When you’re choosing what to invest in, a key question to ask is: What should you look at to decide whether a company is worth your money? One approach is focusing on fundamental indicators—the metrics that show whether a business is profitable, stable, and positioned for growth. Here’s what fundamentals are, how they work, and how investors can use them to evaluate stocks.
What are fundamentals?
Fundamentals are financial and qualitative factors that reflect how a company is performing. These include key indicators such as earnings, cash flow, assets, liabilities, and competitive advantages. When these metrics are strong or improving over time, they may signal solid management, sustainable growth, or overall financial health. Investors analyze fundamentals to estimate what a company may be worth (i.e., its “intrinsic value”) and compare it to the current stock price, which can help make a decision about whether to invest. Looking beyond common reports can help you build a more complete picture of an investment’s potential.
Types of fundamentals
Here are some common types of fundamental indicators and what they reveal about a company.
Financial fundamentals
These show how well a company makes money:
- Revenues are the total amount a company earns from the sale of its products or services. Rising revenues may indicate growing demand or effective business expansion. Flat or shrinking revenues might indicate the opposite.
- Net income (or “earnings”) is the company’s profit after all expenses and taxes. It is a major driver of stock prices over time and a key indicator of profitability.
- Earnings per share (EPS) tells you the portion of a company’s net income for each share held by common stockholders. It can help tell you how profitable a company is.
- Profit margins show how much a company keeps from each dollar of revenue. Common types include gross margin, operating margin, and net margin.
- Cash flow measures how much cash a company generates and uses. Free cash flow (FCF)—cash remaining after expenses and investments—is particularly important for long‑term stability.
- Balance sheet strength includes an assessment of assets, liabilities, and shareholders’ equity. It reflects the company’s ability to meet financial obligations. This is often expressed by the formula that gives the balance sheet its name: total assets (what the company owns) minus liabilities (what it owes) plus shareholder equity (company’s net worth). Common ratios include:
- Debt-to-equity ratio shows reliance on debt
- Current ratio assesses the ability to cover short-term obligations
- Quick ratio measures how well a company can pay its short-term liabilities using its most liquid assets.
Valuation fundamentals
These help investors compare a company’s price to its fundamentals. Some common measures:
- Price-to-earnings (P/E ratio) shows how much people are willing to pay for one dollar of a company’s profits. It compares the stock’s current price to how much the company earns per share (EPS). This helps you see whether a stock is expensive or cheap compared to its past price or to other companies.
- Price-to-book (P/B ratio) compares a company’s market value to its net assets.
- Price-to-sales (P/S ratio) compares a company’s stock price to its revenues and tells the investor how much they are willing to pay for each dollar of the company’s sales.
Business and economic fundamentals
Not all fundamentals are purely numerical. Business and economic fundamentals include:
- A moat (competitive advantage) protects the company’s line of business from competitors and can include technology, brand power, patents, cost advantages, etc.
- Management quality describes whether the company has strong leadership, strategic decision-making, and consistent performance which can often translate into better long-term outcomes.
- Product innovation reflects a company's ability to create new products, improve existing ones, and stay competitive over time.
- Market share measures how much of an industry’s total sales a company controls.
- Industry trends and growth refers to whether a company may be facing tailwinds from an expanding industry environment or conversely, experiencing challenges from a shrinking industry environment.
How do you find a company’s fundamentals?
You can find a company’s fundamentals through publicly disclosed financial statements, including annual (10‑K) and quarterly (10‑Q) reports, as well as earnings calls and investor presentations. Research tools such as stock screeners and company analysis pages also provide quick access to revenue trends, earnings, valuation ratios, and other core data. You can also find a lot of this information with Fidelity’s research stock tools. These resources help clarify the fundamentals meaning by showing how each metric appears in real financial results. Most of this information is publicly available through:
- Investor Relations (IR) pages on a company’s website
- The SEC’s EDGAR database
- Finance websites
- Industry news and research reports
How to use fundamentals
When you use fundamental indicators, you’re practicing fundamental analysis. Fundamental analysis can be used to determine a company’s potential intrinsic value by looking at its earnings, revenues, cash flow, and other relevant data that could influence its stock price. This analysis could help you decide whether a company may be a potential investment.
Look at trends, not single numbers
A single quarter rarely tells the whole story. Instead, track each metric across several quarters or years. This helps you understand whether a company is moving in the right direction, holding steady, or facing headwinds.
Compare metrics within the same industry
Every industry has its own norms. Comparing fundamentals to industry peers helps you understand what “strong” or “weak” looks like for that specific sector.
Revenues
- What’s generally good: Steady or accelerating revenue growth in various business units
- What may be a concern: Flat or declining revenues
Net income
This is the company’s bottom-line profit.
- What’s generally good:
- Positive net income
- Consistent growth over time
- Stable or improving profit margins
- What may be a concern:
- Negative income loss
- Large, sudden drops
- Income that swings dramatically year-to-year
Earnings and EPS
Growing earnings suggest the company is profitable and managing expenses well, while shrinking earnings may signal operational challenges.
- What’s generally good:
- Consistent or growing earnings
- EPS increasing over time
- What may be a concern:
- Declining earnings across several periods
- EPS volatility or sudden drops
Profit margins
Tightening margins may mean rising costs or competitive pressures.
- What’s generally good:
- Margins that are stable or improving
- Margins above industry averages
- What may be a concern:
- Margins narrowing over time
Cash flow
Cash flow shows whether a company has enough money to reinvest in its business, pay down debt, or return value to shareholders.
- What’s generally good: Positive and growing free cash flow
- What may be a concern: Negative or shrinking free cash flow
Balance sheet strength
A healthy balance sheet can help a company weather difficult market conditions.
- What’s generally good:
- Assets growing faster than liabilities
- Reasonable debt levels in comparison to shareholder equity
- What may be a concern:
- Rising debt without rising income
- Liquidity ratios (like current ratio) trending downward
Valuation metrics: P/E, P/B, P/S
A high valuation doesn’t necessarily mean a stock price is bad, but it can mean the stock is priced for strong future performance—and may carry more risk if expectations don’t pan out.
- What’s generally good: Valuation metrics in line with or below industry peers when fundamentals are strong
- What may be a concern: Very high valuations without supportive fundamentals
Put fundamentals together for a full picture
Rather than relying on one number, combine multiple fundamentals to understand:
- Is the business growing?
- Is it profitable?
- Is it financially stable?
- Is it valued reasonably?
The stronger and more consistent the fundamentals, the more confident you may feel in the company’s long‑term potential.
Use fundamentals to align with your goals
Your investment strategy influences how you weigh each metric:
- Growth investors may prioritize revenue and earnings acceleration.
- Value investors often focus on valuation metrics and cash flow.
- Income investors may look for stable earnings and strong free cash flow to support dividends.
Looking for more indicators to make informed investing decisions? Try looking at technical indicators for more insights.