Fundamental analysis is one of the most important techniques used by professional investors to evaluate the value of assets and make investment decisions. It allows you to determine the intrinsic value of companies, bonds or other financial instruments, regardless of short-term market fluctuations.
Assessment of the company’s financial condition
Unlike technical analysis, which focuses on price and volume behavior, fundamental analysis focuses on the company’s financial condition, development prospects, macroeconomic environment, and industry factors. Professional investors use this technique both when investing in stocks, bonds, funds, and more complex alternative instruments.
The basic element of fundamental analysis is the assessment of the financial condition of the company. Professionals analyze quarterly and annual reports, paying attention to profitability, liquidity, debt, and cash flow ratios.
The most important indicators include:
- ROE (Return on Equity) – measures the effectiveness of the use of equity,
- ROA (Return on Assets) – shows the profitability of the company’s assets,
- EBITDA – assesses the ability to generate operating profits,
- Debt-to-Equity Ratio – determines the level of debt to equity,
- Cash Flow – evaluates cash flows, which determine the company’s ability to finance investments and repay liabilities.
Analyzing these indicators allows professionals to assess a company’s financial stability, the risk of insolvency, and the potential for growth in the value of shares in the long term.
Industry and macroeconomic analysis
The next step in fundamental analysis is to assess the market and macroeconomic environment. Professionals study the industry in which the company operates, competition, demand dynamics, legal regulations and technological innovations.
Macroeconomic analysis includes monitoring economic indicators, such as GDP, inflation, interest rates, exchange rates or the political situation, which may affect the financial results of companies. A professional investor also takes into account economic cycles and global trends that can determine long-term profit potential.
An industry and macroeconomic assessment makes it possible to understand the context in which a company operates and what factors may affect its value in the future.
Valuation of the company and determination of intrinsic value
One of the most important stages of fundamental analysis is the valuation of a company. Professionals use various valuation methods to determine the intrinsic value of an asset and compare it to the current market price.
The most commonly used methods are:
- Discounted Cash Flow Method (DCF) – estimates the value of the company based on future cash flows discounted to the present value,
- Comparison methods (multiples) – use market indicators, such as P/E, P/B, EV/EBITDA, to compare the company with other entities in the industry,
- Net asset valuation – based on the book value of assets minus liabilities,
A professional valuation allows investors to determine whether a company is undervalued, overvalued, or worth keeping in a long-term portfolio.
Integrating fundamental analysis into investment decisions
Professional investors do not use fundamental analysis in isolation – they integrate it with other techniques, such as technical analysis, quantitative analysis or risk management. This allows you to better plan your investment strategies, determine when to enter and exit a position, and manage your portfolio in a conscious and thoughtful way.
In practice, integration includes m.in:
- use of fundamental indicators for the selection of companies,
- monitoring technical signals to optimize the moment of purchase or sale,
- use of hedging to reduce market risk,
- periodic portfolio reviews and asset allocation adjustments based on changes in company fundamentals.
Such a holistic strategy allows professional traders to maximize returns while controlling risk.
Fundamental analysis is an inseparable tool of a professional investor, enabling the assessment of the financial condition of companies, industry and macroeconomic analysis, valuation of internal value and integration into a full investment strategy. With this technique, investors can make informed decisions, identify undervalued assets, avoid overvalued investments, and effectively manage their portfolio over the long term. Professional fundamental analysis requires experience, reliable knowledge and systematic work, but its use provides a competitive advantage in demanding financial markets.