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Fundamental investment analysis is a procedure whereby a potential investor undertakes a study or evaluation of an organization or business sector before making any decision regarding investment. The main purpose of a fundamental investment analysis is to assure the investor that the business is a worthwhile venture. For instance, if an investor buys some stock in ABC company, such an investor may take the advisable business decision of undertaking a fundamental investment analysis of the organization.
Such a fundamental investment analysis will necessarily include an evaluation of the values of the company’s shares on the stock market, net profits, size, rate of growth, weaknesses, strengths and future forecasts. One of the tools for conducting a fundamental investment analysis is the Strengths, Weaknesses, Opportunities, Threats (SWOT) tool. An application of the basic principles outlined in the SWOT to a prospective company will allow the investor to decide if such a company is a good investment. The strengths of the company may include factors like its reach and scope of operations, while the weaknesses may include the lack of use of current technology. Opportunities may include new foreign markets, while threats may include a reduction in demand by consumers.
Apart from a company, an investor may conduct a fundamental investment analysis into a business sector with the intention of finding out the potentials or pitfalls. For example, an investor who wishes to invest in the oil and gas sector may conduct a fundamental investment analysis on the sector in general and not on just one company. Such an investor may be trying to set up a company that is related to that industry and is trying to find out how profitable or successful such a business venture would be.
The cash flow statement of a company is one of the important aspects that is studied during an analysis of the company. The cash flow is the inflow of cash into the company as well as the outflow. An analysis of the cash flow of the company will help reveal the level of its solvency. A good cash flow means that the company is strong financially or solvent, while a poor cash flow means that the company may be insolvent or financially weak. The cash flow also helps in the making of future forecasts regarding the possible future expectations. This makes it possible for the company and potential investors to make deductions regarding the survival and success of the company.