDP? Are more people getting hired?
The industry influences the outlook for the company. Making sure the company is in an up-trend industry is very important.
Company analysis is done by studing its financial statements, in which a number of ratios should be studied. Net profit margin, P/E ratio, book value per share, current ratio, debt ratio and inventory turnover are among them that should be paid more attention to.
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