How to analyze a company before you invest
What to calculate, how to interpret each indicator and what values should raise a red flag — with sector benchmarks and a real-world example.
The basic vocabulary: a few words you need
Before indicators and formulas, you need a few words. They're the building blocks everything else is made of — once they're clear, nothing that follows will intimidate you.
A piece of a company. If the firm is divided into a million pieces and you own one, you're the owner of one-millionth of the business — you're not just looking at a chart, you become a co-owner.
All the money coming in from sales, before any expenses. What the company took in, not what it earned.
What's left after you subtract everything: costs, salaries, interest, taxes. The "bottom line" — the money the business actually earned.
Everything the company owns that has value: factories, inventory, cash in the bank, brands, patents.
Everything it owes: loans, unpaid bills, obligations to suppliers.
Assets minus liabilities — what would be left for shareholders if the firm sold everything and paid off its debts. "Net worth." Half of all indicators rest on this one word.
That's it. And if you forget an abbreviation along the way, the list of key abbreviations is waiting at the bottom of the page — a quick reminder you can come back to anytime.
A good company, at the right price: the two checks
A serious analysis answers both. Either one alone isn't enough.
The quality of the business: profitability, debt under control, a real competitive advantage, competent management.
What you pay for what you get. An excellent company bought too expensively can be a bad investment — and a mediocre one, at a very low price, a good one.
The three financial statements
Every analysis starts from the documents the company publishes. There are three reports, each answering a different question — and you don't need to be an accountant to get the essentials. For each one: what it is, what to look at, what's a good sign and what's a cause for concern.
The balance sheet shows what the company owns and owes at a given point in time — assets, liabilities and equity (the difference between the first two). What to look at: is equity positive and growing year after year? Are liabilities growing faster than assets?
Good sign: solid equity, growing steadily.
Cause for concern: liabilities ballooning year after year while equity stagnates — the company is growing on borrowed money.
The income statement shows how much the company sold and how much was left after costs, over a quarter or a year. What to look at: do revenue and profit grow steadily over several years, or do they jump around erratically?
Good sign: revenue of 100, 112, 125 million over three consecutive years, with profit growing at the same pace.
Cause for concern: profit doubled from last year, but it came from a one-off event — selling a factory, winning a lawsuit. It won't repeat next year.
The cash flow statement shows the actual money that came in and went out. Accounting profit can be shaped by recording methods; cash, much less so — which is why analysts read this report the most closely.
Good sign: positive operating cash flow year after year — the business genuinely generates cash.
Classic red flag: a pretty accounting profit, but negative operating cash flow for several years running — on paper it earns, in reality the cash goes out.
Where to find them: on the company's investor relations page; for U.S. companies, in the public EDGAR database run by the regulator (SEC) — the annual report (Form 10-K) and the quarterly report (Form 10-Q). Broker platforms usually aggregate them, with the indicators already calculated.
How to read an indicator correctly
No threshold is universal. Every indicator should be compared along three axes: against the sector average, against the company's own history, and against direct competitors. Sector averages don't need to be calculated by hand — the broker's platform usually displays them alongside the company's indicators, and the data is public. The figures below are indicative benchmarks, not fixed standards.
What you pay for what you get
These indicators answer a single question: is the price the market is asking today high or low relative to what the company produces? A good business can be a bad investment if you overpay for it, so these are the filter you pass through before buying. The four most commonly used are below.
The best-known valuation indicator. It tells you how many years of profit, at today's level, it would take to add up to the price you paid for a share. If a share costs 100 lei and the company earns 5 lei per share a year, the P/E is 20 — you're paying the equivalent of 20 years of current profit. You'll see it in two forms: "trailing" (on actual profit from the last 12 months) and "forward" (on estimated profit for the next 12 months).
- 1You calculate the P/E on actual profit from the last 12 months (the "trailing" version).
- 2You compare it with the sector average.
- 3You compare it with the company's own history over several years.
- 4You also check the "forward" version: if it's much lower, the market is expecting profits to grow.
| Sector | Typical P/E |
|---|---|
| Big banks | ~14 |
| Utilities | ~20 |
| Grocery retail | ~25 |
| Software | ~37 |
| Semiconductors | ~49 |
Sector benchmarks: Damodaran, NYU Stern, Jan. 2026. S&P 500 historical average: ~15-16.
