The simplest fundamental analysis definition is a method of analyzing the fundamentals of a company or cryptocurrency project in order to uncover the intrinsic value backing their issued securities and digital currencies.
Understanding Fundamental Analysis
Let’s look at what fundamental analysis is by understanding what it is used for:
Fundamental analysis (FA) is performed by traders and investors who seek to gain a deep understanding of a company’s or crypto project’s financial performance and well-being.
They do this primarily to get a better perspective on the potential future success of a company they’re looking to invest in, whether that be by acquisition, buying stock or tokens, or other methods.
For example, a crypto investor may look at fundamental metrics at the protocol level. These are such as the Total Value Locked (TVL) of a crypto project to get a sense of its growth and development, not just the valuation of its native cryptocurrency.
Fundamental analysis is concerned with a company’s fundamentals.
These are the financial factors that determine a company’s financial standing and health, but they can also include less concretely measurable elements like management, company culture, employee satisfaction, working conditions, and many more factors that can contribute to a company’s success.
Fundamental analysis is used for long-term predictions of values of future phenomena, based on historical data and any factors likely to affect the level of supply and demand.
Czaplicka, M., & Wisniewski, R. (2016)
Factors like this can help investors understand if a publicly traded company is undervalued or overvalued.
Components of Fundamental Analysis
Fundamental analysis looks at three key elements that can determine the future profitability and trajectory of a company:
- Macroeconomic conditions: World events like major regulatory changes, crises, and technological developments shaping entire industries.
- Sector and industry strength: The growth of and projections for a particular economic sector and the particular industries inside of it.
- Company performance and financial state: The state of the analyzed company’s financials. These include things such as outstanding debt, assets under management, and equity.
Fundamental Analysis vs. Technical Analysis
Technical analysis looks at the price movement of a security and uses this data to attempt to predict future price movements. Fundamental analysis instead looks at economic and financial factors that influence a business.
AMG Funds. (2018)
Pitting fundamental analysis vs technical analysis is a widespread yet false narrative.
While some traders and investors believe exclusively in the power of technical analysis (i.e., the analysis of the historical price performance of securities) to inform their financial decisions, most, especially those anticipating longer-term investment, apply both methods.
Both fundamental and technical analysis are important in understanding a company’s performance. A third type of analysis, sentiment analysis (i.e., looking at public attitudes towards a company), is often added to improve the accuracy of findings further.
Quantitative and Qualitative Fundamental Analysis
Fundamental analysis looks at both quantitative and qualitative factors.
Quantitative factors are those concerned with specific, measurable numbers like the value of all debt owed by a company, while qualitative factors address less tangible questions such as how well a company manager is doing their job or how likely the average employee is to quit after a year.
Often Considered Quantitative Factors
These factors include:
- Assets: These are the resources that will be left under a company’s ownership after covering any liabilities (e.g., paying off loans)
- Cash Flow: Another hard number that is quantifiable; The cash flow of a company is a breakdown of all the incoming cash its businesses generate.
- Income: Typically reported annually, this is what a company makes before covering fees and taxes.
Often Considered Qualitative Factors
Here are some qualitative factors investors typically look at:
- Management: How well the company is run and what the daily processes look like. (This is especially important in acquisitions and mergers as the process is considered key to a venture’s long-term success).
- Business: Investors of all kinds will always examine a company’s business model to better understand how it works and why it is valuable.
- Competitive advantage: A company’s competitive advantage is crucial to securing the future success of any business it is engaged in. This is something that usually requires regular reassessment as markets change and adapt and it is something investors track closely when assessing potential investment opportunities.
Conclusion
Fundamental analysis is an important tool in a long-term trader and investor’s toolkit. Whether it’s to get a better view of a company’s financials or predict a crypto project’s future success, fundamentals play a key role in informing prospective investors’ opinions.
Czaplicka, M., & Wisniewski, R. (2016). Fundamental analysis – Possibility of application on the real estate market. University of Warmia and Mazury in Olsztyn.
https://www.researchgate.net/publication/312476074_Fundamental_Analysis_-_Possiblity_of_Application_on_the_Real_Estate_MarketAMG Funds. (2018). Investment essentials: Fundamental vs. technical analysis.
https://media.amgfunds.com/content/dam/amgfunds/documents/landing-pages/investment-essentials/PDFs/PER_IE_Fundamental_vs_Technical_Analysis_PER149.pdf
Coinweb requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial process.
