Chapter 7: Fundamental Analysis
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Day 35: Fundamental Analysis — The Company Health Check
Reading balance sheets and P&L statements like a financial detective
2 min read
📖 The Arranged Marriage Check
In a careful process of evaluating a prospective match, you ask: stable income? (Revenue consistent?). Debt situation? (Balance sheet clean?). Family track record? (Management history?). Future prospects? (Industry growth potential?).
Fundamental analysis is the same rigorous due diligence — applied to companies before you commit your money.
You're not just buying a share. You're buying a piece of a business. Know the business. 💼
In a careful process of evaluating a prospective match, you ask: stable income? (Revenue consistent?). Debt situation? (Balance sheet clean?). Family track record? (Management history?). Future prospects? (Industry growth potential?).
Fundamental analysis is the same rigorous due diligence — applied to companies before you commit your money.
You're not just buying a share. You're buying a piece of a business. Know the business. 💼
Fundamental vs Technical Analysis
| Feature | Fundamental Analysis | Technical Analysis |
|---|---|---|
| Core Question | WHAT to buy | WHEN to buy/sell |
| Time Horizon | Long term (years) | Short to medium term |
| Data Used | Financial statements, management, industry | Price, volume, chart patterns |
| Best For | Long-term investors | Active traders |
| Used Together? | YES! Fundamental picks WHAT to own. Technical tells WHEN to enter. | |
The Three Financial Statements
📊 P&L Statement
Revenue, expenses, profit over a period. "Did the company make money last quarter?"
🏦 Balance Sheet
Assets, liabilities, equity at a point in time. "What does the company own, and what does it owe?"
💰 Cash Flow Statement
Actual cash in and out. The hardest to fake. "Is the business actually generating real cash?"
Essential Ratios — Memorise These
| Ratio | Formula | Good Target | Meaning |
|---|---|---|---|
| EPS | Net Profit / Shares | Growing YoY | Per-share earnings power |
| P/E Ratio | Price / EPS | 15–25 (large cap) | Market's value vs earnings |
| ROE | Net Profit / Equity × 100 | 15%+ | Returns on shareholders' investment |
| Debt-to-Equity | Total Debt / Equity | <1 preferred | Financial leverage level |
| Revenue Growth | YoY % change | 10%+ consistently | Business actually growing? |
| Net Profit Margin | Net Profit / Revenue × 100 | 10%+ good | How much profit per rupee of revenue |
🎯 Today's Takeaway:
Fundamental analysis = understanding the actual business behind the stock. Three statements: P&L (profits), Balance Sheet (what's owned/owed), Cash Flow (real cash). Core ratios: EPS, P/E, ROE, D/E. Tomorrow: P/E Ratio deep dive — the single most used (and most misunderstood) ratio in investing!
Fundamental analysis = understanding the actual business behind the stock. Three statements: P&L (profits), Balance Sheet (what's owned/owed), Cash Flow (real cash). Core ratios: EPS, P/E, ROE, D/E. Tomorrow: P/E Ratio deep dive — the single most used (and most misunderstood) ratio in investing!