Fundamental Analysis

> **Skill:** Fundamental Analysis | **Domain:** trading | **Category:** research | **Level:** intermediate

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Skill: Fundamental Analysis | Domain: trading | Category: research | Level: intermediate Tags: trading, research, fundamental, financials, valuation, moat

Fundamental Analysis

Reference Files

Load these when needed — do not pre-load all of them:

File	Load When
references/financial-statements.md	Analyzing income statement, balance sheet, cash flow, FCF, working capital, red flags
references/valuation-methods.md	Computing or comparing valuation ratios, running DCF, comps, DDM, profitability/liquidity/leverage/efficiency ratios
references/macro-industry.md	Economic indicators, central bank policy, intermarket analysis, Porter's Five Forces, economic moats

Quick Ratio Reference

Valuation Ratios

Ratio	Undervalued	Fair	Expensive	Notes
P/E (trailing)	< 10	10–20	> 30	Compare to sector & growth rate
P/E (forward)	< 12	12–18	> 25	More predictive than trailing
PEG	< 1.0	~1.0	> 1.5	P/E ÷ EPS growth rate
P/S	< 1.0	1–3	> 5	Sector-dependent; SaaS can be 8–20×
P/B	< 1.0	1–3	> 5	Banks/financials: fair at 1–2×
EV/EBITDA	< 8	8–12	> 15	Best for capital-intensive businesses
EV/Revenue	< 1	1–3	> 5	Pre-profit companies

Profitability Ratios

Ratio	Poor	Good	Excellent	Notes
ROE	< 10%	15–20%	> 20%	Beware high leverage inflating ROE
ROA	< 2%	5–8%	> 10%	Banks: 1–2% is normal
ROIC	< WACC	WACC+5%	> 15%	Value creation only if ROIC > WACC
Gross Margin	Sector low	40%+ (tech)	60%+	Highly sector-specific
Operating Margin	< 5%	10–20%	> 25%	Sector-adjusted
Net Margin	< 3%	8–15%	> 20%	Sector-adjusted

Liquidity & Leverage Ratios

Ratio	Weak	Acceptable	Strong	Notes
Current Ratio	< 1.0	1.5–2.0	> 2.5	< 1 = liquidity risk
Quick Ratio	< 0.7	1.0–1.5	> 2.0	Excludes inventory
Cash Ratio	< 0.3	0.5–1.0	> 1.0	Most conservative
Debt/Equity	> 2.0	0.5–1.5	< 0.5	Sector-adjusted
Debt/EBITDA	> 4×	2–3×	< 2×	> 5× = distress risk
Interest Coverage	< 2×	3–5×	> 5×	< 1.5× = danger zone

Efficiency Ratios

Ratio	Poor	Good	Excellent
Asset Turnover	< 0.5	0.8–1.5	> 1.5
Inventory Turnover	< 4	6–12	> 15
DSO (Days Sales Outstanding)	> 60	30–45	< 30
CCC (Cash Conversion Cycle)	> 90 days	30–60	< 30 (or negative)

Financial Statement Structure Overview

Income Statement       →  Profitability (what was earned)
Balance Sheet          →  Financial position (what is owned/owed)
Cash Flow Statement    →  Liquidity (actual cash movement)

Key linkages:
  Net Income (IS) → Retained Earnings (BS) → Operating CF (CFS)
  CapEx (CFS)     → PP&E change (BS)
  D&A  (IS)       → Added back in Operating CF (CFS)
  FCF = CFO - CapEx  (the purest measure of cash generation)

Valuation Method Selection Guide

Situation	Best Method	Why
Stable, predictable FCF	DCF	Intrinsic value based on fundamentals
Profitable, comparable peers exist	Comps (EV/EBITDA, P/E)	Market-derived, fast
Dividend-paying, mature company	DDM (Gordon Growth)	Dividend stream = value
Pre-profit high-growth	EV/Revenue, EV/ARR	No earnings yet
Asset-heavy (banks, real estate)	P/B, P/TBV, P/FFO	Assets = value driver
Acquisition / M&A context	EV/EBITDA + DCF	Enterprise-level view
Cyclical industry	EV/EBITDA on normalized earnings	Avoid peak/trough distortions

Rule: Always triangulate — use 2–3 methods and compare implied price ranges.

