Deep diving into fundamental analysis techniques

Written by Zoe Wilkerson, Content Specialist, on behalf of Trade Maxair.

Fundamental analysis is a method of evaluating securities by analysing the intrinsic value of a company. This approach involves studying various factors that could affect the value of a security, such as macroeconomic factors, industry conditions, and company financials. The goal of fundamental analysis is to determine the true value of a security and identify investment opportunities that are undervalued or overvalued. Fundamental analysis can turn your portfolio from zero to hero! Get more info at Trade Maxair by connecting with investment education firms. Learn more now!

Understanding financial statements

One of the key components of fundamental analysis is the analysis of financial statements. Financial statements provide a snapshot of a company’s financial performance and health. The three main financial statements are the balance sheet, income statement, and cash flow statement.

  • Balance sheet: The balance sheet provides information about a company’s assets, liabilities, and equity. It gives investors an idea of a company’s financial position at a specific point in time.
  • Income statement: The income statement shows a company’s revenue, expenses, and profit over a specific period. It helps investors assess a company’s profitability.
  • Cash flow statement: The cash flow statement shows how changes in balance sheet accounts and income affect cash and cash equivalents. It helps investors understand a company’s ability to generate cash.

Ratio analysis

Ratio analysis is a key part of fundamental analysis. Ratios help investors evaluate a company’s financial performance and health. Some common ratios used in fundamental analysis include:

  • PE ratio: The price-to-earnings ratio measures a company’s current share price relative to its per-share earnings. It is used to assess the valuation of a company’s stock.
  • EPS: Earnings per share is a measure of a company’s profitability. It is calculated by dividing net income by the number of outstanding shares.
  • ROE: Return on equity measures a company’s profitability by showing how much profit a company generates with the money shareholders have invested.

Qualitative factors in fundamental analysis

In addition to financial statements and ratios, fundamental analysis also considers qualitative factors. These include:

  • Industry analysis: Understanding the industry in which a company operates is crucial. Factors such as industry growth, competition, and regulatory environment can impact a company’s performance.
  • Competitive advantage: Companies with a sustainable competitive advantage are more likely to generate higher profits over the long term. Fundamental analysis seeks to identify companies with strong competitive advantages.
  • Management quality: The quality of a company’s management team can have a significant impact on its performance. Fundamental analysis looks at factors such as management experience, track record, and strategic vision.

Valuation techniques

Fundamental analysis uses various valuation techniques to determine the intrinsic value of a security. Some common valuation methods include:

  • DCF analysis: Discounted cash flow analysis estimates the value of an investment based on its future cash flows. It calculates the present value of expected future cash flows to determine if an investment is undervalued or overvalued.
  • Comparable company analysis: This compares the valuation metrics of a company to those of similar companies in the same industry. It helps investors determine if a company is trading at a discount or premium compared to its peers.
  • Asset-based valuation: Asset-based valuation calculates the value of a company based on its assets and liabilities. It is often used for companies with significant tangible assets, such as real estate or equipment.

Economic analysis

Economic analysis is an essential part of fundamental analysis. It involves studying macroeconomic factors such as GDP growth, inflation, interest rates, and unemployment. These factors can have a significant impact on the performance of companies and industries.

Case studies and examples

To illustrate the importance of fundamental analysis, let’s look at a few case studies:

  • Apple Inc.: Fundamental analysis of Apple would involve analysing its financial statements, ratios, and qualitative factors such as its competitive advantage in the technology industry.
  • Amazon.com Inc.: Fundamental analysis of Amazon would include studying its financial performance, industry conditions, and management quality to determine its long-term investment potential.
  • Tesla Inc.: Fundamental analysis of Tesla would involve analyzing its financial statements, including its cash flow and profitability, as well as qualitative factors such as its position in the electric vehicle market.


Fundamental analysis is a critical tool for investors looking to make informed investment decisions. By understanding the key components of fundamental analysis, investors can identify investment opportunities that have the potential to provide attractive returns over the long term.

[Image CC by Gerd Altmann from Pixabay]


About Author

Related News