For medium- to long-term investors, understanding fundamental stock analysis is an essential skill. This approach goes beyond daily price fluctuations — it helps investors evaluate a company’s true quality from within: its financial performance, business prospects, and competitive position in the industry.
This article explains what fundamental analysis is, its key functions, the practical steps involved, how to apply it to investing, and an example case study to make the concept easier to grasp.
What Is Fundamental Stock Analysis?
Fundamental analysis is a method used to assess a stock’s value by examining a company’s financial and non-financial factors to determine whether its current price reflects its true worth.
At its core lies the concept of intrinsic value. According to Investopedia, investors aim to calculate a company’s fair value based on its financial statements, growth projections, and industry outlook. If the market price is below intrinsic value, the stock is considered undervalued; if it’s higher, it’s overvalued.
This approach differs from technical analysis, which focuses on price charts and market trends. Fundamental analysis emphasizes long-term performance, making it ideal for investors seeking sustainable portfolio growth.
Why Is Fundamental Analysis Important?
Here are the main reasons fundamental analysis plays a crucial role in investing:
- Determine a Stock’s Fair Value
By analyzing earnings, revenue, assets, and liabilities, investors can assess whether a stock is worth buying. - Identify Strong Investment Opportunities
Instead of following short-term market trends, fundamental analysis helps spot healthy companies with solid long-term growth potential. - Support Portfolio Diversification
It allows investors to compare different sectors — such as energy, technology, and healthcare — to balance risk and return. - Encourage Rational Decision-Making
Data-driven analysis helps investors stay calm during volatility and avoid emotional reactions. - Form the Basis for Long-Term Strategy
Many institutional investors rely on fundamental analysis to evaluate business quality before investing. Without it, decisions often turn into speculation.
Key Steps in Fundamental Analysis
According to CMC Markets, fundamental analysis typically involves four main stages:
1. Macroeconomic Analysis
Investors start by examining broad economic conditions like inflation, interest rates, GDP growth, exchange rates, and government policy. These factors influence how companies perform. For example, rising interest rates often pressure the property and banking sectors.
2. Industry Analysis
Each industry has its own cycle and characteristics. Commodity sectors tend to surge when global prices rise, while technology stocks depend more on innovation and market adoption. Understanding these trends helps investors choose industries with stronger prospects.
3. Company Analysis
This step involves reviewing financial statements:
- Balance Sheet: to evaluate assets, liabilities, and capital structure.
- Income Statement: to measure profitability and revenue trends.
- Cash Flow Statement: to assess liquidity and cash generation.
Beyond numbers, investors should evaluate management quality, expansion strategies, governance standards, and how the company compares to competitors.
4. Determining Intrinsic Value
Using both quantitative and qualitative data, investors estimate a stock’s intrinsic value. Common valuation methods include:
- P/E Ratio (Price to Earnings): compares stock price to earnings per share.
- P/B Ratio (Price to Book): compares stock price to book value.
- DCF (Discounted Cash Flow): calculates the present value of expected future cash flows.
The result guides investment decisions — whether to buy, hold, or sell.
How to Apply Fundamental Analysis in Investing
Fundamental analysis isn’t just about numbers — it’s about turning insights into action:
- Buy undervalued stocks – when market price is below intrinsic value.
- Sell overvalued stocks – when prices exceed fair value and risks rise.
- Select quality stocks for long-term growth – those with consistent ROE, strong cash flow, and manageable debt.
- Build a balanced portfolio – allocate across sectors based on your risk profile.
Retail investors can use publicly available financial reports, analyst research, or data from investment platforms to implement these steps.
Case Study Example
Imagine a retail company reports the following:
- Net profit = IDR 2 trillion
- Shares outstanding = 1 billion
- EPS = IDR 2,000
- Current market price = IDR 15,000
- Industry P/E = 10
Fair value calculation:
2,000 × 10 = IDR 20,000
Since the market price (IDR 15,000) is below the fair value, the stock appears undervalued.
However, before deciding, an investor should also check:
- Is the company’s profit trend increasing or declining?
- Does it have a clear and sustainable expansion plan?
- Are its debt levels under control?
If these factors are positive, the stock could be a solid long-term investment. But if earnings are falling or management execution is weak, a “cheap” valuation might be a trap.
Conclusion
Fundamental stock analysis is the foundation of rational investing. By understanding key financial factors and calculating intrinsic value, investors can determine whether a stock deserves to be bought, held, or sold.
This approach not only maximizes long-term returns but also protects investors from the risks of investing in fundamentally weak companies.
FAQ
1. Can fundamental analysis be used for short-term trading?
→ Generally, no. Fundamental analysis is better suited for medium- to long-term investing since it focuses on business performance, not daily price movements.
2. Is one method enough to find a stock’s intrinsic value?
→ No. It’s best to combine multiple methods — such as P/E, P/B, and DCF — for more accurate results.
Disclaimer:
PT Valbury Asia Futures is a licensed futures broker regulated by OJK, offering derivative financial products backed by securities.
