What Is Fundamental Analysis?
Fundamental Analysis estimates an asset's intrinsic value by analyzing financial statements, business performance, industry conditions, and broader economic factors. It's the dominant approach for long-term investors and the foundation of value investing.
Key metrics for stock fundamental analysis:
- P/E Ratio: Price divided by Earnings per Share. Lower is cheaper. Compare to industry average. - P/B Ratio: Price divided by Book Value. Used for asset-heavy businesses. - PEG Ratio: P/E divided by growth rate. Adjusts P/E for growth expectations. - Free Cash Flow: Cash generated after capital expenditures. Often more honest than reported earnings. - Debt-to-Equity: Measures financial leverage. - Return on Equity (ROE): How efficiently the company uses shareholder capital.
Fundamental analysis is most useful on multi-month to multi-year timeframes. Stocks can deviate from fair value for long periods, so fundamentals are weak short-term signals but reliable long-term anchors.
For short-term trading, technical analysis is generally more useful. The two approaches work together: fundamentals tell you *what* to buy, technicals tell you *when*.
Related terms
- Market Capitalization — The total value of a company's outstanding shares: share price × total shares.
- Earnings Report — Quarterly publication of a company's financial results.
- Technical Analysis — Predicting future price movements by analyzing past price and volume data.