What is Fundamental Analysis?
Fundamental analysis involves evaluating a company’s financial health, market position, and growth potential to determine its intrinsic value. This foundational skill is essential for making smarter investment decisions.
Example: How Does the P/E Ratio Work? A low P/E ratio might suggest that a stock is undervalued, while a high P/E ratio could indicate overvaluation—or strong growth potential.
Key Financial Metrics
- P/E Ratio (Price-to-Earnings): Measures how much investors are willing to pay for each dollar of earnings.
- EPS (Earnings Per Share): Indicates the company’s profitability on a per-share basis.
- ROE (Return on Equity): Assesses how effectively a company uses shareholder funds to generate profit.
- Dividend Yield: Shows the return on investment from dividends compared to the stock price.
How to Read a Financial Statement
Understanding financial statements is essential for analyzing a company’s performance. Here’s an overview:
- Balance Sheet: Summarizes assets, liabilities, and equity to show financial stability.
- Income Statement: Reports revenue, expenses, and profits over a specific period.
- Cash Flow Statement: Tracks cash inflows and outflows to measure liquidity.
Explore our detailed guide to learn more about financial statements.