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Fundamental Analysis

In short

Evaluating a company's financials and business to determine intrinsic value

Fundamental analysis digs into a company's financial statements, business model, and competitive position to figure out what it's really worth. If the stock price is below intrinsic value, it might be a buy.

Fundamental analysis examines financial statements (income statement, balance sheet, cash flow statement), competitive advantages (moat), management quality, industry dynamics, and macroeconomic factors. Used by value investors like Buffett and Graham to identify undervalued companies.

Related concepts

  • P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.
  • Intrinsic Value — The market price is what people are willing to pay right now. Intrinsic value is an estimate of what the stock is actually worth based on the company's cash flows and assets. If a $40 stock has an estimated intrinsic value of $55, the gap ($15) is what practitioners call the margin of safety.
  • DCF Model — Imagine a friend promises to pay you $100/year for 10 years. Would you pay $1,000 today? Not quite — money tomorrow is worth less than money today. DCF calculates what future cash flows are worth right now.
  • Technical Analysis — Technical analysis reads charts and price patterns to predict future price moves. It assumes all information is already in the price. Unlike fundamental analysis, it doesn't care about earnings — just supply and demand dynamics.