Fundamental Analysis Learning
Learn how to evaluate companies based on their financial health and business fundamentals
Start LearningWhat is Fundamental Analysis?
Evaluating a company's intrinsic value by examining related economic, financial, and other qualitative and quantitative factors
Fundamental analysis is a method of measuring a security's intrinsic value by examining related economic, financial, and other qualitative and quantitative factors. It involves studying everything from the overall economy and industry conditions to the financial condition and management of companies.
Unlike technical analysis, which focuses on price movements and trends, fundamental analysis attempts to measure a security's intrinsic value by examining related economic, financial, and other qualitative and quantitative factors.
Learning Path
Follow our structured learning path to master fundamental analysis
Financial Statements
Learn to read and interpret the three main financial statements: Income Statement, Balance Sheet, and Cash Flow Statement.
Financial Ratios
Understand key financial ratios for evaluating profitability, liquidity, leverage, and efficiency of companies.
Valuation Methods
Master various valuation techniques including DCF, comparable company analysis, and precedent transactions.
Industry Analysis
Learn how to analyze industry dynamics, competitive positioning, and market trends.
Qualitative Factors
Understand how to evaluate management quality, business models, competitive advantages, and other non-financial factors.
Key Topics
Explore essential fundamental analysis concepts
Income Statement
The Income Statement shows a company's financial performance over a specific accounting period. It displays how much revenue was generated and the expenses incurred to generate that revenue.
Sample Income Statement
| Revenue | ₹1,000 Cr |
|---|---|
| Cost of Goods Sold | ₹600 Cr |
| Gross Profit | ₹400 Cr |
| Operating Expenses | ₹200 Cr |
| Operating Income | ₹200 Cr |
| Net Income | ₹150 Cr |
Balance Sheet
The Balance Sheet provides a snapshot of a company's financial position at a specific point in time. It shows what a company owns (assets), what it owes (liabilities), and the amount invested by shareholders (equity).
Sample Balance Sheet
| Assets | |
|---|---|
| Current Assets | ₹500 Cr |
| Fixed Assets | ₹700 Cr |
| Total Assets | ₹1,200 Cr |
| Liabilities | |
| Current Liabilities | ₹300 Cr |
| Long-term Debt | ₹400 Cr |
| Shareholders' Equity | ₹500 Cr |
Cash Flow Statement
The Cash Flow Statement shows how changes in balance sheet accounts and income affect cash and cash equivalents. It breaks the analysis down to operating, investing, and financing activities.
Sample Cash Flow Statement
| Cash from Operating Activities | ₹250 Cr |
|---|---|
| Cash from Investing Activities | ₹-150 Cr |
| Cash from Financing Activities | ₹-50 Cr |
| Net Change in Cash | ₹50 Cr |
Annual Reports
Annual reports provide comprehensive information about a company's performance, strategy, and outlook. They include management discussion and analysis, financial statements, and auditor reports.
Key sections to focus on:
- Management Discussion & Analysis (MD&A)
- Financial Statements and Notes
- Auditor's Report
- Corporate Governance Report
Profitability Ratios
Measure a company's ability to generate earnings relative to its revenue, assets, and equity:
- Gross Margin: (Revenue - COGS) / Revenue
- Operating Margin: Operating Income / Revenue
- Net Profit Margin: Net Income / Revenue
- Return on Equity (ROE): Net Income / Shareholders' Equity
- Return on Assets (ROA): Net Income / Total Assets
Liquidity Ratios
Measure a company's ability to meet its short-term obligations:
- Current Ratio: Current Assets / Current Liabilities
- Quick Ratio: (Current Assets - Inventory) / Current Liabilities
- Cash Ratio: Cash & Equivalents / Current Liabilities
Leverage Ratios
Measure the amount of debt a company uses to finance its assets:
- Debt-to-Equity: Total Debt / Shareholders' Equity
- Debt-to-Assets: Total Debt / Total Assets
- Interest Coverage Ratio: EBIT / Interest Expense
Valuation Ratios
Help determine if a stock is fairly valued:
- P/E Ratio: Price per Share / Earnings per Share
- P/B Ratio: Price per Share / Book Value per Share
- P/S Ratio: Price per Share / Revenue per Share
- EV/EBITDA: Enterprise Value / EBITDA
- Dividend Yield: Annual Dividend / Price per Share
Discounted Cash Flow (DCF)
DCF valuation estimates the value of an investment based on its expected future cash flows, which are discounted to their present value.
Formula: Value = Σ [CFt / (1 + r)^t]
Where CFt is the cash flow in year t, r is the discount rate, and t is the time period.
Comparable Company Analysis
This method values a company by comparing it to similar publicly traded companies based on valuation multiples like P/E, EV/EBITDA, P/B, etc.
Steps involved:
- Select comparable companies
- Calculate valuation multiples
- Apply multiples to the target company
- Determine valuation range
Precedent Transactions
This approach values a company based on the prices paid for similar companies in past M&A transactions.
Key considerations:
- Transaction timing
- Size of transactions
- Strategic vs. financial buyers
- Market conditions at time of transaction
Sum-of-the-Parts Valuation
This method values a company by determining the value of each of its business segments separately and then adding them up to get the total enterprise value.
Useful for:
- Conglomerates with diverse businesses
- Companies with non-core assets
- Situations where different segments deserve different multiples
Porter's Five Forces
Framework for analyzing industry competitiveness and profitability:
- Threat of New Entrants: How easy is it for new competitors to enter the market?
- Bargaining Power of Suppliers: How much power do suppliers have over prices?
- Bargaining Power of Buyers: How much power do customers have over prices?
- Threat of Substitute Products: Are there alternative products that could fulfill the same need?
- Industry Rivalry: How intense is competition among existing firms?
SWOT Analysis
Framework for evaluating a company's strategic position:
- Strengths: Internal factors that give an advantage over competitors
- Weaknesses: Internal factors that place the company at a disadvantage
- Opportunities: External factors the company could exploit to its advantage
- Threats: External factors that could cause trouble for the company
Economic Moats
Sustainable competitive advantages that protect a company from competitors:
- Intangible Assets: Brands, patents, regulatory licenses
- Cost Advantage: Ability to produce at lower costs
- Switching Costs: Costs customers incur when switching providers
- Network Effects: Value of service increases with more users
- Efficient Scale: Served market limited to one or few profitable players
Industry Life Cycle
Stages of industry development:
- Introduction: New industry, slow growth, high R&D costs
- Growth: Rapid expansion, increasing competition
- Maturity: Slower growth, industry consolidation
- Decline: Negative growth, shrinking market
Learning Resources
Expand your knowledge with these recommended resources
Recommended Books
The Intelligent Investor by Benjamin Graham
Security Analysis by Benjamin Graham & David Dodd
View AllVideo Courses
Fundamental Analysis for Beginners
Advanced Financial Statement Analysis
Browse CoursesReady to Apply Your Knowledge?
Use EquityKaro's advanced fundamental analysis tools to practice what you've learned
Try Our Tools Download Financial Ratios Guide