Fundamental analysis is the process of evaluating a security by examining the underlying business — its industry, competitive position, financial performance, management quality and intrinsic value. A fundamental analyst asks: what is this business actually worth, and is the current market price above or below that worth?
It is the intellectual foundation of value investing, and the primary analytical approach used by long-term equity investors, fund managers, and equity research analysts.
The fundamental analysis framework has three layers:
Business analysis: industry structure (Porter's Five Forces), competitive advantages (moats), management quality and capital allocation track record. This is qualitative but the most important layer — a financially weak business with a great moat eventually recovers; a great business with terrible management eventually disappoints.
Financial analysis: ratio analysis across profitability (ROE, ROCE, margins), efficiency (asset turns, working capital days), leverage (D/E, interest coverage) and liquidity. Historical trend analysis and comparison with sector peers.
Valuation: is the business cheap, fair or expensive relative to its earnings power? P/E, EV/EBITDA, P/BV, DCF — using the appropriate framework for the industry.
This skill is most useful combined with: equity research, technical analysis, financial modelling, portfolio management.