Fundamental analysis measures a security’s intrinsic value using a mix of quantitative and qualitative assessments. Investors, day traders, and analysts all want to answer the same question: does the “fair market price” actually reflect the business underneath it?<\/p>\n
If you’re confident in your fundamental stock market analysis, spotting an undervalued security could generate decent upside if the price eventually rises to meet your estimate.<\/p>\n
In this article, we’ll cover how to apply fundamental analysis in practice: what to look at in a company, its financials, and the other factors that shape its value.<\/p>\n
Fundamental analysis in trading is a way of examining the fundamental factors of a business so you can more accurately judge its share price. It’s about taking a long-term view of a company rather than worrying about short-term details, such as the end-of-day share price.<\/p>\n
Investors who use fundamental analysis usually fall into two categories:<\/p>\n
Say the market prices a company at $100 a share, with normal fluctuations. But after applying fundamental analysis, you think it’s undervalued and should be $120. Buying now, before the market catches up, could be a smart move.<\/p>\n
On the other hand, if a security is overvalued, it could drop to $80. As with any investment, it’s a data-backed judgment call – and the more data you’ve got for analysis, the smarter decisions you can make.<\/p>\n
The goal is to understand “fair market value” and whether a stock looks undervalued or overvalued relative to how the market and other analysts have priced it.<\/p>\n
Stock fundamentals are a company’s key metrics – things like cash flow and return on assets (ROA).<\/strong> Fundamental analysts predict where a stock’s price should be by looking at the company’s financial health and market position to determine whether it’s likely to outperform or underperform its sector.<\/p>\n Conducting a fundamental analysis involves going over the following stock fundamentals (and several others, depending on how deep you want to go):<\/p>\n Once you’ve collected this information and analyzed it, you might have a different view of the true value of a security than the market and other analysts do.<\/p>\n Technical analysis and fundamental analysis sit at opposite ends of the spectrum. Which one someone uses is usually a matter of personal preference.<\/p>\n Both methods rely heavily on data. However, technical analysis forecasts future price movements based on historical share price action and trading volumes over a fixed period (e.g., six months, two years, etc.). Price trends and actions are then compared to other companies in that sector or asset class.<\/p>\n Investors and analysts can use a number of approaches, such as finding a symmetrical triangle or the wedge<\/a>, to assess how one security compares to similar businesses.<\/p>\n In some cases, investors try to get as close to real-time data analysis as possible to make faster investment decisions. With this approach, you need vast amounts of market data, clean data sets, and machine learning tools to help make quick trades.<\/p>\n Fundamental analysis can still play a role here, though more as a way of narrowing down which securities deserve your attention. In this scenario, market data and historical data are useful, as is a clear understanding of the fundamentals of the companies you’re interested in.<\/p>\n Fortunately, it’s not an either-or situation. You can combine fundamental and technical analysis to get an even clearer picture of the strength, value, and potential of the companies you’re interested in.<\/p>\n Step 1: Understand the Business.<\/strong> Fundamental stock analysis starts with understanding what the company does, its products or services, its business model, and its place in the industry. Look into the company’s annual reports, press releases, and news articles. Analyze the industry’s growth potential, the competitive landscape, and any regulatory or technological changes that might come into play.<\/p>\n Step 2: Analyze Financial Statements.<\/strong> Review the company’s stock fundamentals like revenue, expenses, and profits over several years to assess its profitability and growth trends. Examine its assets, liabilities, and shareholders’ equity to get an idea of its financial health and stability. Look at its operating, investing, and financing cash flow to gauge its liquidity and cash management.<\/p>\n Step 3: Evaluate Financial Ratios and Metrics.<\/strong> Fundamental investing focuses on return on equity (ROE), return on assets (ROA), and profit margins to see how effectively the company generates profits. The current ratio and quick ratio show its ability to meet short-term obligations. Price-to-earnings (P\/E), price-to-book (P\/B), and price-to-sales (P\/S) ratios help you judge how the market is valuing the stock, while debt-to-equity and interest coverage ratios give a picture of the company’s leverage.<\/p>\n Step 4: Consider Qualitative Factors.<\/strong> Research the company’s leadership, their track record, management style, and corporate governance practices. Determine its unique selling propositions, patents, brand strengths, and market share. Look at expansion plans, new product developments, and innovation strategies to evaluate future growth prospects.<\/p>\n Step 5: Compare and Make a Decision.<\/strong> Fundamental analysis of stocks compares the company’s performance, ratios, and growth prospects with its industry competitors. It also considers interest rates, inflation, economic growth forecasts, and other indicators of the overall economic environment. Based on that analysis, decide whether the stock looks undervalued, overvalued, or fairly valued, and make your decision accordingly.<\/p>\n The main risk of fundamental analysis is that your analysis is incomplete, and markets are pricing in something you’re not aware of or have weighted differently. When you take a value-based approach to fundamental analysis, you’re betting on a reversion to the mean.