Every stock has a share price. But how do you know whether it’s really worth what “the market” says it’s worth? Many investors try to answer that question by engaging in fundamental analysis.
What Is Fundamental Analysis?
Fundamental analysis is a method used to find a stock’s intrinsic or “true” value by evaluating metrics such as the company’s revenue, expenses, and profits. It also takes into account other less tangible factors such as the strength of its management team, the quality of its business model, its reputation, and where it stands in its industry, as well as the overall economy.Investors put a magnifying glass to this and other data to determine whether a company is overvalued or undervalued. It also gives investors a raw view of whether the company is poised to succeed or struggling and vulnerable to major downturns.
This vantage ultimately helps investors decide whether to buy or sell any particular stock. Value investors in particular use fundamental analysis to find hidden gems or cheap stocks with major potential.
How to Conduct Fundamental Analysis
Fundamental analysis starts by looking at the numbers in a company’s financial statements. This will provide you with metrics including earnings, cash flow, assets, revenue, profits, debts, expenses, and much more. You can find this data in company filings, which publicly traded companies are required to disclose under the Securities and Exchange Commission (SEC). Here are some examples.- Form 10-K (annual report)
- Form 10-Q (quarterly report)
- Form 8-K (current events report)
When you look at these numbers, you’re looking at quantitative data. But just as important is the information that can’t be measured with numbers. This includes the skillset of the company’s management team, the company’s competitive edge, its reputation among the public, and more.
To find this data, you may need to look beyond the financial statements. Consider the company’s official website. Look at its leadership and dig into their resumes. How did they perform at other companies, and what do they bring to the table at their current position?
Read reputable financial and trade publications that extensively cover publicly traded companies and the industries they occupy. This can give you a taste of where the company stands in the overall market.
Moreover, financial data providers such as Morningstar and Bloomberg can give you valuable fundamental data about various companies, industries, and markets. Many brokerage companies also supply research reports about publicly traded companies and their industries.
Digging Into Financial Statements
You can find key fundamental data in a company’s public filings or financial statements. So let’s take a closer look at some key points.Income statement: This tells you about a company’s revenue, expenses, and profits. By looking at these metrics over time, you can get a good glimpse at whether it’s succeeding or struggling.
Balance sheet: This tells you about the company’s assets and liabilities, or debts. What is left over is called shareholders’ equity. If it owns more than what it owes, this is typically a good sign.
Cash flow statement: This tells you all about the cash coming in and out of the company. It can tell you about the company’s capacity to earn money, pay its bills, and reinvest in its internal operations.
Why Fundamental Analysis Matters
By closely examining a company’s financials as well as its position in the overall economy, you can get a better look at what the company is truly worth. You don’t have to rely solely on fluctuating share prices. Fundamental analysis gives you an inside look. By looking at how a company is handling money over time and how it’s competing in its industry, you can project whether the company is set for growth or closer to failure. This can even help you spot companies that are fundamentally worth more than their stock is selling for. This can give you an opportunity to jump into a company that’s about to explode. That’s why it’s a key strategy for value investors.The Bottom Line
Fundamental analysis helps investors discover the true, intrinsic, or fair market value of any stock. It involves taking a close look at a company’s financials. But it also entails looking at nontangible factors such as the acumen of a company’s management team, how it’s viewed by the public, and its competitive advantage. Taken together, this can help you make a decision as to whether you should invest in the stock or sell it.The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
