What Is Fundamental Analysis?

When investors decide whether to buy a share, they do not simply look at whether the price has been rising. Fundamental analysis asks a deeper question: is the company actually worth what the market is charging for it? It is the standard method professional investors use — and, as our guide to how to research a share explains, you can apply a simplified version of it right now in the Student Investor Challenge.

What does fundamental analysis actually mean?

At its heart, fundamental analysis is about intrinsic value: the idea that every company has a real underlying worth based on what it earns, owns, and owes — independent of what the stock market happens to be quoting today. If the market price is lower than that intrinsic value, the share may be undervalued and potentially a good buy. If the market price is higher, the share may be overvalued and potentially expensive relative to what the business is actually worth.

The word “fundamental” is the clue: you are looking at the fundamentals of the business itself — not at price charts or trading patterns. You are asking “how healthy is this company?” before you ask “where is the price heading?”

This is the approach used by long-term, professional investors who think in years rather than days. Warren Buffett famously described his strategy as buying “a wonderful company at a fair price.” Deciding whether a price is fair is exactly what fundamental analysis does.

Two types of fundamental analysis

Fundamental analysis splits into two complementary streams. You need both to get the full picture.

Quantitative — the numbers you can measure

Quantitative analysis is the part most people think of first. It covers everything that appears in a company’s financial statements: revenue, profit margins, earnings per share, debt levels, and cash flow. These numbers are objective, comparable between companies, and (for UK-listed firms) publicly available free of charge. The income statement, balance sheet, and cash flow statement are the three documents where quantitative analysts spend most of their time — and each of those documents has its own article in this blog if you want to go deeper.

Qualitative — the story behind the numbers

Qualitative analysis is harder to measure but equally important. It covers things like management quality, brand strength, competitive advantages (sometimes called a “moat”), and the direction of the industry the company operates in. These do not show up directly in financial statements, yet they explain the numbers. Two companies with identical price-to-earnings ratios can be very different investments if one has a strong brand that keeps customers loyal and the other is fighting off well-funded competitors. Qualitative analysis helps you make that distinction.

In practice, you read the quantitative data first to identify whether the company looks interesting on paper, then apply qualitative judgement to understand why the numbers look the way they do and whether that is likely to continue.

Five key metrics every fundamental analyst checks

No single metric tells the whole story, but these five are the ones most investors look at first. Together they give a quick health check of any company.

1. Revenue (and revenue growth)
   Revenue is the total money a company brings in from selling its products or services — sometimes called the “top line.” More important than the absolute figure is whether revenue is growing from year to year, and whether that growth is accelerating or slowing. A company with flat or falling revenue has a fundamental problem that almost no amount of cost-cutting can solve indefinitely.
2. Profit margin
   Revenue tells you how much money came in; profit margin tells you how much of it the company actually kept. A 20% profit margin means the business keeps 20p of profit for every £1 of revenue. Higher margins generally mean a stronger competitive position. Comparing a company’s margin to its sector peers quickly reveals whether it is more or less efficient than its rivals.
3. Earnings per share (EPS)
   Earnings per share is total profit divided by the number of shares in existence. It is the single number that most directly shows how much a company earns “per slice.” Rising EPS over several years is a strong signal that the business is genuinely growing and not just treading water. Watch for companies that boost EPS by buying back their own shares rather than growing profits — that is a different story.
4. Price-to-earnings (P/E) ratio
   The price-to-earnings ratio divides the share price by the earnings per share. A P/E of 15 means investors are paying £15 for every £1 of annual profit. The P/E is the most widely quoted valuation metric in investing, and comparing it against sector peers is usually the first step in deciding whether a share looks cheap or expensive. High P/Es are not automatically bad; they may reflect high growth expectations. Low P/Es are not automatically good; they may reflect a company in trouble.
5. Cash flow
   Cash flow measures actual money moving in and out of the business, separate from accounting profit. A company can show a profit on paper while running out of cash — a dangerous situation. Positive and growing operating cash flow confirms that the profit reported on the income statement is real, not just an accounting artefact. Analysts often trust cash flow more than reported profit precisely because it is harder to manipulate.

None of these metrics in isolation gives you a buy or sell signal. The skill is in comparing them: against the company’s own history over three to five years, and against direct competitors in the same sector. A P/E that looks high in one industry may be perfectly normal in another.

How to do a basic fundamental analysis — five steps

Here is a practical, five-step process that any beginner can follow. You do not need specialist software or a finance qualification to work through it.

