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).
Quick Answer
Fundamental analysis is a method of valuing financial instruments based on economic, financial and qualitative data, aiming to determine a company's intrinsic value and compare it with market price. When intrinsic value exceeds market price the company is undervalued (an opportunity); when it is lower, the company is overvalued. Key indicators include P/E (price to earnings), P/B (price to book), ROE and net debt/EBITDA. It answers what to buy over a long-term horizon, and works best combined with technical analysis. This is educational information, not investment advice.
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.
How Freenance can help
Freenance tracks your investments and shows portfolio results in context of allocation. Having the full picture makes it easier to decide which companies to invest in more based on fundamental analysis.
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FAQ
What is fundamental analysis?
Fundamental analysis is a method of valuing financial instruments based on a company's financial data, the macroeconomic environment and qualitative factors. The goal is to estimate intrinsic value and compare it with the current market price to identify potentially undervalued or overvalued securities.
What does the P/E ratio actually tell you?
The price-to-earnings (P/E) ratio shows how many years of current earnings an investor pays for one share. A low P/E may indicate an undervalued or slow-growing company, while a high P/E often reflects strong growth expectations or overvaluation — context and sector benchmarks matter.
What is the P/B ratio used for?
The price-to-book (P/B) ratio compares the market price of a share to its book value per share. A P/B below 1 means the market values the company below its net accounting assets, which can signal either an opportunity or underlying problems with asset quality.
Why is cash flow more important than reported profit?
Cash flow shows the real money flowing into and out of a business, while accounting profit can be affected by non-cash items and accruals. Sustainable free cash flow makes it easier to fund investments, repay debt and pay dividends, which is why analysts treat it as a key health indicator.
Is fundamental analysis a guarantee of investment success?
No — fundamental analysis improves the quality of investment decisions but does not eliminate market risk, sentiment-driven price swings or unexpected macro shocks. It works best when combined with risk management, diversification and a long-term horizon, and capital losses are always possible.
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