Fundamental Analysis — What It Is and How to Evaluate Companies
What is fundamental analysis, which financial ratios to use, and how to assess whether company stocks are worth buying.
What is fundamental analysis?
Fundamental analysis is a method of valuing financial instruments based on economic, financial, and qualitative data. The goal is to determine the intrinsic value of a company and compare it with the market price.
If intrinsic value > market price → company is undervalued (opportunity). If intrinsic value < market price → company is overvalued (expensive).
Key ratios
P/E (Price to Earnings)
Stock price / earnings per share. Shows how many years of earnings you pay for the company.
- P/E 10 → cheap stock (or slow-growing)
- P/E 30+ → expensive stock (or rapidly growing)
P/B (Price to Book)
Stock price / book value per share. P/B < 1 means the market values the company below its net assets.
ROE (Return on Equity)
Net income / shareholders' equity. Measures how efficiently the company uses shareholder capital. ROE > 15% is usually a good result.
Net Debt / EBITDA
How many years of operating profit needed to pay off debt. Below 3 — comfortable level.
Dividend
Dividend yield = dividend per share / stock price. Regular, growing dividend is a sign of a healthy company.
How to conduct fundamental analysis?
1. Macroeconomic analysis
What's the state of the economy? Are interest rates rising? What's the inflation rate? This affects all companies.
2. Sector analysis
Is the industry growing? What are the trends? E.g., technology sector grows differently than mining.
3. Company analysis
- Revenue and profits (growing? stable?)
- Margins (gross, operating, net)
- Debt levels
- Management and strategy
- Competitive advantage (moat)
Where to find data?
- Quarterly and annual reports — on company website (Investor Relations section)
- Yahoo Finance / Google Finance — US stocks, ratios, charts
- SEC.gov — US company filings
- Company websites — investor relations sections
- Financial data providers — Bloomberg, Reuters, etc.
FA vs TA — which is better?
| Feature | Fundamental Analysis | Technical Analysis |
|---|---|---|
| Question | What to buy? | When to buy? |
| Time horizon | Long-term | Short-/medium-term |
| Data | Financial, macro | Price, volume |
| Effort | High (reading reports) | Medium (charts) |
Best results come from combining both approaches.
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