Red Flags Checklist

Earnings Quality

[] Revenue growing faster than cash from operations
[] Accounts receivable growing faster than revenue (channel stuffing)
[] Gross margin declining while revenue rises
[] Frequent non-recurring "one-time" charges
[] Auditor changes or going-concern opinion
[] Earnings beat only due to tax rate or share count changes

Balance Sheet

[] Goodwill > 30% of total assets (acquisition risk)
[] Inventory buildup without revenue growth
[] Rising short-term debt to fund operations
[] Pension obligations understated (check footnotes)

Cash Flow

[] Persistent CFO < Net Income (low earnings quality)
[] FCF negative for 3+ years without clear growth investment story
[] Heavy reliance on asset sales in investing CF
[] Dividends paid from debt, not earnings

Analytical Workflow

Screen → Use ratio table above to flag outliers
Understand the business → Revenue model, customers, competitive position
Read financial statements → See references/financial-statements.md
Compute ratios → See references/valuation-methods.md
Value the company → DCF + comps + sector-specific multiples
Assess macro/industry → See references/macro-industry.md
Form a view → Bull/base/bear scenario with margin of safety

Related Skills

---name: fundamental-analysisdescription: > **Skill:** Fundamental Analysis | **Domain:** trading | **Category:** research | **Level:** intermediate---> **Skill:** Fundamental Analysis | **Domain:** trading | **Category:** research | **Level:** intermediate> **Tags:** `trading`, `research`, `fundamental`, `financials`, `valuation`, `moat`# Fundamental Analysis## Reference FilesLoad these when needed — do not pre-load all of them:| File | Load When ||------|-----------|| [references/financial-statements.md](references/financial-statements.md) | Analyzing income statement, balance sheet, cash flow, FCF, working capital, red flags || [references/valuation-methods.md](references/valuation-methods.md) | Computing or comparing valuation ratios, running DCF, comps, DDM, profitability/liquidity/leverage/efficiency ratios || [references/macro-industry.md](references/macro-industry.md) | Economic indicators, central bank policy, intermarket analysis, Porter's Five Forces, economic moats |---## Quick Ratio Reference### Valuation Ratios| Ratio | Undervalued | Fair | Expensive | Notes ||-------|-------------|------|-----------|-------|| P/E (trailing) | < 10 | 10–20 | > 30 | Compare to sector & growth rate || P/E (forward) | < 12 | 12–18 | > 25 | More predictive than trailing || PEG | < 1.0 | ~1.0 | > 1.5 | P/E ÷ EPS growth rate || P/S | < 1.0 | 1–3 | > 5 | Sector-dependent; SaaS can be 8–20× || P/B | < 1.0 | 1–3 | > 5 | Banks/financials: fair at 1–2× || EV/EBITDA | < 8 | 8–12 | > 15 | Best for capital-intensive businesses || EV/Revenue | < 1 | 1–3 | > 5 | Pre-profit companies |### Profitability Ratios| Ratio | Poor | Good | Excellent | Notes ||-------|------|------|-----------|-------|| ROE | < 10% | 15–20% | > 20% | Beware high leverage inflating ROE || ROA | < 2% | 5–8% | > 10% | Banks: 1–2% is normal || ROIC | < WACC | WACC+5% | > 15% | Value creation only if ROIC > WACC || Gross Margin | Sector low | 40%+ (tech) | 60%+ | Highly sector-specific || Operating Margin | < 5% | 10–20% | > 25% | Sector-adjusted || Net Margin | < 3% | 8–15% | > 20% | Sector-adjusted |### Liquidity & Leverage Ratios| Ratio | Weak | Acceptable | Strong | Notes ||-------|------|------------|--------|-------|| Current Ratio | < 1.0 | 1.5–2.0 | > 2.5 | < 1 = liquidity risk || Quick Ratio | < 0.7 | 1.0–1.5 | > 2.0 | Excludes inventory || Cash Ratio | < 0.3 | 0.5–1.0 | > 1.0 | Most conservative || Debt/Equity | > 2.0 | 0.5–1.5 | < 0.5 | Sector-adjusted || Debt/EBITDA | > 4× | 2–3× | < 2× | > 5× = distress risk || Interest Coverage | < 2× | 3–5× | > 5× | < 1.5× = danger zone |### Efficiency Ratios| Ratio | Poor | Good | Excellent ||-------|------|------|-----------|| Asset Turnover | < 0.5 | 0.8–1.5 | > 1.5 || Inventory Turnover | < 4 | 6–12 | > 15 || DSO (Days Sales Outstanding) | > 60 | 30–45 | < 30 || CCC (Cash Conversion Cycle) | > 90 days | 30–60 | < 30 (or negative) |---## Financial Statement Structure Overview```Income Statement → Profitability (what was earned)Balance Sheet → Financial position (what is owned/owed)Cash Flow Statement → Liquidity (actual cash movement)Key linkages: Net Income (IS) → Retained Earnings (BS) → Operating CF (CFS) CapEx (CFS) → PP&E change (BS) D&A (IS) → Added back in Operating CF (CFS) FCF = CFO - CapEx (the purest measure of cash generation)```---## Valuation Method Selection Guide| Situation | Best Method | Why ||-----------|-------------|-----|| Stable, predictable FCF | DCF | Intrinsic value based on fundamentals || Profitable, comparable peers exist | Comps (EV/EBITDA, P/E) | Market-derived, fast || Dividend-paying, mature company | DDM (Gordon Growth) | Dividend stream = value || Pre-profit high-growth | EV/Revenue, EV/ARR | No earnings yet || Asset-heavy (banks, real estate) | P/B, P/TBV, P/FFO | Assets = value driver || Acquisition / M&A context | EV/EBITDA + DCF | Enterprise-level view || Cyclical industry | EV/EBITDA on normalized earnings | Avoid peak/trough distortions |> **Rule**: Always triangulate — use 2–3 methods and compare implied price ranges.---## Red Flags Checklist### Earnings Quality- [] Revenue growing faster than cash from operations- [] Accounts receivable growing faster than revenue (channel stuffing)- [] Gross margin declining while revenue rises- [] Frequent non-recurring "one-time" charges- [] Auditor changes or going-concern opinion- [] Earnings beat only due to tax rate or share count changes### Balance Sheet- [] Goodwill > 30% of total assets (acquisition risk)- [] Inventory buildup without revenue growth- [] Rising short-term debt to fund operations- [] Pension obligations understated (check footnotes)### Cash Flow- [] Persistent CFO < Net Income (low earnings quality)- [] FCF negative for 3+ years without clear growth investment story- [] Heavy reliance on asset sales in investing CF- [] Dividends paid from debt, not earnings---## Analytical Workflow1. **Screen** → Use ratio table above to flag outliers2. **Understand the business** → Revenue model, customers, competitive position3. **Read financial statements** → See `references/financial-statements.md`4. **Compute ratios** → See `references/valuation-methods.md`5. **Value the company** → DCF + comps + sector-specific multiples6. **Assess macro/industry** → See `references/macro-industry.md`7. **Form a view** → Bull/base/bear scenario with margin of safety---## Related Skills- [Market Intelligence](../market-intelligence.md)- [Equities Trading](../equities-trading.md)- [Cross Asset Relationships](../cross-asset-relationships.md)---

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