<\/p>\n For example, if your fundamental analysis leads you to believe a stock should be valued at $80, and right now it’s trading at $60, you’re making a bet that the market will eventually agree with you. In practice, due to macro factors, this may not happen, or it may take many years. There could be a systemic crash that affects all stocks, and that $60 stock could go to $20. There’s also an opportunity cost to fundamental investing.<\/p>\n Your analysis might be right and the stock does eventually reach $80… but it took 10 years to get there. Your money could have been working harder elsewhere. As with any investment, whether it’s $1,000 or $1 million, it’s a judgment call, and fundamental analysis is one way to make that call.<\/p>\n While these risks exist, famous fundamental investors like Warren Buffett and Charlie Munger have had huge success using fundamental analysis to make investment decisions.<\/p>\n Here’s a list of some of the most helpful tools for fundamental analysis. If you want to determine whether a stock is worth your investment, these data points will help you make an informed decision.<\/p>\n Start with the basics. Take notes from the company’s website, investor relations pages, and annual reports. This should answer the following questions for you:<\/p>\n From this fundamental analysis of a stock, you should have a fairly clear top-level overview. Now it’s time to go a bit deeper.<\/p>\n The balance sheet is a snapshot of the company’s assets, liabilities, and equity. The identity that ties it all together: Assets = Liabilities + Shareholders’ Equity.<\/p>\n Likewise, assessing a company’s P&L is always useful. You need to know whether they’re making a profit or losing money, and what their earnings before interest and taxes (EBIT) look like.<\/p>\n EBIT is an important fundamental analysis tool to know because it shows how much income a business generates from its core operations, before financing and tax decisions enter the picture.<\/p>\n A company’s balance sheet, income statement, and cash flow statement are among your best fundamental analysis tools. They offer direct insight into a company’s financial operations and let you assess financial health, profitability, debt levels, and cash management. By reading the financial statements, you can get a clearer view of a company’s real underlying valuation than you can by simply exploring the stock’s historical price trends.<\/p>\n SEC filings are some of the best fundamental analysis tools for publicly traded companies in the U.S. They provide a detailed overview of the company’s financials, risks, and management decisions in comprehensive, legally required documents – all public on the SEC’s EDGAR system. Here are the key SEC filings to look at when doing fundamental analysis of a stock.<\/p>\n Providers like Bloomberg Terminal, Reuters Eikon, and Tiingo are popular fundamental analysis tools with professional investors who need real-time, comprehensive data. The traditional terminals are excellent products, built for institutions with the budget for them.<\/p>\n Tiingo<\/a> (that’s us) serves individual and professional investors who want comprehensive, affordable financial data. Our API provides access to stock prices, fundamentals, ETF data, and news across 80,000+ assets, and the API-first design lets you tailor the data to your own analysis – especially useful if you have specific data needs or run algorithmic trading strategies. We’ve kept pricing accessible to individual investors and small firms since 2014, because that’s the whole point of Tiingo: high-end tools made accessible to all.<\/p>\n Stock price ratios make it easier to see whether the stock fundamentals line up with how a security is priced. For this fundamental analysis tool, you’ll want access to a high-quality fundamental data API<\/a>.<\/p>\n Cash flow, share price ratios, and credit ratings are just a few of the fundamental company financial metrics you’ll want to dig deeper into.<\/p>\n It takes time to build an accurate picture of a business, especially when operational leaders and accountants are keen to publish materials that paint them in a positive light. As an analyst or investor, you’ve got to look closely at the real metrics, including market data and historical data. Here’s what to look into:<\/p>\n The strength of a sector – whether it’s growing, contracting, or stagnant – can directly impact a company’s health. In most cases, this is factored into the share price. However, using fundamental analysis, you can spot what others have missed, such as:<\/p>\n Industry reports are an important fundamental analysis tool for understanding the competitive landscape and the external factors affecting a company. Analysts study them to get a feel for current and upcoming conditions in the sector. Where to Find Industry Reports:<\/strong><\/p>\n Analyzing the economy and its potential impact on the businesses you’re interested in is also important. You can look at indices like the Consumer Price Index or the Purchasing Managers’ Index<\/a>. You can also consider metrics like gross domestic product (GDP) in the countries a company operates in, as well as interest rates.<\/p>\n Economic indicators are crucial for Top-Down fundamental analysis, where macroeconomic conditions are a primary concern. They help you gauge the overall economic environment and its potential impact on investments and markets. Types of Economic Indicators:<\/strong><\/p>\n It’s always worth looking into a company’s statement of cash flows, as this shows the actual inflow and outflow of money.<\/p>\n Cash flow is an indicator of the overall financial health of a company. There are a number of ways a business demonstrates this publicly, such as operating cash flow (OCF), cash from financing (CFF), and cash from investing (CFI).<\/p>\n Of those three, operating cash flow is the most important, as it shows how much cash a company generates from its core activities. Ideally, a company should have more coming in from its core business than from investing or financing.