Fundamental Analysis

Fundamental Analysis is driven by underlying fundamental facts. It depends upon the future Earnings per Share (EPS) and the Required Return on investment. Analysts determine an EPS based on their knowledge of the company and their views on the business environment in which the company operates. The Required Return is an assessment of risk and alternative investment returns.

The Stock Price Analysis Module applies basic Fundamental Analysis to determine the Fair Value price of a stock. For this calculation input the annual Earnings per Share (EPS) of the stock. EPS values can be obtained from the Fundamental Analysis link for the stock in the Stock Price Analysis Module or from stock analysts. To determine the future stock price future EPS values should be considered. Multiple year EPS values can be used in the Stock Price Analysis Module by separating the value for each year by a comma. Unfortunately forecast error increases the further in the future we look.

Calculating Fair Value also requires the required return on investment to be set. This is a percentage return on the capital investment. It is set considering the return available on alternative investments and the level of risk associated with the investments. If you can achieve a 5% per annum return on a government guaranteed investment with very low risk then you would need to achieve a higher return on a riskier investment.

To maintain the inherent simplicity of the Stock Price Analysis Module calculations do not use discounted cash flow techniques. Due to the short term forecast used; usually only one or two years of EPS data is available, the increased forecast error in longer term forecasts, and that the analysis calculates a stocks relative Value as its key measure the lack of discounted cash flow has negligible impact.

Possibly the greatest downfall of Fundamental Analysis stock pricing is that it can not consider the human dynamic of the stock market. However it can provide a reasonable starting point and act as a measure of stock value. It can also be supplemented with Technical Analysis which applies actual historical stock price data that is influenced by human emotion.

For additional detail see Fundamental Analysis at Wikipedia.