Fundamental Analysis

Before any statement or ratio, the reader has to adopt the stance that makes fundamental analysis work: treating a share as a piece of a business, and separating what a stock costs from what it is worth.

• 1Valuing the business behind the stockFundamental analysis is the study of a business, its earnings, assets, debt, and prospects, to estimate what its shares are really worth. It is the investor's counterpart to technical analysis, answering what a share is worth rather than when to trade it. 8 min
• 2What a thing costs is not what it is worthThe price is what the market is asking today; the value is what the business is actually worth. They are often different, and the whole of investing is buying when price is below value, with a margin of safety to protect you when your estimate is wrong. 8 min
• 3Owning businesses, not renting tickersFundamental analysis serves the long-term investor, who buys a share as part-ownership of a business and holds while it compounds, rather than the trader who profits from short-term moves. The horizon changes everything about what matters. 8 min

Fundamental analysis rests on the numbers a company must publish. Part 2 teaches the reader to read the three statements and the annual report without assuming any accounting background, one statement at a time.

• 4The three views of a businessEvery listed company publishes three linked statements, the income statement (what it earned), the balance sheet (what it owns and owes), and the cash flow statement (where the cash moved). Together they are three views of the same business, and they connect. 8 min
• 5How much the business earnedThe income statement runs from revenue down to net profit, subtracting costs, interest, and tax along the way. The gaps between those lines, the margins, tell you how profitable the business really is. 9 min
• 6What the business owns and owesThe balance sheet is a snapshot of what a company owns (assets), what it owes (liabilities), and what is left for the owners (equity), on a single date. It shows the financial strength that decides whether a business can weather a bad year. 9 min
• 7Cash is the truth, profit is an opinionA company can report a profit and still run out of cash, because profit includes non-cash items and timing choices. The cash flow statement, split into operating, investing, and financing, shows the money that actually moved, which is harder to dress up. 9 min
• 8Where the real story is toldThe financial statements are only part of the annual report. The management discussion, the notes, the auditor's report, and the related-party disclosures are where the honest reader finds the risks and the real story a headline number hides. 9 min

With the statements readable, Part 3 turns them into the handful of ratios that let you compare a business with its own past and with its peers. Each chapter builds a ratio from numbers the reader can now find.

• 9How well the business turns capital into profitThe best businesses earn a high return on the money invested in them. Return on equity and return on capital employed measure that, and a durably high return is one of the strongest signs of a quality business. 9 min
• 10Cheap, expensive, and how to tellValuation ratios compare a company's price to what it earns or owns, so you can judge whether a stock is cheap or expensive. The price-to-earnings ratio is the most quoted, alongside price-to-book, EV to EBITDA, and dividend yield. 9 min
• 11Earnings, growth, and your sliceRatios rest on per-share figures, above all earnings per share, and on how fast those figures are growing. Growth matters, but only alongside the price you pay for it, because overpaying for growth is a classic way to lose money. 9 min
• 12Can the business survive a bad yearDebt magnifies a company's results and its risks, exactly as leverage does for a trader. The debt-to-equity ratio and interest coverage show whether a business is carrying more debt than it can safely service, which is how apparently sound companies fail. 9 min

Numbers describe the past; they cannot tell you whether the business will still be strong in ten years. Part 4 covers the qualitative judgement, the moat, the management, and the industry, that decides whether good numbers will last.

• 13What keeps competitors outA moat is a durable competitive advantage that lets a business keep earning high returns without competition eroding them. Brands, network effects, low-cost production, switching costs, and scale are common moats, and spotting a real one is the heart of quality investing. 9 min
• 14Who is running it, and for whomA business is only as trustworthy as the people running it. In India this means looking hard at the promoters, their holding, whether they have pledged their shares, how they allocate capital, and whether related-party dealings are quietly moving value away from minority shareholders. 10 min
• 15The business does not stand aloneA company lives inside an industry and an economy, and both can lift or sink it regardless of its own quality. Understanding the industry's structure and where it sits in its cycle, and the difference between cyclical and defensive businesses, keeps you from mistaking a good year for a good business. 9 min

The final part puts the pieces together into a decision: estimating what a business is worth, comparing it with its peers and its price, avoiding the traps, and turning the analysis into a portfolio.

• 16What a business is really worth, and buying below itIntrinsic value is what a business is worth based on the cash it will generate over its life. You do not need heavy mathematics to use the idea, estimate value conservatively, then buy well below it, so that being wrong still leaves you safe. That gap is the margin of safety. 9 min
• 17Comparing peers and finding candidatesIn practice most investors value a company by comparing its ratios with similar businesses and its own history, and use screens to find candidates worth studying. Both are useful and both mislead if used carelessly, because a screen finds numbers, not businesses. 8 min
• 18Cheap for a reason, and other errorsA low price is not the same as a bargain. A value trap is a stock that looks cheap on the numbers but is cheap because the business is declining. This chapter gathers the recurring mistakes, chasing stories, overpaying for growth, anchoring, and trusting a single ratio. 9 min
• 19The checklist, the portfolio, and the sandboxA final chapter turns the whole course into a repeatable process, a written investment case, a research checklist that combines the numbers and the judgement, and sensible rules for turning analysis into a portfolio. The practice sandbox lets you research and track ideas without risking money. 9 min