Introduction to fundamental analysis
What you'll learn
Understand what fundamental analysis is, how it differs from speculation, and a few plain-English metrics it uses.
Fundamental analysis means judging an investment by the actual business behind it - its earnings, revenue, debt and cash flow - rather than by price moves or hype. The question it asks is simple: what is this company really worth, and is the price fair?
That is the opposite of speculation, which bets on the price rising regardless of the underlying business.
A few things fundamental analysts look at
| Metric | What it tells you in plain English |
|---|---|
| Earnings (profit) | How much the company actually keeps after costs |
| Revenue | How much money comes in before costs |
| P/E ratio | The share price compared to its earnings per share |
| Debt | How much the company owes, and how risky that is |
| Dividends | Cash paid to owners - a sign of real, spendable profit |
The P/E ratio, simply
The price-to-earnings (P/E) ratio is the share price divided by the profit each share earns. A share at £20 earning £2 has a P/E of 10. A higher P/E means you pay more for each pound of profit, often because buyers expect fast growth. It is a rough gauge, not a verdict.
Intrinsic value
Intrinsic value is what the business is genuinely worth based on the cash it produces. When the market price drifts far from that, fundamentals are what tell you.
You probably do not need to do this
Most beginners are well served by a low-cost index fund, which owns many companies at once and saves you analysing each one. Understanding fundamentals still helps: it lets you spot when a price has detached from reality.
Key takeaways
- Fundamental analysis judges the business - earnings, revenue, debt, cash - not the price chart.
- It is the opposite of speculation, which bets on price alone.
- The P/E ratio compares price to earnings; dividends signal real cash profit.
- Most beginners do not need to do this - a low-cost index fund covers it - but the concepts help you sense-check a price.
Illustrative only: two made-up companies both priced at £20 a share, one earning £2 a share and one earning £0.50. This shows how price alone tells you little; it is not a forecast and not based on any real company.
Frequently asked questions
Do I need to do fundamental analysis myself?
No. Most beginners are well served by a low-cost, broadly diversified index fund, which spreads money across many companies without you judging each one. Understanding the basics simply helps you spot when a price looks detached from reality.
What is the difference between fundamental analysis and speculation?
Fundamental analysis judges an investment by the actual business - its earnings, revenue, debt and cash. Speculation bets on the price going up, often driven by hype or momentum rather than the underlying value.
Is a low P/E ratio always a good thing?
Not on its own. A low price relative to earnings can signal good value, or it can signal a struggling business the market expects to shrink. No single number tells the whole story.
General information, not financial advice. The value of investments can fall as well as rise, and figures and rules can change; check the current position before acting.