Glossary
Fundamental analysis
Evaluating a security by studying the business, its financial statements, industry and economy to estimate its intrinsic value.
On this page
Fundamental analysis is the practice of judging what a security is worth from the economics behind it: the company's revenue, profits, cash flow, balance sheet, competitive position, management and the industry and economy around it. The analyst forms an estimate of intrinsic value and compares it with the market price. It is the approach behind most long-term investing, and it contrasts with technical analysis, which studies price and volume patterns.
How it works
Most fundamental work moves through a few layers:
- The business. What it sells, to whom, how it makes money and what protects it from competitors.
- The financial statements. Growth, margins, returns on capital and cash generation from the income statement, balance sheet and cash flow statement, read over several years.
- Valuation. Either relative, using multiples such as P/E or EV/EBITDA against peers and history, or absolute, using a discounted cash flow model.
- Context. Interest rates, the economic cycle and industry trends that could change the picture.
Analysts work "top-down" (economy, then sector, then company) or "bottom-up" (company first).
Limits
Fundamentals can explain value over years but say little about next week's price. Inputs are estimates, accounting can obscure economics, and a stock that looks cheap can stay cheap for a long time. Many investors combine fundamental work with attention to risk management and, sometimes, price trends.