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What does 'Fundamentals' mean

Fundamentals include the basic qualitative and quantitative information that contributes to the financial or economic well-being and the subsequent financial valuation of a company, security or currency. Analysts and investors examine these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment; that is, whether it is fairly valued in the market, given an analysis of its business fundamentals. For businesses, information such as profitability, revenue, assets, liabilities and growth potential are considered fundamentals. Fundamental analysis, involving calculating a company's financial ratios, is the implementation of fundamentals into investment decision making.

BREAKING DOWN 'Fundamentals'

In business and economics, fundamentals represent the basic qualities and reported information needed to analyze the health and stability of the business or asset in question. This can include topics within both the macroeconomic and microeconomic disciplines that are considered standards for determining the financial values attributed to the assets.

Macroeconomics and Microeconomics

Macroeconomic fundamentals include topics that affect an economy at large. This can include statistics regarding unemployment, supply and demand, growth, and inflation, as well as considerations for monetary or fiscal policy and international trade. These categories can be applied to analysis of a large-scale economy as a whole or can be related to individual business activity to make changes based on macroeconomic influences.

Microeconomic fundamentals focus on the activities within smaller segments of the economy, such as a particular market or sector. This can include issues of supply and demand within the specified segment, as well as the theory of firms, theory of consumers and labor issues as related to a particular industry.

Fundamentals in Business

By looking at the economics of a business, such as the balance sheet, the income statement, overall management and cash flow, investors are looking at a company's fundamentals, which help determine the company's health as well as its growth prospects. A company with little debt and a lot of cash is considered to have strong fundamentals.

Strong fundamentals suggest that a business has a viable framework or financial structure, while those with weak fundamentals may have issues in the areas of debt obligation management, cost control or overall organizational management. A business with strong fundamentals may be more likely to survive negative events, such as economic recessions or depressions, than one with weaker fundamentals and may indicate less risk should an investor consider purchasing securities associated with the aforementioned businesses.

While fundamentals are most often considered factors that relate to particular businesses or securities, national economies and their currencies also have a set of fundamentals that can be analyzed. For example, interest rates, GDP growth, trade balance surplus/deficits and inflation levels are some macroeconomic factors that are considered to be fundamentals of a currency's value. Macroeconomic fundamentals are also used in top-down analysis of individual companies.

Fundamental Analysis

Investors and financial analysts are interested in evaluating the fundamentals of a company in order to compare its economic position relative to its industry peers, the broader market or to itself over time. Fundamental analysis involves digging deep into a company's financial statements to extract its profit and growth potential, relative riskiness, and to ultimately decide if its shares are over-, under- or fairly valued in the market. Often fundamental analysis involves computing and analyzing ratios in order to make apples-to-apples comparisons. Some common fundamental analysis ratios include the debt-to-equity ratio, the quick ratio, financial leverage, the price-to-earnings (P/E) ratio and DuPont analysis. Fundamental analysis should be carried out with a holistic approach, utilizing several ratios and including some bottom-up and well as top-down analysis in order to come to specific conclusions and actions.

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