Fundamental Analysis is the study of a company's financial statements including its balance sheet, income and cash flow statements together with a company's "story" which is set out in its annual and quarterly reports.  Important fundamentals include a company's earnings, the rate of earnings growth, income, expenses, debt levels, returns on equity and assets.  Fundamental analysis also includes a review of the competency of management, growth prospects, and how insulated the company is from competition.  

 

The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

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Analysts typically study, in order, the overall state of the economy and then the strength of the specific industry before concentrating on individual company performance to arrive at a fair market value for the stock.

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Fundamental analysis uses public data to evaluate the value of a stock or any other type of security. For stocks, fundamental analysis uses revenues, earnings, future growth, return on equity, profit margins, and other data to determine a company's underlying value and potential for future growth.  All of this data is available in a company's annual and quarterly reports.

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The value of a company, or its intrinsic value, is only an estimate, an educated opinion, of what the company's share price should be worth compared to the currently trading market price.

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If your analysis of a company produces an intrinsic value that is higher than the current share price, the stock may be one you want to purchase.  If the intrinsic value is lower than the current share price, you will probably want to either sell the stock if you own it or avoid it if you don’t.