Fundamental Analysis — What it is and How to Evaluate a Company
What is fundamental analysis, which indicators to use and how to assess whether company shares 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 market price.
If intrinsic value > market price → company is undervalued (opportunity). If intrinsic value < market price → company is overvalued (expensive).
Key indicators
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 company (or slow growing)
- P/E 30+ → expensive company (or dynamically growing)
P/B (Price to Book)
Stock price / book value per share. P/B < 1 means market values company below its net assets.
ROE (Return on Equity)
Net profit / shareholders' equity. Measures how efficiently company uses shareholders' 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 healthy company.
How to conduct fundamental analysis?
1. Macroeconomic analysis
What's the state of economy? Are interest rates rising? What's inflation? 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 — company website (Investor Relations section)
- Yahoo Finance — international companies, ratios, charts
- SEC EDGAR — US companies
- Company annual reports (10-K, 10-Q) — detailed financial data
- Financial news websites — analysis and news
FA vs TA — which is better?
| Feature | Fundamental analysis | Technical analysis |
|---|---|---|
| Question | What to buy? | When to buy? |
| 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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