Fundamental analysis

Fundamental analysis estimates what a security is worth by examining the underlying business — its revenue, earnings, cash flow, debt, management, competitive position — and the broader economic conditions it operates in, then compares that estimate of intrinsic value to the current market price. It stands in direct contrast to technical analysis, which studies price and volume history rather than the business itself.

Analysts build fundamental views from financial statements and industry research, using tools such as discounted cash flow models to estimate intrinsic value directly from projected future cash flows, and simpler relative measures such as the price-to-earnings ratio to compare a company against peers. "Top-down" fundamental analysis starts from macroeconomic conditions and works down to sectors and companies; "bottom-up" starts from an individual company's own numbers.

Fundamental analysis underlies most long-horizon investing and value-oriented strategies, on the premise that price eventually converges toward intrinsic value even if it diverges for a period, and it underpins metrics like internal rate of return used in project and deal appraisal. Its main pitfalls are the sensitivity of any valuation model to its input assumptions — small changes in projected growth or discount rates can swing an estimate of value substantially — and the risk of anchoring to a thesis and ignoring evidence that a business's fundamentals have genuinely deteriorated.