1. Find the results statement or annual report
   UK-listed companies are required to publish their financial results publicly. You can find them on the London Stock Exchange’s Regulatory News Service (RNS), or directly on the company’s own investor relations page. Both are free. Look for the most recent full-year results or interim report.
2. Read the CEO’s letter and strategic overview
   Before diving into the numbers, read what management says about the business. The CEO’s letter sets the context: what the company is trying to achieve, where it sees opportunities, and — crucially — what risks management itself is flagging. If the CEO is evasive about problems, that tells you something. If the tone is clear and honest, that is a good sign.
3. Check the revenue and profit trend over three to five years
   One year of data can mislead. A single good year might be a one-off. A single bad year might be a temporary disruption. Looking at the trend over three to five years reveals whether growth is consistent, accelerating, or beginning to falter. Look for companies where both revenue and profit have grown together — revenue growth that does not translate into profit growth can signal a business working very hard for very little reward.
4. Calculate (or look up) the key ratios
   Once you have the revenue and profit figures, the main ratios — P/E, profit margin, EPS — are simple arithmetic. However, many free tools do this for you. Sites like Yahoo Finance, Morningstar, and the Financial Times markets pages list these ratios automatically. Your job is to understand what they mean, not to spend hours in a spreadsheet.
5. Ask whether the share price already reflects what you found
   This is the step most beginners skip, and it matters enormously. A company can have excellent fundamentals and still be a poor buy if the good news is already fully priced in — if the market has already driven the share price up to reflect all that optimism. Compare the P/E with sector peers. Check if the share price has already surged. Read recent analyst commentary. For a full framework on putting these pieces together, see our step-by-step guide to researching a company before you invest.

Fundamental analysis vs technical analysis

The two main schools of investment analysis take very different approaches. Fundamental analysis studies the company: its finances, competitive position, and business model. It asks “is this company worth owning?” Technical analysis studies the share price chart: patterns, trends, moving averages, and trading volume. It asks “where is the price likely to go next?”

Most long-term investors use fundamental analysis as their primary lens. Short-term traders tend to use technical analysis more, because chart patterns can help predict short-term price movements even when the underlying business has not changed. In the Student Investor Challenge you are building and managing a portfolio over a period of months, so fundamental analysis is the natural fit — you are thinking like an investor, not a day trader.

Using fundamental analysis in the Student Investor Challenge

The Challenge gives you a virtual £100,000 to invest in real FTSE-listed companies. That means the companies you research have real, publicly available financial data — the same data professional investors use. Fundamental analysis is not an abstract classroom exercise here; it is directly applicable.

Start with the five metrics above before you make any purchase. A company with three consecutive years of growing revenue, a rising profit margin, and a P/E in line with its sector peers is a much more defensible pick than one you chose because it was in the news. Even checking just two or three of the five metrics puts you ahead of players who simply follow recent price momentum.

For the qualitative side, ask yourself: does this company have something that competitors would find hard to copy? Is the industry it operates in growing or shrinking? Are there any obvious risks the market might not have fully priced in? These questions do not require a Bloomberg terminal — a company’s annual report and a few minutes of reading will usually give you enough to form a view.

If you are just getting started, our guide to picking your first shares walks through the decision-making process in a practical, step-by-step way — and it pairs well with the framework in this article.

Frequently asked questions

Is fundamental analysis suitable for beginners?

Yes — you do not need to be an accountant. Most beginner fundamental analysis starts with just two or three numbers: revenue growth, earnings per share, and the P/E ratio. The five-step approach above gives you a workable starting point without needing a finance degree.

What is the difference between fundamental analysis and technical analysis?

Fundamental analysis studies the company itself — its revenues, profits, and competitive position — to judge whether the share price is fair. Technical analysis studies the share price chart — patterns, moving averages, and trading volume — to predict short-term price moves. Long-term investors tend to rely more on fundamental analysis; short-term traders use both.

Do I need to be good at maths to use fundamental analysis?

Not particularly. The key metrics — earnings per share, price-to-earnings ratio, profit margin — are simple division. Many financial websites calculate them for you automatically. What matters more is understanding what those numbers mean, which is exactly what this guide covers.

Can I use fundamental analysis in the Student Investor Challenge?

Absolutely. The Challenge gives you a virtual £100,000 to invest in real FTSE-listed companies. Before picking a share, checking its recent revenue trend, profit margin, and P/E ratio relative to sector peers will give your decision a solid foundation — and usually beats picking shares based on headlines alone.

Where do I find a company’s fundamental data for free?

UK-listed companies publish their full results on the London Stock Exchange’s RNS feed and on their own investor relations pages — both are free. Sites such as Morningstar and the Financial Times markets pages surface the key ratios without you needing to dig through the raw accounts.

This article is educational and is not financial advice. The companies and figures used are simplified illustrations to explain how fundamental analysis works, not descriptions of real firms or recommendations to buy or sell anything.