What is Fundamental Analysis and How to Use It in Trading?

Every investor wants to buy low and sell high. But how do you know whether a stock is undervalued or overvalued? The answer lies in fundamental analysis — a powerful strategy that helps you evaluate a company’s intrinsic value, financial health, and future growth potential.

While technical analysis looks at price charts and trends, fundamental analysis dives deep into the company’s actual business performance. In this detailed guide, we’ll explain what fundamental analysis is, why it matters, how to use it effectively in trading, and the tools and strategies you need to get started in 2025.

What is Fundamental Analysis?

Fundamental analysis is the process of evaluating a company’s financial statements, business model, management, economic environment, and industry conditions to determine its real worth or intrinsic value.

The goal is simple:

Buy a stock when its market price is below its intrinsic value (undervalued), and sell when it’s above (overvalued).

It’s a long-term investment strategy rooted in rational decision-making, not emotional market reactions. It answers questions like:

• Is the company profitable?
• How fast is it growing?
• Is it too much in debt?
• Does it have a competitive edge?
• How is the overall industry performing?

Why is Fundamental Analysis Important?

In the chaotic world of stock markets, price alone doesn’t tell the whole story. A ₹500 stock could be cheaper than a ₹100 stock — if the ₹500 stock has stronger earnings, lower debt, and better growth prospects.

Fundamental analysis helps investors:

• Make informed and data-driven investment decisions
• Understand the long-term potential of a business
• Identify undervalued or overvalued stocks
• Avoid falling for hype and pump-and-dump schemes
• Build a diversified, quality portfolio for wealth creation

Legendary investors like Warren Buffett, Charlie Munger, and Benjamin Graham have built fortunes using fundamental analysis.

Key Pillars of Fundamental Analysis

Fundamental analysis is built on three major pillars:

1. Company Analysis (Micro Level)

You analyze the company’s financials, management, business model, competitive position, and growth prospects.

2. Industry Analysis (Meso Level)

You study the broader industry trends, market demand, competitors, and regulatory landscape.

3. Economic Analysis (Macro Level)

You consider macroeconomic indicators like GDP growth, inflation, interest rates, monetary policy, and global trends.

Together, these levels offer a complete picture of where the company stands and how it is likely to perform in the future.

Types of Fundamental Analysis

There are two core approaches:

1. Qualitative Analysis

Non-measurable factors that affect a company’s value:

• Business model
• Leadership and management
• Brand value
• Customer loyalty
• Market share
• Industry reputation

2. Quantitative Analysis

Measurable data from financial statements:

• Revenue, expenses, net profit
• Assets and liabilities
• Earnings per share (EPS)
• Ratios like P/E, ROE, Debt/Equity, etc.

Let’s now explore the most important financial metrics used in fundamental analysis.

Key Financial Metrics for Fundamental Analysis

1. Earnings Per Share (EPS)

EPS = Net Profit / Total Outstanding Shares

A higher EPS means the company is generating more profit per share.

2. Price-to-Earnings (P/E) Ratio

P/E = Stock Price / EPS

Compares stock price to earnings. A lower P/E may indicate undervaluation.

3. Price-to-Book (P/B) Ratio

P/B = Stock Price / Book Value per Share

Shows how the market values the company’s net assets.

4. Return on Equity (ROE)

ROE = Net Income / Shareholders’ Equity

Measures how efficiently a company uses shareholders’ funds.

5. Debt-to-Equity (D/E) Ratio

D/E = Total Debt / Total Equity

Indicates financial risk. Lower is generally better.

6. Current Ratio

Current Ratio = Current Assets / Current Liabilities

Shows liquidity and short-term financial strength.

7. Free Cash Flow (FCF)

FCF = Operating Cash Flow – Capital Expenditures

The cash available to reinvest, reduce debt, or pay dividends.

How to Perform Fundamental Analysis Step-by-Step

Here’s a beginner-friendly roadmap to using fundamental analysis for selecting good stocks in 2025:

Step 1: Understand the Business

• What does the company do?
• Is the business scalable?
• Is the product/service in demand?

Example: Infosys – provides IT services globally, with a strong client base.

Step 2: Review Financial Statements

Study the Balance Sheet, Income Statement, and Cash Flow Statement for:

• Revenue growth over the years
• Profitability trends
• Debt levels
• Operating margins

Use platforms like Screener.in, Tickertape, or Moneycontrol.

Step 3: Analyze Key Ratios

Use valuation and performance ratios:

• P/E, P/B, ROE, ROCE
• Debt/Equity, Interest Coverage Ratio
• Sales & profit CAGR (Compound Annual Growth Rate)

Tip: Compare with sector averages to identify strengths or weaknesses.

