Fundamental analysis studies economic, financial and asset-specific factors to understand what influences an asset's value.
It's widely used for stocks, but can also apply to bonds, currencies or cryptocurrencies.
The criteria vary with the asset.
In this article, I'll focus mainly on fundamental analysis of stocks.
What is fundamental analysis for?
For a stock, fundamental analysis helps assess whether its market price looks consistent with the company's situation and prospects.
An investor or trader aims to identify a potential gap between the current share price and the value they assign to it.
A stock may look attractive when the company appears undervalued or its prospects seem better than the market expects.
It may look too expensive when its valuation relies on difficult-to-meet expectations or the company's outlook deteriorates.
An investor might then decide not to buy, or to sell an existing position.
Some traders may also try to profit from a decline through short selling.
But the assessment remains subjective.
Two investors can analyse the same information, use different assumptions and reach opposite conclusions.
How does it differ from technical analysis?
Fundamental and technical analysis are often compared, but they use different information and answer different questions.
| Fundamental analysis | Technical analysis |
|---|---|
| Studies the asset's characteristics and environment | Mainly studies price behaviour |
| Uses financial, economic or asset-specific data | Uses prices, volume and technical indicators |
| Aims to assess the asset's value | Aims to identify trends or market setups |
| Often used over medium or long horizons | Can be used over much shorter horizons |
The two can complement each other.
For example, fundamental analysis might identify a company considered undervalued, while technical analysis examines how its share price is moving.
Analysing a company's fundamentals
Fundamental analysis begins with the company itself.
It helps you understand the business, financial performance and competitive position before assessing the stock's valuation: the price the market assigns to the company.
1. Understand the business
Identify what the company sells, who its customers are and where revenue and profit come from.
Breaking activity down by product, service or geography also shows what actually contributes to results and where the main dependencies lie.
2. Analyse growth
Revenue trends show whether the business is growing, stagnating or shrinking.
They become more meaningful when viewed over several years and compared with the sector.
3. Study profitability
Revenue growth doesn't necessarily mean greater profitability.
Profits and margins show how much revenue remains after the company's various expenses.
Looking across several periods also helps distinguish lasting improvement from a one-off result.
4. Examine the financial position
The balance sheet presents assets, liabilities and equity.
It lets you examine cash, debt and the company's ability to fund operations or meet commitments.
5. Analyse cash flows
Cash flows are the money coming into and leaving the company.
They measure the cash actually generated by operations and show how much is used to fund investment.
6. Compare competitors
Numbers mean more when compared with similar businesses.
This puts growth, profitability and financial strength in the context of the sector.
7. Analyse the economic and industry environment
A company's performance also depends on its environment.
Interest rates, inflation, regulation, competition and changing demand can affect revenue, costs and profit.
Which ratios help measure these factors?
A company's numbers are hard to interpret in isolation.
Financial ratios relate them to one another to assess profitability, debt or valuation, then compare them over time or with other companies.
| Ratio | What it helps assess |
|---|---|
| Operating margin | Profitability after the main operating expenses |
| ROE, return on equity | Profitability generated from shareholders' capital |
| Net debt / EBITDA | Debt relative to earnings generated by the business |
| P/E ratio | Share price relative to earnings per share |
| EV / EBITDA | Enterprise value relative to EBITDA |
How do you tell if a stock is undervalued or overvalued?
Analysing the company helps you understand its operations, profitability, finances and outlook.
You then need to compare those factors with the stock market price.
Two main approaches are used.
Compare valuation multiples
The first compares the company with similar businesses.
Ratios such as P/E or EV/EBITDA relate the price paid to the company's profits or earnings.
A company might trade at 10 times earnings while comparable businesses trade around 5 times.
That gap may be justified by better growth, profitability or prospects. Otherwise, the stock may look expensive relative to competitors.
You can also compare the ratios with their historical levels to see whether the company is more or less expensive than before.
Estimate value using DCF
Another approach estimates the company's value directly from the money it could generate in the future.
That's the principle of discounted cash flow, or DCF.
It relies on estimates of growth, profitability, investment and future cash flows.
The resulting value therefore depends on your assumptions.
An overly optimistic growth estimate, for example, can lead you to overvalue the company.
Multiples and DCF answer the same question in different ways.
The first compares the company with the market; the second estimates value from future performance.
Where do you find the data?
For a listed company, the main information is in its financial publications.
Annual reports, quarterly or half-year results, income statements, balance sheets and cash-flow statements let you analyse the business and financial position.
A fundamental analysis example: Tesla
I'll use Tesla to show how the different parts of fundamental analysis fit together.
The figures come from second-quarter 2026 results and the balance sheet at 30 June 2026.
Business, growth and profitability
Tesla still generates most of its revenue from cars, but is also developing energy, services, autonomous driving and robotics.
Second-quarter 2026 revenue reached $28.24 billion, compared with $22.50 billion a year earlier.
Operating profit, however, fell from $923 million to $398 million over the same period.
Revenue growth therefore didn't bring improved profitability.
Tesla also held around $43.5 billion in cash and short-term investments.
In the first six months of 2026, it generated $8.63 billion in operating cash flow and spent $8.28 billion on investments.
Those investments can weigh on cash in the short term while contributing to future results if they develop profitable activities.
Elon Musk's influence on Tesla
These figures help analyse Tesla's situation, but can't alone tell you whether the stock is cheap or expensive.
Part of its valuation depends on expected results from businesses still being developed, including autonomous driving, robotaxis and robotics.
Elon Musk's compensation plan illustrates how much those expectations matter.
Some targets depend on a substantial increase in Tesla's market capitalisation and the development of robotaxis and humanoid robots.
I've explained how that compensation plan works here.
Tesla's valuation therefore partly depends on performance that hasn't yet appeared in current results.
The Elon Musk factor
I also account for Elon Musk's influence when analysing Tesla, because it can't easily be measured through company accounts alone.
His image, public statements and expectations around his projects can strongly affect investors' perception of Tesla and therefore its share price.
That can produce price moves that seem to contradict the financial results.
In April 2025, for example, Tesla shares rose sharply despite declining results.
Musk's statements about his involvement in Tesla and autonomous-taxi development also influenced investor expectations.
Tesla shows that analysing revenue, profit and valuation doesn't always explain a stock's movements on its own.
The limits of fundamental analysis
Fundamental analysis partly uses historical data, while a stock's price mainly depends on expectations for the future.
Estimates of growth, margins or cash flow can prove wrong.
Hard-to-predict events can also change a company's prospects quickly.
Investor behaviour adds another limitation.
Price reacts not only to reported results, but also to expectations before their release.
A company can announce good results and see its stock fall because the market expected more.
Management, company announcements and perceptions of executives can also shape those expectations.
Tesla and Elon Musk are a particularly visible example.
Fundamental analysis therefore can't precisely predict a share price.
It helps assess a company's situation, prospects and valuation using the information available.
