Learn What is Fundamental Analysis, its types, methods, and key ratios like EPS, ROE, and P/B. A complete beginner’s guide to analyzing company stocks before investing.
Every new investor dream of earning profits from the stock market, but many fail because they don’t understand how to choose the right company for investment. The key to successful investing lies in understanding a company’s true worth — and this is where fundamental analysis comes in.
In this article, we’ll discuss in detail What is Fundamental Analysis, its types, how to do it, and the important ratios that help determine a company’s financial health. By the end, you’ll have a clear idea of how to analyze a company fundamentally before investing in its shares.
📘 What is Fundamental Analysis?
Fundamental Analysis means studying the intrinsic value (true value) of a company’s stock. The intrinsic value is the actual worth of a company based on its assets, earnings, future growth potential, and overall business performance — not just its current market price. In simple terms, fundamental analysis helps you determine whether a stock is undervalued, overvalued, or fairly priced. For example, if a company’s intrinsic value is ₹200 per share but its market price is ₹150, it means the stock is undervalued — a good buying opportunity.
On the other hand, if its market price is ₹250, it might be overvalued, meaning you’re paying more than it’s worth. Thus, fundamental analysis helps investors make rational investment decisions instead of emotional ones.
📊 Types of Fundamental Analysis.
Fundamental analysis is broadly divided into two types
1. Qualitative Analysis
This focuses on the non-numerical aspects of a company such as:
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Company management decisions and leadership quality
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Brand reputation and customer trust
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Corporate governance practices
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Product quality and innovation
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Industry position and business model
Qualitative analysis answers questions like:
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Is the management capable of consistent growth?
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Does the company have a strong market presence?
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How is the company different from competitors?
These factors, though intangible, play a huge role in determining a company’s long-term performance.
2. Quantitative Analysis
Quantitative analysis focuses on numbers and measurable data from a company’s financial statements.
It includes:
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Revenue and profit growth
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Earnings per share (EPS)
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Return on Equity (ROE)
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Debt levels
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Cash flow strength
In this type of analysis, investors examine the company’s financial performance using numerical data to calculate key ratios and assess whether the company’s stock is worth investing in.
🧾 How to Do Fundamental Analysis.
To perform a complete fundamental analysis, investors must carefully study the three main financial statements of a company:
📄 1. Balance Sheet
The Balance Sheet shows the company’s financial position at a specific point in time.
It provides details about:
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Assets: What the company owns (cash, property, inventory, etc.)
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Liabilities: What the company owes (loans, expenses, etc.)
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Shareholder’s Equity: The owner’s share in the company after deducting liabilities
By analyzing the balance sheet, you can understand how financially strong a company is and how well it manages its debt and assets.
📄 2. Income Statement
The Income Statement (or Profit & Loss Statement) shows the company’s performance over a specific period — usually a quarter or a year.
It includes:
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Revenue (Total sales)
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Expenses (Operational and other costs)
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Net Profit or Loss
This statement helps determine whether the company is profitable and how efficiently it operates.
📄 3. Cash Flow Statement
The Cash Flow Statement records the inflow and outflow of cash within the company.
It is divided into three parts:
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Operating Activities: Cash generated from day-to-day business operations
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Investing Activities: Cash used or received from investments or asset sales
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Financing Activities: Cash raised from debt or shareholders
A company with consistent positive cash flow is usually financially stable and better positioned for growth.
⚙️ Important Fundamental Analysis Ratios.
Financial ratios are the most powerful tools in Fundamental analysis. They help compare a company’s performance with its competitors and industry benchmarks.
Let’s look at the most important ratios:
1. EPS Ratio (Earnings Per Share)
EPS measures how much profit the company makes per share. A higher EPS indicates better profitability.
Formula:
EPS = (Net Income – Preferred Dividend) / Total Number of Shares
Example:
If a company earns ₹10 lakh and has 1 lakh shares, EPS = ₹10 per share.
2. P/B Ratio (Price-to-Book Ratio)
The P/B Ratio compares the company’s market price per share with its book value (net worth per share), It helps investors understand if a stock is overvalued or undervalued compared to its actual worth.
Formula:
P/B Ratio = Share Price / Book Value per Share
Example:
If the share price is ₹200 and the book value is ₹100, P/B = 2, meaning the stock trades at twice its book value.
3. ROE Ratio (Return on Equity)
ROE measures how efficiently a company generates profit using shareholders’ equity.
Formula:
ROE = Net Income / Shareholder’s Equity
A higher ROE shows that the company is using investors’ money effectively to generate profit.
4. Debt-to-Equity Ratio
This ratio shows how much debt a company has compared to its equity. It helps investors assess financial risk — companies with very high debt levels are riskier.
Formula:
Debt-to-Equity Ratio = Total Debt / Shareholder’s Equity
A lower ratio indicates financial stability, while a high ratio signals potential solvency issues.
🧠 Why Fundamental Analysis is Important.
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Helps Identify Good Companies:
You can identify strong, fundamentally sound businesses with consistent growth potential. -
Long-Term Investment Decisions:
Fundamental analysis is ideal for long-term investors who prefer steady wealth creation over quick profits. -
Avoids Emotional Trading:
It helps investors make logical, data-backed decisions instead of reacting to short-term market volatility. -
Determines True Value:
It helps you understand whether a stock is undervalued or overvalued before investing. -
Builds Confidence:
When you understand a company’s fundamentals, you invest with confidence and patience.
Disclaimer: The information written in this article is for educational purposes only. If you want to invest in the stock market, you should learn about the stock market yourself or take advice from a financial advisor and certified expert. The stock market is subject to risk. Before making any investment, you must take expert advice.
🔚 Conclusion
Through this article, we have explained What is Fundamental Analysis, its types, and how to conduct it using financial statements and key ratios. If you understand and apply fundamental analysis properly, it can help you make smart investment decisions and avoid unnecessary risks. We hope this guide has given you valuable insights into the importance of fundamental analysis. If you found this article helpful, don’t forget to like, share, and comment below!
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👉 Read Also: What is Share Market? | Complete Guide to Share Market in India (2025).
FAQ
1. What is fundamental analysis?
You can evaluate whether a company is good or bad through fundamental analysis. A good company shows some good results, and a bad company shows some bad results.
2. How to do fundamental analysis?
To do fundamental analysis, the management of any company, the economic condition of the company, the current price of the share, the future plan of the company, and the business model of the company are studied.
3. How many types of fundamental analysis are done?
Qualitative analysis includes the decision of the company management, the performance of the company, the brand value of the company, the future plan of the company and other things. In quantitative analysis, the financial statements of the company and the number reports of the company are examined.