Step 4: Check Industry Trends

Ask:

• Is the industry growing?
• Are there any major risks or disruptions?
• What are the key tailwinds (e.g., government policies, global demand)?

Example: EV and renewable energy sectors have strong future demand.

Step 5: Assess Management Quality

• Are the promoters increasing or decreasing their stake?
• Any frauds, penalties, or corporate governance issues?
• Is the management visionary and shareholder-friendly?

Step 6: Determine Intrinsic Value

Use models like:

• Discounted Cash Flow (DCF)
• Dividend Discount Model (DDM)
• Relative Valuation (based on peer comparison)

Then:

If Intrinsic Value > Market Price → Stock is Undervalued
If Intrinsic Value < Market Price → Stock is Overvalued

Real-Life Example: Analyzing HDFC Bank (As of 2025)

Let’s say you’re considering investing in HDFC Bank. Here’s a quick breakdown:

Metric	Value
EPS	₹75
P/E Ratio	16
ROE	18%
Net Profit Growth	12% YoY
NPA (Bad Loans)	Low and falling
D/E Ratio	< 0.5

The bank has:

• Consistent earnings growth
• High ROE
• Low debt
• High promoter holding
• Industry tailwinds in retail credit and digital banking

Based on fundamental analysis, it looks like a solid long-term investment.

Pros and Cons of Fundamental Analysis

Advantages

• Deep understanding of company performance
• Helps identify true value stocks
• Reduces investment risk
• Useful for long-term wealth creation
• Filters out hype and speculation

Limitations

• Time-consuming
• Requires understanding of financial terms
• Intrinsic value estimation isn’t 100% accurate
• Doesn’t consider short-term price movements
• Market behavior can remain irrational longer than expected

Fundamental Analysis vs. Technical Analysis: What’s the Difference?

When it comes to analyzing stocks or financial assets, there are two major methods investors and traders use: Fundamental Analysis and Technical Analysis. While both aim to help you make smarter investing decisions, they take very different approaches.

Feature	Fundamental Analysis	Technical Analysis
Definition	Evaluates a company’s intrinsic value using financial and economic data.	Analyzes stock price movements and patterns using charts and indicators.
Focus	Business performance, earnings, valuation, economy, and industry.	Stock price, trading volume, and historical price patterns.
Time Horizon	Long-term (months to years).	Short- to medium-term (minutes to weeks).
Main Users	Investors, value investors, mutual fund managers.	Traders, intraday traders, swing traders.
Data Used	Financial statements, EPS, P/E, ROE, debt, industry trends.	Charts, candlesticks, RSI, MACD, moving averages, volume.
Purpose	Identify undervalued or overvalued stocks for long-term gains.	Identify buy/sell points for quick profits or short-term trades.
Assumption	Market may misprice a stock, but price will correct over time.	All information is already reflected in the price.
Tools/Platforms	Screener.in, Moneycontrol, Tickertape, Annual Reports.	TradingView, Zerodha Kite, ChartIQ, MetaTrader.
Decision Making	“What to buy” based on company fundamentals.	“When to buy/sell” based on price action and signals.
Best Suited For	Long-term investors seeking wealth creation.	Short-term traders seeking quick gains.

Who Should Use Fundamental Analysis?

Fundamental analysis is best for:

• Long-term investors (5+ years)
• Value investors
• Dividend seekers
• Mutual fund and SIP investors
• Traders looking for high-quality stocks for swing or positional trading

If you’re into intraday or short-term trading, you might rely more on technical indicators — but combining strong fundamentals with technical setups can offer the best of both worlds.

Tools & Websites for Fundamental Analysis (India)

Here are some popular resources for Indian investors:

Platform	Features
Screener.in	Financial data, ratios, filters, exports to Excel
Tickertape	Stock dashboards, forecasts, and comparison
Moneycontrol	News, results, historical data, analyst views
TradingView	Charts, ideas, and custom indicators
NSE/BSE websites	Official filings, annual reports, ratios

Conclusion

In 2025, with global uncertainty, inflation, interest rate changes, and sector rotations, fundamental analysis remains your strongest weapon in finding quality businesses at attractive valuations.

By studying a company’s true strengths, competitive edge, financial health, and market environment, you can build a resilient portfolio that not only survives market volatility but grows steadily over the years.

So, whether you’re a beginner or experienced trader — don’t skip the fundamentals. After all, the market is a weighing machine in the long run.

FAQs