Fundamental Analysis: How to Make Smarter Investment Decisions?

Have you ever used fundamental analysis to make your investment decisions? Many beginner traders and investors don’t realize that fundamental analysis is one of the most powerful tools to help you understand whether an asset is truly worth its current market price.

Fundamental analysis is not just a game of theoretical numbers — it’s a set of practical techniques used by the most successful investors for nearly a century. Warren Buffett and Benjamin Graham have consistently demonstrated that thorough research into companies and assets can lead to excellent results.

What Is Fundamental Analysis and Why Do You Need It?

Fundamental analysis is a methodology used by investors to determine the intrinsic value of assets and companies. Unlike superficial price charts, fundamental analysis dives deeper by examining financial data, market conditions, and external environmental factors.

Suppose you’re interested in a particular company. You start by looking at its income statements, balance sheets, and cash flow statements. Then you broaden your view to research competitors, target markets, and whether the company plans to expand. You can go even further by analyzing economic factors such as interest rates and inflation.

This “bottom-up” approach begins with a specific company and moves to the bigger picture. But you can also do the opposite — start by examining broader economic changes and then focus on specific companies.

In summary, fundamental analysis aims to answer one simple question: does the current market price reflect the true value of the asset? If the projected intrinsic value is higher than the current price, the asset may be undervalued. Conversely, it could be overvalued.

Fundamental vs. Technical Analysis: Which One to Choose?

If you’re looking for an answer as to which method has advantages, the real question is much more flexible: what does each give you?

Fundamental analysts believe that the current stock trading price does not necessarily reflect the true value of the asset. Based on this principle, they make their investment decisions.

Technical analysts, on the other hand, believe that price charts, patterns, and trading volumes can predict future price movements. They do not rely on external factors but look for ideal price levels to open positions.

The Efficient Market Hypothesis (EMH) states that technical analysis cannot outperform the market because all known information is already reflected in prices. Its “strong” versions even claim that detailed research does not provide a competitive advantage.

In practice, a smart approach is to use both methods together. Many successful traders combine fundamental and technical analysis to see the bigger picture for both short-term trades and long-term investments.

Classic Indicators: EPS, P/E, and Others

In fundamental analysis, you don’t look for indicators used by technical traders (like MACD or RSI). Instead, FA-specific metrics are used.

Earnings Per Share (EPS)

EPS shows how much profit a company makes per active share. The calculation is simple: