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Home > Fundamental analysis

• analysing its balance sheet and income statement,
• guessing the incidence its future economic prospects on those accounts.

1 Range of FA techniques

Financial analyses uses among others discounted cash flow analysis. Generally, the analyst estimates the expected future cash flow of the investment, and uses projections of interest rates to assess the present value of the cash flow.

Also dividends might be taken into account, as the direct income shareholders can expect, capital gains being more hypothetic for them

2 Several pitfalls

• Linear projections based on five year averages are usually adequate, but this need to add the final discounted value at the end of the period (either a projected book value, or a string of cash-flows based on the general economic growth).

• The choice of the discounting rate is tricky, It should normally should include a risk premium, but this is debated (see risk aversion, risk premia puzzle , behavioral finance)

• A crucial concern of many investors is to obtain a large margin of safety when making an investment. It is well known that forecasting future earnings and interest rates is difficult, and estimates of these are often unreliable.

3 Alternative or additional techniques

Sometimes earnings multiples, such as the PE ratioIn finance, the PE ratio of a stock (also called its "multiple" or "P/E") is calculated as: Price per Share Earnings Per Share The price per share (numerator) is the market price of a single share of the stock. The Earnings per share (denominator) is the, are used to determine value, where cash flows are relatively stable and predictable. This market-based criteria can take into account behavioral parameters, for example the stock imageA stock image in publishing is an image that is commercially available (see stock photography). A stock image in finance is a stock valuation coefficient. It links the estimated economic value ( fair value) and the stock market price. This coefficient, us

Another complementary method is to interview employees, competitors, vendors and customers about a company. Often these people will know as much or more about a company than its management. One of the goals of this research should be to determine whether the company has good practices, and whether its management is honest.

4 See also

Politics	Business	Finance

Topics: Fundamental Analysis Value Company Determine Cash Flow...

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