What is Fundamental Analysis?

Fundamental analysis is a method of evaluating assets that aims to determine the intrinsic value of a company, stock, or other investment by examining its underlying economic and financial factors.

The main goal is to understand whether an asset's current price is undervalued, overvalued, or aligned with its true worth, allowing investors to make more informed and confident decisions.

What's the Purpose of Fundamental Analysis?

It helps answer essential questions like:

• Is the company profitable and financially healthy?

• Is it highly leveraged or well-positioned in the market?

• Does it have long-term growth potential?

• Is the current stock price cheap, expensive, or fair?

Based on this analysis, you can decide whether to invest in, hold, or sell a particular asset.

Fundamental Analysis vs. Technical Analysis: What's the Difference?

Aspect

Fundamental Analysis

Technical Analysis

Focus

Company, industry, economy

Charts, prices, and volumes

Time Horizon

Medium to long term

Short to very short term

Objective

Determine true value of the company

Identify price patterns

Primary Use

Investing and valuation

Trading, speculation

Indicator Examples

ROE, P/E, Debt/EBITDA, Dividend Yield

Moving averages, RSI, Bollinger Bands

Pillars of Fundamental Analysis

1. Macroeconomic Analysis

This evaluates the global and national economic context, including:

• GDP growth

• Inflation

• Interest rates

• Exchange rates

• Political and fiscal landscape

The overall economic performance directly impacts industries and companies.

2. Industry Analysis

This involves analyzing the industry in which the company operates:

• Industry lifecycle (expansion, maturity, or decline)

• Competition and barriers to entry

• Sensitivity to the economy (cyclical vs. defensive sectors)

• Government regulation

3. Company Analysis

Here, you'll study the company itself by examining:

• Balance sheet

• Income statement (P&L)

• Cash flow statement

• Corporate governance

• Business models

• Growth strategies

Key Fundamental Analysis Indicators

1. Profitability Ratios

• ROE (Return on Equity): Measures how much profit a company generates relative to its shareholder equity.

• Formula: Net Income ÷ Shareholder Equity

• Higher is generally better.

• ROA (Return on Assets): Measures the return on a company's total assets.

• Net Margin: The percentage of profit generated from revenue.

• Formula: Net Income ÷ Revenue

2. Valuation Ratios

• P/E (Price-to-Earnings Ratio): Shows how many years of current earnings it would take to pay back the stock price.

• Formula: Share Price ÷ Earnings Per Share

• A low P/E might indicate an undervalued asset, but it depends on the industry.

• P/B (Price-to-Book Ratio): Compares a company's market price to its book value (shareholder equity).

• If less than 1, it might suggest the stock is trading below its book value.

• EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization): Relates a company's total value to its operational earnings.

• Used to compare companies within the same industry.

3. Debt Ratios

• Net Debt / EBITDA: Measures how many years of operational profit a company would need to pay off its net debt.

• Ideally, below 3.

• Interest Coverage Ratio: Assesses whether a company generates enough cash to cover its interest payments on debt.

4. Efficiency Ratios

• Asset Turnover: Measures how efficiently a company uses its assets to generate revenue.

• Operating Cycle: The time it takes for a company to convert its investments in inventory and accounts receivable into cash.

5. Dividend Ratios

• Dividend Yield (DY): The percentage of dividends paid relative to the stock price.

• Formula: Dividends Per Share ÷ Share Price

• Income investors often look for higher DYs.

Documents to Use for Analysis

• Balance Sheet: A snapshot of a company's assets, liabilities, and equity at a specific point in time.

• Income Statement (P&L): Shows a company's revenues, expenses, and profit over a period.

• Cash Flow Statement: Details how cash is generated and used by a company.

• Annual Reports (10-K in the US): Comprehensive yearly reports filed with regulatory bodies (like the SEC in the US) providing detailed financial and operational information.

• Quarterly Reports (10-Q in the US): Shorter, unaudited reports filed quarterly.

These documents are typically found on the Investor Relations (IR) section of each company's website.

Tools for Fundamental Analysis

• Financial Data Platforms: Services like Bloomberg Terminal, Refinitiv Eikon, or free alternatives like Yahoo Finance, Google Finance, and TradingView.

• Brokerage Platforms: Many online brokers offer research tools and financial data for their users.

• Company IR Websites: The primary source for official financial reports.

These platforms offer up-to-date data, historical information, and often automated indicator calculators.

Step-by-Step Guide to Your First Analysis

1. Choose an industry you understand or are interested in.

2. List companies within that industry.

3. Evaluate key fundamental indicators:

• Profitability (ROE, Margins)

• Debt (Net Debt/EBITDA)

• Valuation (P/E, P/B)

• Dividends (DY)

4. Read quarterly and annual reports.

5. Monitor the macroeconomic and industry outlook.

6. Decide if the current price offers a margin of safety.

7. Compare companies within the same industry.

Practical Examples

Company A: Banking Sector

• ROE: 18% (excellent)

• P/E: 8 (below historical average, potentially cheap)

• Controlled debt

• Dividend Yield: 7% annually

Conclusion: A profitable, efficient company that pays good dividends and has an attractive valuation.

Company B: Retail Sector

• ROE: 5% (low)

• P/E: 35 (very high, elevated price)

• High leverage (Net Debt/EBITDA of 4)

• Low dividends

Conclusion: Highly dependent on future growth. Might be risky for a conservative investor profile.

Cautions and Limitations of Fundamental Analysis

• Doesn't predict unforeseen events: Crises, pandemics, or regulatory changes can still occur.

• Can generate false expectations: If based on unrealistic projections.

• Requires constant updates: Companies and industries are dynamic.

Because of these limitations, always combine fundamental analysis with diversification and risk management.

Advantages of Using Fundamental Analysis

• Ideal for long-term investors.

• Allows you to buy undervalued assets with appreciation potential.

• Increases confidence in your investment choices.

• Helps build a retirement or dividend portfolio.

Conclusion: Why Master Fundamental Analysis?

Understanding and applying fundamental analysis transforms your investor profile. You'll stop relying on hunches, fads, or "hot tips" and start making decisions based on concrete data, solid financials, and a long-term vision.

If you're looking to build wealth consistently, securely, and intelligently, fundamental analysis is the way to go.