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A Guide to Fundamental Analysis for Stock Selection

  • Parkview Partners Capital Management
  • 13 minutes ago
  • 3 min read
A desk setup with a laptop, open notebook, pen, and magnifying glass, displaying financial charts and 'Intrinsic Value' text.

Understanding the Purpose of Fundamental Analysis


Fundamental analysis is a method used to evaluate a company’s financial and qualitative characteristics to help determine its potential long-term value. Rather than focusing on short-term market movements, this approach examines the business itself—its financial strength, competitive position, and management quality. The goal is to understand whether a company appears financially sound and how its fundamentals may relate to its current stock price.


This guide provides an educational overview of key concepts frequently used in fundamental analysis.


Principles That Guide Fundamental Analysis


A structured research process may support consistent and objective evaluation. Several principles can help frame that process:



Viewing Stocks as Ownership in a Business


This perspective emphasizes evaluating the company’s underlying performance and long-term outlook.



Distinguishing Between Price and Value


Market prices fluctuate daily, but underlying business value tends to change more gradually. Fundamental analysis focuses on the latter.



Using Data-Based Decision Making


Financial statements and regulated filings offer structured information to evaluate profitability, stability, and cash flow.



Maintaining a Long-Term View


Fundamental analysis is often used by individuals who prefer to evaluate companies across multiple years rather than reacting to short-term volatility.



Quantitative Analysis: Interpreting Financial Statements


Financial statements provide standardized data that help assess a company’s financial position.



Income Statement


Shows revenue, expenses, and net income over a specific period.


Purpose: Understand profitability trends and operating efficiency.



Balance Sheet


Provides a snapshot of assets, liabilities, and shareholders’ equity.


Purpose: Evaluate financial strength, leverage, and liquidity.



Cash Flow Statement


Tracks cash generated or used in operating, investing, and financing activities.


Purpose: Assess a company’s ability to generate cash and support operations.



Analyzing all three together may offer a more complete view of financial health.



Qualitative Analysis: Factors Beyond the Numbers


Qualitative considerations can influence a company’s long-term competitive position.


Common Areas of Review


  • Management quality and leadership structure

  • Brand strength and customer loyalty

  • Economic moats, such as cost advantages or intellectual property

  • Industry dynamics, including competitive pressures and regulatory environment


These factors help contextualize financial performance and potential durability.


A desk scene featuring financial documents, calculator, pen, and a plant, with 'KEY RATIOS' text.

Key Financial Ratios and What They Include


Ratios help translate financial data into comparable metrics. They are most meaningful when viewed over time or compared with industry peers.


Profitability Ratios


  • Return on Equity (ROE): Measures how effectively a company generates profit from shareholder capital.

  • Net Profit Margin: Evaluates how much profit is retained from each dollar of revenue.


Liquidity and Solvency Ratios


  • Current Ratio: Compares current assets to current liabilities to assess short-term stability.

  • Debt-to-Equity Ratio: Indicates reliance on debt relative to shareholder equity.


Valuation Ratios


  • Price-to-Earnings (P/E) Ratio: Compares stock price to earnings per share.

  • Price-to-Book (P/B) Ratio and Price-to-Sales (P/S) Ratio: Provide additional context on valuation relative to different metrics.


These tools help assess whether a company’s stock price appears aligned with its fundamentals.


Approaches to Valuing a Company


Valuation models offer structured ways to estimate a business’s potential worth. Although estimates vary based on inputs and assumptions, these models help create a framework for analysis.


Absolute Valuation


Often uses discounted cash flow (DCF) analysis to estimate the present value of projected future cash flows.


Relative Valuation


Compares a company to peers using valuation multiples (e.g., P/E, P/B, P/S) to understand how the market is pricing similar businesses.


Combining both approaches may offer a more balanced assessment.



Incorporating Industry and Economic Context


A company operates within broader market and economic environments. Understanding this context can help inform analysis.


Considerations


  • Industry characteristics: cyclical vs. defensive sectors

  • Growth expectations: emerging vs. mature industries

  • Macroeconomic indicators: interest rates, inflation, GDP trends


Evaluating how external conditions affect business performance may provide additional insight into long-term prospects.



Building a Repeatable Research Process


A consistent framework supports disciplined decision-making.


Sample Analysis Steps


  1. Review industry landscape and competitive environment.

  2. Analyze financial statements for trends and stability.

  3. Calculate key ratios and compare with peers.

  4. Evaluate management, brand, and other qualitative factors.

  5. Apply valuation models to estimate potential value.

  6. Consider broader economic conditions.

  7. Document findings for future review.


This structure may help reduce reactive decision-making.



Conclusion


Fundamental analysis provides a structured approach for evaluating companies based on their financial performance and qualitative characteristics. While no method predicts outcomes, understanding a business’s fundamentals can support informed long-term decision-making when integrated into a broader financial plan and risk-aware investment strategy.



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.


 
 
 

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Columbus, OH 43215


Phone: (614) 427-2132

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