Fundamental analysis (FA) asks “what is this worth?” by studying the business behind the ticker — its earnings, growth, and balance sheet. Where technicals time, fundamentals value.
The three statements
- Income statement — revenue, costs, and profit over a period.
- Balance sheet — what the company owns (assets) and owes (liabilities) at a point in time.
- Cash flow statement — the actual cash moving in and out. Profit can be massaged; cash is harder to fake.
Common ratios
| Ratio | Asks | Rough read |
|---|---|---|
| P/E (price ÷ earnings) | What you pay per $1 of profit | Higher = more growth priced in |
| P/S (price ÷ sales) | Same, for revenue | Useful when profits are early |
| Debt / equity | How leveraged it is | Higher = more risk |
| ROE (return on equity) | How well capital is used | Higher is generally better |
| FCF | Cash left after running the business | Positive and growing is healthy |
Context matters
Ratios mean little in isolation. Compare a company to its own history and its peers — a “high” P/E for a utility may be “cheap” for fast-growing software.
Valuation, briefly
Analysts estimate intrinsic value (e.g., by discounting future cash flows) and compare it to the price. If price is well below estimated value, that gap is the margin of safety.
For investors vs. traders
- Investors lean on fundamentals to choose what to own for years.
- Traders watch fundamentals mainly around catalysts — earnings, guidance, product news — that move price quickly.
Caution
”Cheap” can get cheaper and “expensive” can keep rising. Fundamentals tell you what and why; they are poor at telling you when. Many combine FA for selection with TA for timing.