Fundamental analysis is the method of assessing a security's true value — its "intrinsic value" — based on a company's financial position, industry standing, and macroeconomic factors. Unlike technical analysis, which studies historical price movements, fundamental analysis asks: what is this asset actually worth? The method is used by value investors, fund managers, and analysts to find assets the market has underpriced.

Fundamental analysis — what it is and how to use it

Fundamental analysis was popularised by Benjamin Graham and David Dodd in Security Analysis (1934) and refined by Warren Buffett into the dominant method among long-term value investors. The core idea: a market price can temporarily diverge from an asset's true value — and disciplined analysts can find those gaps and profit when price converges toward fundamental value.

Top-down vs. bottom-up analysis

Top-down analysis

Starts with macroeconomics: global GDP growth, inflation, interest rates, political stability. From there, attractive countries or regions are identified, then sectors that benefit from the current macro environment, and finally individual companies within those attractive sectors.

Bottom-up analysis

Starts with a single company — regardless of the macro environment. The question is: is this company exceptionally well-run and undervalued? If yes, you buy — even if the macro picture is unclear. Warren Buffett's method is typically bottom-up: he looks for "wonderful companies at a fair price."

Key ratios in fundamental analysis

P/E ratio — Price to Earnings

The P/E ratio measures how much you pay per unit of a company's earnings: P/E = Share price / EPS (earnings per share). A P/E of 20 means you pay 20 dollars for each dollar of annual earnings. A lower P/E may indicate a cheaper valuation — but can also reflect lower growth expectations or structural problems. Always compare P/E against sector averages and the company's own history.

P/B ratio — Price to Book

P/B measures the share price against the company's book value (net assets) per share. P/B = Share price / Book value per share. Banks and property companies are often valued on P/B; a P/B below 1.0 implies the market values the company below its book assets — a potential bargain, but also a warning sign if the book value is overstated.

EV/EBITDA

Enterprise Value to EBITDA (earnings before interest, tax, depreciation, and amortisation) is a standard metric for comparing companies with different capital structures. It neutralises the effect of taxes and depreciation policy, giving a clearer picture of operating profitability.

Dividend yield

Dividend per share divided by the share price. Important for income investors. A high yield (>6–8%) may signal the market doubts the dividend's sustainability — always check whether the payout ratio is realistic.

Free Cash Flow (FCF)

The cash a company generates after capital expenditure. Many analysts prefer FCF over reported earnings because cash flow is harder to manipulate through accounting choices. The DCF model (Discounted Cash Flow) discounts future cash flows to present value to calculate intrinsic worth.

Analysing the industry — Porter's Five Forces

Michael Porter's framework analyses competitive dynamics in an industry through five factors:

  1. Competitive rivalry: how many and how strong are the existing competitors?
  2. Threat of new entrants: how difficult is it for new players to enter?
  3. Supplier bargaining power: can suppliers squeeze margins?
  4. Buyer bargaining power: can customers easily switch provider?
  5. Threat of substitutes: are there alternative products that could replace the company's offering?

Companies in industries with high entry barriers, loyal customers, and weak substitutes — think consumer brands and network businesses — have structurally better prospects for long-term profitability.

Macroeconomic analysis

Macro factors set the framework for every industry. Key variables to monitor:

Fundamental analysis vs. technical analysis

The methods are not mutually exclusive. Fundamental analysis answers what and why — identifying undervalued assets. Technical analysis answers when — finding a good entry price. The combination is common among professional investors: fundamental analysis for selection, technical analysis for timing. Read more about technical analysis. A well-grounded stock analysis should also consider how the company fits into a broad portfolio — see the guide on portfolio diversification.

Trade equities and deepen your analysis at aktie.se. Fundamental analysis can also be applied to commodity companies — see the guide on commodity investment strategy. Want to combine stock analysis with a broad portfolio core? Read more about what is an ETF.

Frequently asked questions about fundamental analysis

How long does fundamental analysis take?

A thorough analysis of a mid-cap listed company takes a seasoned analyst roughly 10–40 hours: reviewing annual reports (at least 3–5 years), quarterly results, industry dynamics, management track record, and competitor comparison. A quick ratio screen takes 30–60 minutes. Most retail investors start with a ratio screen and dig deeper on the most interesting candidates.

Can you do fundamental analysis on commodities?

Yes — but the method differs from equity analysis. Commodity analysis focuses on supply-and-demand factors: mine production vs. industrial demand (copper, silver), OPEC+ decisions and geopolitics (oil), central bank purchases and real assets (gold). Ratios like P/E don't apply to commodities — instead, capacity and cost metrics are used. See current prices and background data per commodity at commodity prices today.

What is the DCF model?

The Discounted Cash Flow model calculates the present value of a company's future cash flows. The basic formula: Value = Σ(FCF_t / (1+r)^t) + Terminal value where r is the discount rate (WACC). The model's strength is that it forces the analyst to make explicit assumptions about growth and profitability. Its weakness: the result is highly sensitive to the discount rate and terminal growth rate — "garbage in, garbage out" if the assumptions are unrealistic.

Which parts of the annual report matter most?

Three key sections: (1) Income statement: revenue, costs, EBIT, net income — shows the profitability trend; (2) Balance sheet: assets, liabilities, equity — shows financial strength and leverage; (3) Cash flow statement: operating, investing, and financing cash flows — shows where cash is actually created and used. Reported profit can be manipulated via accounting choices; cash flow is harder to disguise.