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Fundamentals of Economics and Business

[Harvard University - World Book]



- Fundamentals

Fundamentals include fundamental qualitative and quantitative information that contributes to the financial or economic well-being of a company, security or currency and its subsequent financial valuation. Where qualitative information includes elements that cannot be directly measured, such as management experience, quantitative analysis (QA) uses mathematics and statistics to understand assets and predict their movements. 

In business and economics, fundamentals represent the main characteristics and financial data needed to determine the stability and health of an asset. These data can include macroeconomic or large-scale factors, as well as microeconomic or small-scale factors, to set the value of a security or business.

While fundamentals are often thought of as factors associated with a particular business or security, national economies and their currencies also have a set of fundamentals that can be analyzed. For example, interest rates, gross domestic product (GDP) growth, trade balance surplus/deficit and inflation levels are some of the factors considered fundamental to a country's value.


- Macroeconomic and Microeconomic Fundamentals

Macroeconomic fundamentals are topics that affect the entire economy, including statistics on 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 the analysis of the economy as a whole or can be related to individual business activities to change based on macroeconomic impacts. Large-scale macroeconomic fundamentals are also part of the top-down analysis of individual companies. 

Microeconomic fundamentals focus on activities within smaller sectors of the economy, such as specific markets or sectors. This small-scale focus can include supply and demand issues within specific market segments, labor, and consumer and business theory. Consumer theory studies how people spend within specific budget constraints.


- Fundamentals in Business

By looking at a business' economics, including its overall management and financial statements, investors are focusing on a company's fundamentals. These data points not only show the health of the business, but also the potential for further growth. A company with little debt and plenty of cash is considered to have strong fundamentals. 

Strong fundamentals indicate that a business has a viable framework or financial structure. Conversely, those with weak foundations may have problems with debt management, cost control, or overall organizational management. Companies with strong fundamentals are more likely to survive adverse events such as recessions or depressions than companies with weaker fundamentals. Additionally, strength may indicate less risk if an investor considers purchasing securities related to the aforementioned businesses.


 - Fundamental Analysis

Investors and financial analysts are interested in evaluating a company's fundamentals to compare its economic standing relative to its peers, the broader market, or its own over time. Fundamental analysis involves digging deep into a company's financial statements to extract its profit and growth potential, relative risk, and ultimately determine whether its stock is overvalued, undervalued or fair in the market.  

Fundamental analysis usually involves calculating and analyzing ratios to make apples to apples comparisons. Some common fundamental analysis ratios are listed below. 

  • The debt-to-equity ratio (DE) measures how well a company finances its operations.
  • The quick ratio measures a company's ability to meet short-term obligations.
  • Financial leverage (DFL) measures the stability or volatility of earnings per share (EPS).
  • The price-to-earnings (P/E) ratio compares investments to earnings.
  • DuPont Analytics examines return on equity (ROE) by looking at asset utilization efficiency, operational efficiency, and financial leverage.

Fundamental analysis should be conducted with a holistic approach, utilizing multiple ratios, including bottom-up and top-down analysis, to draw specific conclusions and actions.



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