Fundamental Analysis Summary
A condensed overview of fundamental analysis as covered in this repository (books and concepts). For full book notes and deep dives, see Fundamental Analysis and Book Notes.
1. What Is Fundamental Analysis?
Definition: Evaluation of a company’s financial statements, business quality, and competitive position to estimate intrinsic value and decide whether a security is under- or overvalued at current price.
Core idea: Price can deviate from value in the short run; over the long run, price tends to reflect fundamentals. Buy when price < intrinsic value (margin of safety); avoid or sell when price >> value or quality deteriorates.
2. Financial Statements (The Big Three)
Income Statement (P&L)
Revenue (sales) − Expenses (COGS, operating, interest, tax) = Net income (earnings).
Key lines: Gross profit, operating income (EBIT), net income, EPS (earnings per share).
Use: Trend in revenue and earnings; margins (gross, operating, net); quality of earnings (recurring vs one-time).
Balance Sheet
Assets = Liabilities + Equity. Snapshot at a point in time.
Assets: Current (cash, receivables, inventory); non-current (PP&E, intangibles, investments).
Liabilities: Current (payables, short-term debt); long-term debt.
Equity: Book value; retained earnings; shareholders’ equity.
Use: Liquidity (current ratio, quick ratio); leverage (debt/equity); book value; working capital.
Cash Flow Statement
Operating: Cash from core business (adjusts net income for non-cash items, changes in working capital).
Investing: CapEx, acquisitions, investments.
Financing: Debt issued/repaid, dividends, share buybacks.
Use: Can the company fund operations and growth? Is earnings backed by cash flow? (Beware earnings without cash flow.)
3. Key Ratios (Quick Reference)
Profitability
ROE
Net income / Equity
Return on shareholder capital
ROA
Net income / Assets
Return on total assets
Gross margin
(Revenue − COGS) / Revenue
Pricing power, cost control
Operating margin
Operating income / Revenue
Operating efficiency
Net margin
Net income / Revenue
Bottom-line profitability
Liquidity
Current ratio
Current assets / Current liabilities
Short-term solvency (>1 healthy)
Quick ratio
(Current assets − Inventory) / Current liabilities
Stricter liquidity
Leverage
Debt/Equity
Total debt / Equity
Financial risk
Interest coverage
EBIT / Interest expense
Ability to pay interest
Valuation
P/E
Price / EPS
Price relative to earnings
P/B
Price / Book value per share
Price relative to book
P/S
Price / Revenue per share
Price relative to sales
EV/EBITDA
Enterprise value / EBITDA
Enterprise value vs operating cash earnings
Growth
Revenue growth
YoY % change
Top-line growth
EPS growth
YoY % change
Bottom-line growth
4. Valuation Approaches
Discounted Cash Flow (DCF)
Estimate future free cash flows (FCF); discount to present value using required return (WACC or cost of equity); add terminal value. Sum = enterprise or equity value.
Sensitivity: Small changes in growth or discount rate can change value a lot. Use a range of assumptions.
Comparable Multiples (Relative Valuation)
Compare company’s P/E, P/B, P/S, EV/EBITDA to peers or sector average. “Cheap” if multiples are below peers for similar quality and growth.
Adjust for: Growth, risk, profitability. A low P/E with no growth or poor quality is not necessarily a bargain.
Margin of Safety (Graham / Value Investing)
Buy only when market price is meaningfully below estimated intrinsic value (e.g. 20–30%+ discount). Buffers errors in valuation and bad luck.
Quality: Prefer companies with durable competitive advantage (moat), strong balance sheet, and honest management.
5. Qualitative Factors
Competitive advantage (moat): Brand, scale, network effects, switching costs, cost advantage. Sustained high ROE and margins often reflect a moat.
Management: Capital allocation (reinvest vs dividends vs buybacks); integrity (clear reporting, no aggressive accounting).
Industry and position: Growth industry vs mature; market share; barriers to entry.
Risks: Regulatory, technology disruption, concentration (customer/supplier), ESG.
6. Value vs Growth
Value investing (Graham, Buffett): Focus on intrinsic value, margin of safety, quality (moat, management). Buy when price < value; hold for long term.
Growth investing (Fisher, Lynch): Focus on future earnings potential, quality of business and management, scalability. Willing to pay higher multiples for superior growth and quality.
In practice: Many investors blend (e.g. “growth at reasonable price,” GARP).
7. Red Flags and Quality of Earnings
Earnings manipulation: Aggressive revenue recognition; one-time gains boosting earnings; shrinking cash flow vs reported earnings; off-balance-sheet items.
Balance sheet: High debt; declining liquidity; large intangibles or goodwill relative to equity.
Quality of earnings: Recurring vs one-time; cash flow vs net income; consistency of margins and growth. (See “Quality of Earnings” in book list.)
8. How This Fits With Technical Analysis and Options
FA answers what to buy/sell (quality and value). TA answers when (timing, levels, stops). Options answer how to structure the bet (leverage, hedging, income).
Workflow: Use FA to screen and rank ideas; use TA to time entry/exit and set risk; use options (if desired) for sizing, hedging, or premium income.
9. Book Notes in This Repo
The Intelligent Investor — Value investing, margin of safety, market fluctuations.
Security Analysis — Deep dive into financial statements and valuation.
Common Stocks and Uncommon Profits — Qualitative analysis, growth, management.
Financial Statements: Step-by-Step Guide — Reading and building financial reports.
The Little Book of Valuation — DCF, multiples, practical valuation.
The Intelligent Investor / Buffett interpretation — Using financial statements to find durable advantages.
Links: Fundamental Analysis README | Book Notes
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