<\/p>\n If that’s not the case, it’s worth asking why – the company may be carrying too much debt, or its business model may mean non-core activities generate more cash than its main products or services.<\/p>\n When a competitive advantage is easy to see, the market prices it into a stock. When it isn’t as clear to other investors, it’s worth exploring further. So you need to understand:<\/p>\n Look into everything you can about a company’s leadership: track record, performance, execution of the strategic plan, compensation, the targets the board has set, and whether they’ve been buying or selling stock recently.<\/p>\n A leadership team can make or break a company. If the market underestimates the C-suite, you could be picking up an undervalued stock.<\/p>\n You can set up your fundamental analysis tools in several ways.<\/p>\n Start with the investor relations sections of the companies you’re interested in. Equally useful is the Securities and Exchange Commission’s EDGAR filings database, where you can pull all of the usual reports: 8-K, 10-Q, 10-K, etc. Investors and analysts can find SEC filings on the SEC EDGAR page<\/a>, though working with raw filings requires extensive joining of data fields and standardization across companies and within companies.<\/p>\n Tiingo already provides standardized fundamental data<\/a> – 20+ years of structured history covering quarterly and annual statements plus daily metrics – so you can compare across companies and industries, and within companies, without doing all of that joining yourself.<\/p>\n Beyond public sources, investors and analysts need a reliable, in-depth source of clean data and financial news.<\/p>\n With high-quality data, you can uncover all sorts of nuggets. Take the time to make a holistic assessment of the stocks you’re looking at, from P&L and cash flow to the executive team and how the sector is doing economically.<\/p>\n Fundamental analysis of stocks covers more than crunching numbers and churning through spreadsheets.<\/p>\n Go for a deep-dive mix of quantitative and qualitative factors, such as:<\/p>\n If your analysis shows the market is underestimating the company, you could be onto a winner.<\/p>\n Top-Down vs. Bottom-Up Fundamental Analysis.<\/strong> Top-Down analysis begins at the macro level. It looks at national economic data like GDP and unemployment, then hones in on individual companies. Bottom-Up fundamental stock analysis goes in the opposite direction: it starts with a single company’s financial statements and then broadens out to industry and national trends.<\/p>\n Top-Down fundamental stock analysis starts with macroeconomic factors and works its way down to the industry and individual company level.<\/strong> Top-Down is often preferred in stable or predictable economic climates. The top 10 items to look into when doing Top-Down fundamental analysis are:<\/p>\n Applying fundamental analysis this way is a research funnel: identify securities that other investors aren’t pricing accurately (giving you an advantage). To determine fair market value, fundamental analysts look into:<\/p>\n Here’s a hypothetical to show how the pieces fit together:<\/p>\n Bottom-Up fundamental analysis of a stock focuses on the individual company rather than broader industry or economic trends.<\/strong> Bottom-Up can be effective at identifying strong performers in otherwise weak sectors. The top 10 items to examine in a Bottom-Up analysis are:<\/p>\n Another hypothetical:<\/p>\n Using the fundamental analysis tools and metrics above, investors can build a view of intrinsic value for a security, making it easier to judge whether a company looks undervalued or overvalued.<\/p>\n Every investor and analyst will have their own view on “value,” so this research is about collecting enough data to reach a valuation you can defend. One of the best ways to conduct effective fundamental analysis is to have access to reliable, clean financial data.<\/p>\n That’s exactly why we built Tiingo<\/a>. We don’t believe in holding good data hostage, so we’ve been making high-end financial data accessible and affordable since 2014 – no outside investors, profitable for 8+ years, which is what lets us put people over short-term profit. The free plan is $0 and includes 30+ years of price history and 5 years of fundamentals; the Power plan is $30\/month. And for deep fundamental work, our Fundamental Data API<\/a> add-on provides 20+ years of structured fundamental history: quarterly and annual statements plus daily metrics.<\/p>\n\n
Fundamental Analysis vs. Technical Analysis<\/h2>\n
How to Do a Fundamental Analysis of a Stock<\/h2>\n
What Are the Risks of Fundamental Analysis?<\/h2>\n
The Best Fundamental Analysis Tools for Traders<\/h2>\n
Business Model<\/h3>\n
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Financial Statements: Balance Sheet, Income and Profit and Loss<\/h3>\n
SEC Filings<\/h3>\n
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Investment Data Providers<\/h3>\n
Share Price Ratios<\/h3>\n
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Industry Reports<\/h3>\n
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Economic Indicators<\/h3>\n
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Cash Flow and Income Statements<\/h3>\n
Competitive Advantage<\/h3>\n
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Leadership Team Track Record<\/h3>\n
How to Set Up Your Tools for Fundamental Analysis<\/h2>\n
Different Approaches to Fundamental Analysis<\/h2>\n
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Top-Down Fundamental Analysis<\/h3>\n
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Example: Top-Down in Practice<\/h3>\n
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Bottom-Up Fundamental Analysis<\/h3>\n
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Example: Bottom-Up in Practice<\/h3>\n
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Use Clean, Complete Data for Your Fundamental Analysis<\/h2>\n