9 Core Techniques for Fundamental Analysis for Stock Selection

Understanding the Role of Fundamental Analysis

Fundamental analysis is a research approach used to evaluate a company’s financial health, business model, and long-term viability. Rather than focusing on short-term price movements, this method examines underlying economic and company-specific factors to understand how a business operates and sustains itself over time.

This guide outlines nine commonly referenced techniques used in fundamental analysis. These concepts are presented for educational purposes and are not intended as specific investment recommendations.

1. Analyzing Revenue and Earnings Trends

Revenue and earnings trends provide insight into a company’s growth and stability. Reviewing performance across multiple years may help identify consistency, cyclicality, or structural changes within the business.

Evaluating growth in context—such as industry conditions or economic cycles—adds perspective to the analysis.

2. Reviewing Financial Statements

A comprehensive analysis typically includes reviewing a company’s core financial statements:

• Income statement: Evaluates profitability

• Balance sheet: Assesses financial strength and leverage

• Cash flow statement: Examines cash generation and usage

Together, these statements help illustrate how a company operates and funds its activities.

3. Assessing Profitability Metrics

Profitability ratios help measure how efficiently a company generates profit from its operations.

Common metrics include:

• Gross margin

• Operating margin

• Return on equity (ROE)

Trends in these metrics may indicate operational efficiency or competitive pressures.

4. Evaluating Cash Flow Quality

Cash flow analysis focuses on the sustainability of a company’s operations. Strong operating cash flow relative to reported earnings may indicate higher earnings quality.

Understanding how cash is allocated—toward reinvestment, debt reduction, or shareholder returns—provides additional insight.

5. Examining Balance Sheet Strength

Balance sheet analysis helps assess financial stability and risk.

Key considerations include:

• Debt levels relative to equity

• Liquidity ratios

• Asset composition

A strong balance sheet may offer flexibility during economic downturns.

6. Understanding the Business Model

Evaluating how a company generates revenue helps clarify long-term viability. This may involve reviewing:

• Revenue sources and pricing power

• Customer concentration

• Competitive positioning

• Industry dynamics

A clear, sustainable business model supports long-term analysis.

7. Evaluating Management and Governance

Management quality and corporate governance can influence long-term outcomes.

Common review areas include:

• Leadership experience and tenure

• Capital allocation decisions

• Transparency in reporting

• Alignment of incentives with shareholder interests

Strong governance practices may support consistent decision-making.

8. Reviewing Valuation Metrics

Valuation metrics help contextualize a company’s market price relative to fundamentals.

Common valuation ratios include:

• Price-to-earnings (P/E)

• Price-to-book (P/B)

• Price-to-sales (P/S)

Comparisons are often more meaningful when made relative to peers or historical ranges.

9. Considering Industry and Economic Context

Companies operate within broader economic and industry environments. Understanding sector trends, regulatory factors, and macroeconomic conditions may help contextualize company performance.

Industry analysis adds depth to company-specific research.

Implementation Considerations

• Identify Moat Sources: Before investing, an investor may seek to identify at least one defensible moat. This could include a strong brand, a low-cost production process, or a powerful network effect.

• Assess Moat Durability: It is important to evaluate not just the existence of a moat, but its sustainability. Consider how long the company can realistically maintain its advantages against competitive and technological disruption.

• Monitor for Threats: A moat is not permanent. Investors might continuously monitor for disruptive threats that could erode a company's competitive positioning over time.

Integrating Techniques Into a Disciplined Process

Fundamental analysis is most effective when applied consistently using a structured framework. Documenting assumptions and reviewing outcomes over time can help maintain discipline.

These techniques are often used alongside broader portfolio construction and risk management practices.

Conclusion

Fundamental analysis provides a structured approach to evaluating companies based on financial performance, business quality, and economic context. While no technique eliminates uncertainty, applying these principles consistently may support informed, long-term investment decision-making.

Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd and Parkview Partners Capital Management are separate entities. Neither Stratos nor Parkview Partners Capital Management provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. Investing involves risk, including possible loss of principal. The information presented is for educational purposes only and should not be interpreted as individualized investment, tax, or legal advice. Past performance is not indicative of future results. For more information, please review our Form ADV, available upon request.