Mastering Fundamental Analysis
How to read financial statements, calculate intrinsic value, and spot quality stocks before the market does.
What is Fundamental Analysis?
Fundamental analysis is the art and science of determining a company's intrinsic value by examining related economic and financial factors.
Unlike technical analysis, which looks at price patterns, fundamental analysts look at the business itself: its balance sheet, its management, and its competitive advantage (moat). The goal is simple: buy a dollar of value for 50 cents.
Core Valuation Metrics
Never buy a stock just because the price is going up. Use these metrics to determine if you are overpaying.
P/E Ratio
Price-to-Earnings. The classic yardstick.
Good for: Stable, profitable companies.
Bad for: High-growth tech or cyclical stocks with volatile earnings.
PEGY Ratio
P/E to Growth & Yield. The superior metric.
It adjusts the PEG ratio to include dividends.Formula: P/E / (Growth Rate + Div Yield)Target: < 1.0 is undervalued.
The Gold Standard: Discounted Cash Flow (DCF)
A DCF model is the most rigorous way to value a company. It relies on the principle that a company is worth the sum of all its future free cash flows, discounted back to today.
The DCF Equation in Plain English
"I estimate this company will generate $100M next year, growing at 5% for 10 years. Since money today is worth more than money tomorrow (due to inflation and risk), I will 'discount' those future millions by 10% per year to find out what they are worth right now."
Key DCF Inputs
- Free Cash Flow (FCF): Cash generated after paying for operations and capital expenditures (Capex).
- Terminal Value: What the company is worth at the end of your projection period (usually huge).
- WACC (Discount Rate): The required rate of return. Higher risk = Higher discount rate = Lower stock price.
Identifying Quality & "Moats"
A cheap stock is not always a good buy. It might be a "value trap"—a company in terminal decline. Use these quality checks to avoid traps.
ROIC > WACC
Return on Invested Capital must exceed the cost of that capital. If not, growth actually destroys value.
Gross Margin Stability
Stable or expanding margins indicate pricing power. Declining margins signal commoditization.
Interest Coverage
Can they pay their debts? EBIT should be at least 3x (preferably 5x) their Interest Expense.
Ready to apply these concepts?
Use our institutional-grade stock screener to filter 10,000+ stocks by PEGY, ROIC, and DCF Valuation.
Open Stock ScreenerFrequently Asked Questions
What is the "Intrinsic Value" of a stock?▼
Intrinsic value is the "true" worth of a stock based on its future cash flows, independent of its current market price. If Intrinsic Value > Market Price, the stock is undervalued.
How is PEGY different from PEG?▼
The PEG ratio (Price/Earnings-to-Growth) penalizes high-dividend companies because it ignores the return you get from dividends. PEGY adds the dividend yield to the growth rate, making it much fairer for REITs, Utilities, and mature value stocks.
Is a low P/E ratio always better?▼
No. A very low P/E (e.g., under 5x) often signals that the market expects earnings to collapse soon. Always compare P/E to the company's historical average and its sector peers.