Fundamental analysis is a method used by investors to evaluate a company’s true value by examining its financial health, business model, industry position, and future growth prospects. Unlike technical analysis, which focuses on price charts and trends, fundamental analysis digs deep into the company’s core fundamentals to determine whether a stock is overvalued, undervalued, or fairly priced. Whether you’re investing for the long term or just starting out, having a simple checklist can help you make more informed and confident investment decisions.
Fundamental Analysis Checklist
1. Understand the Business
- What does the company do?
- What industry is it in?
- Who are its main competitors?
- What is its unique selling proposition (USP) or moat?
- Are there enough trade barriers for competitors to enter?
2. Check Financial Statements
- Income Statement: Is revenue growing consistently? Are profits increasing?
- Balance Sheet: Does it have more assets than liabilities?
- Cash Flow Statement: Is the company generating positive free cash flow?
3. Key Financial Ratios
- P/E Ratio (Price/Earnings): Is it overvalued or undervalued?
- Debt-to-Equity Ratio: Is it taking on too much debt?
- Return on Equity (ROE): Is it using shareholders’ money effectively?
- Current Ratio: Can it meet short-term obligations?
4. Growth Potential
- Is the company in a growing or sunrise industry/sector?
- Are they launching new products or expanding into new markets?
- Is management guiding towards future growth?
5. Promoter/Management Quality
- Are management executives or promoters experienced and have a good track record?
- Is promoter ownership high enough (do they have skin in the game)?
- Are there any red flags in the management (e.g., frequent resignations, scandals, family feud)?
6. Valuation
- Compare valuation ratios (P/E, P/B, EV/EBITDA) to peers.
- Use DCF or other valuation models if needed.
- Is the current stock price justified by fundamentals (compared to competitors or the market)?
7. Risks & Red Flags
- Is the company overly dependent on a single product or market?
- Are there regulatory, legal, or political risks?
- Any signs of accounting irregularities or lawsuits?
8. Dividends (if applicable)
- Does the company pay regular dividends?
- Is the dividend payout ratio sustainable?
- Has it consistently increased dividends?