Fundamental analysis is one way of analyzing the value of a stock based on the economic health of the company issuing the shares, measured in terms of revenues, profits, assets, liabilities, Return on Equity (ROE), Return on Assets (ROA), return on investment (ROI), growth prospects and cash flows, etc.

The fundamentals tell you about the value of the company. You can say a company is having a solid foundation if it is growing at a nice pace, generating a profit, has limited debt and ample liquidity.

The analysis of the fundamental of a company always involves getting insight into its financial, rather than analyzing the movement of the stock price, the activity known as technical analysis.

Equity researchers normally do fundamental analysis to calculate the intrinsic value of the shares of a company. If  a company’s stock is trading above the intrinsic value or fair value, then the stock is overvalued. If the company’s stock price is less than intrinsic value, then the stock is undervalued.

If you follow the stock market very closely,  the price of the shares of most companies never matches the fair value. Often, day traders and investors prefer investment options in the short term, investing in these stocks, regardless of the outlook on the companies’ long-term growth. However, long-term investors generally prefer to invest in companies with sound fundamentals and ignore the short-term movements, the share price.