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The 5 steps you need to do a Fundamental Analysis of a Stock

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Created on
March 27, 2023


What’s Inside

If you’re interested in investing in the equity market over the long term, knowing how to do a fundamental analysis of the stock is crucial. Simply put, fundamental analysis is a technique that allows you to determine whether a stock is overvalued or undervalued.

The Magic of Evaluating the Fundamentals

Fundamental analysis of shares is essential since it can help you determine the actual intrinsic value of a company. You can use this information to identify companies ideal for long-term investment. For instance, companies undervalued by the market may have a high potential for capital appreciation. With fundamental analysis, you can identify such companies.

Fundamental Analysis of a Company: A 5-Step Checklist

Following the step-by-step guide below can help you understand how to fundamentally analyse stocks.

Understand the Business

It is essential to understand the business of the company that you wish to invest in. This can make it easier to evaluate the company’s financial performance. The best source for getting to know about a company is its website. You can find the vision and mission statements, the product or service portfolio, and the management details listed there. Reading through these details should give you a good idea of the business.

Check the Financial Statements

Once you have a good idea of the company’s business, the next step is to go through its financial statements. You can use the profit and loss statements, balance sheets, and cash flow statements for the last 5 years. This way, it’s easier to analyze how the company has progressed or regressed in revenue, profit, assets and liabilities.

Analyze the Financial Ratios

Financial ratios give you an insight into the company’s financial health and stability. As an investor, you must analyze these ratios thoroughly. You can even compare them with competitors to understand where the company stands. Some of the key financial ratios that you need to consider include:

  • Return on Equity
  • Price to Earnings ratio
  • Debt-to-Equity ratio
  • Current ratio
  • Earnings Per Share (EPS)

Look for Red Flags

A company’s red flags may not always be apparent at first glance. Therefore, digging deep to discover possible risk factors is essential. Some common red flags include high levels of debt relative to revenue, a consistently declining profit margin, or even volatile management. If you find that a company has too many risk factors, it may not be a good investment option.

Examine the Company’s Growth Prospects

Investigating the company’s future growth prospects is the last step in the fundamental analysis of shares. A good company is one that is fairly future-proof. If you find that a company is constantly innovating and looking to expand, it may be a great investment option.

Back to the Basics: Analyse Before You Invest

Whether you’re planning on investing in Indian or US stocks, always remember to carry out extensive fundamental analysis before you proceed. Speaking of U.S. stocks, Fi enables you to invest in some of the best US companies like Apple, Tesla, Microsoft, and more at zero brokerage fees. Our app’s intuitive user interface is designed to cater to both new and experienced investors alike.

If you are looking to analyse the trends in US Stock prices, we've got the perfect read for you.

Frequently Asked Questions

1. What is the best way to do a fundamental stock analysis?

The best way to do a fundamental analysis of a stock is to look at indicators like financial ratios. You can also analyze the financial statements of the company, look at its valuation and check if its prospects for future growth seem favourable.

2. What are the five steps of fundamental analysis?

When you are fundamentally analyzing a stock, you need to first understand the business. Once you’ve done that, go through the financial statements, analyze the financial ratios, look for risks, and finally determine the future growth prospects of the business.

3. What are the fundamentals of a stock?

The fundamentals of stock include different metrics such as Return on Equity (RoE), Price to Earnings (P/E) ratio, and debt-to-equity ratio, among others.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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