# How to Analyze Stocks Fundamentally — A Complete Guide

> Fundamental analysis measures a stock's true worth by studying the business across five pillars — profitability, valuation, growth, financial health, and dividend quality — using its financial statements and a handful of ratios, then comparing each metric to the company's own history and its sector peers.

## The five pillars of fundamental analysis

| Pillar | Question it answers | Core metrics |
|--------|--------------------|--------------|
| Profitability | Does it make good money on what it owns and sells? | ROE, ROA, margins |
| Valuation | Is the stock cheap or expensive for what you get? | P/E, PEG, EV/EBITDA, FCF yield |
| Growth | Is the business getting bigger and more profitable? | Revenue growth, EPS growth, CAGR |
| Financial health | Can it survive a downturn? | Debt-to-equity, current ratio, interest coverage |
| Dividend quality | Is the income durable and growing? | Yield, payout ratio, growth streak |

FolioFundamentals organizes its 0–100 Fundamental Score around exactly these five pillars.

## The key ratios — and what each answers

- **P/E ratio** (/learn/pe-ratio) — price relative to earnings; the headline valuation gauge.
- **PEG ratio** (/learn/peg-ratio) — P/E adjusted for growth; is a high multiple justified?
- **ROE** (/learn/roe) — profit generated on shareholders' capital.
- **Debt-to-equity** (/learn/debt-to-equity) — how much leverage sits behind the business.
- **Free cash flow** (/learn/fcf) — the real cash left after running and reinvesting.
- **EPS** (/learn/eps) — profit attributable to each share.

Valuation ratios tell you what you're paying; profitability ratios tell you how good the business is; health ratios tell you whether it can survive a recession; and free cash flow is the hardest number to fake.

## How to read the three financial statements

- **Income statement** — profitability over a period; watch gross, operating, and net margins for pricing power and efficiency.
- **Balance sheet** — what the company owns and owes; where financial health lives (debt vs. equity, current assets vs. liabilities).
- **Cash flow statement** — where cash actually moved; operating cash flow minus capex = free cash flow.

## Putting it together: is the price fair?

1. **Compare to history** — is today's P/E, margin, or yield high or low vs. the company's own 5–10 year average?
2. **Compare to peers** — a 25× P/E is cheap for software, expensive for a utility; sector context is everything.
3. **Demand a margin of safety** — only act when value exceeds price by enough to absorb being wrong.

## Common mistakes to avoid

- Judging a ratio in isolation.
- Chasing yield without checking free cash flow and payout ratio.
- Confusing a low share price with a cheap valuation.
- Ignoring the balance sheet.
- Over-trusting a single year instead of multi-year trends.

## Keep learning

- Dividend Investing Guide (/learn/dividend-investing-guide)
- Best Stock Analysis Tools (/best-stock-analysis-tools)
- Methodology (/methodology)

Analyze any stock free (no credit card): https://foliofundamentals.com/analyzer