For example, a mature company like Coca-Cola typically has a moderate P/E, while a fast-growing one like Nvidia has had periods with a much higher P/E — investors were paying up precisely for the expected growth.
A low P/E doesn't automatically mean "cheap" — it can hide declining profits (known as a "value trap"). It can't be calculated for companies with losses.
Compares the price with the company's "paper value": what would be left for shareholders if the firm sold everything and paid off its debts — a kind of liquidation auction. A P/B of 1 means you're paying exactly what's on the balance sheet; a P/B of 3, three times that.
It works well for banks and companies with physical assets (where the balance sheet reflects real value). It's misleading for software, where value comes from brands and people, which don't show up on the balance sheet. Benchmarks: banks ~0.8-2; tech 5-50.
For a technology company, a high P/B doesn't mean "expensive" — the balance sheet simply understates its value.
Addresses a weakness of the P/E: two firms with the same profit can carry very different levels of debt. This indicator is like buying the whole business — you take on its debt too, the way buying a house means taking on the remaining mortgage as well. That way, two companies become properly comparable.
Below 10 is often viewed favorably. Benchmarks: oil ~5, utilities ~14, software ~25.
It isn't used for banks (where interest is part of the core business) and it ignores capital spending on equipment.
The P/E judges the price, but it doesn't account for how fast the company is growing. PEG corrects that: a company that looks expensive by P/E can actually be reasonable if its profits are growing quickly.
Close to 1 = fair valuation; below 1 = possibly cheap; above 1 = possibly expensive. Concept developed by Mario Farina (1969), popularized by Peter Lynch (1989).
The threshold of 1 is a rule of thumb, not a law. It depends on growth estimates, which tend to be overly optimistic.
How efficiently it turns resources into profit
If valuation indicators say how much you're paying, profitability indicators say how well the company turns resources into profit. A business can have huge revenue and still be inefficient; these indicators show the difference.
Answers the question every shareholder asks: for every dollar put into the company, how much profit does it generate in a year? It's the favorite indicator of many quality-focused investors — but also one of the easiest to inflate, as you'll see below.
The DuPont breakdown shows where it comes from: ROE = net margin × asset turnover × equity multiplier.
| Sector | Typical ROE |
|---|---|
| Regional banks | ~10% |
| Grocery retail | ~13% |
| Whole market | ~17% |
| Software | ~30% |
| Semiconductors | ~31% |
ROE can be inflated by debt and by share buybacks, which shrink equity. A spectacular ROE always calls for checking the source — see the Apple example.
How much profit the company squeezes from every dollar of stuff it owns — factories, inventory, cash — regardless of whether it was bought with equity or with debt. That's exactly why it's harder to game than ROE.
Above 5% is generally good, above 20% excellent. It depends a lot on the sector: software and consulting often exceed 10-20%, heavy manufacturing sits at 2-5%, banks at 1-3% (they have huge assets from loans). A large gap between ROE and ROA tells you the high ROE comes from debt, not efficiency.
How much money is left as profit from every dollar sold, after all costs. A margin of 10% means that out of every 100 lei in sales, 10 remain as profit.
Benchmarks vary widely by industry: grocery retail ~1-2%, software ~25%, semiconductors ~30%. A 5% margin is excellent for a supermarket and weak for software — which is why it's only compared within the same field.
Test the indicators — a guided exercise
Now that you know what they mean, try them on real numbers. The fields come pre-filled with Apple's figures from the 2025 annual report — hit "Calculate" and see the interpreted result. Then change the values however you like, to get a feel for how each indicator moves.
Above the historical average — the market is paying for expected profit growth.
The figures come from Apple's annual report (Form 10-K, fiscal year 2025); the thresholds are indicative and vary by sector.
How fragile the company is
Profit doesn't help if a company collapses under debt at the first sign of trouble. These indicators show how much the firm depends on borrowed money and whether it can cover its short-term obligations.
How much of the company is financed by borrowing versus the owners' own money. Like buying a house: a small down payment and a big loan = high leverage; a lot of own money = solidity.
| Sector | Typical |
|---|---|
| Software/services | 0.2-0.7 |
| Heavy manufacturing | 1.0-2.0 |
| Utilities | 1.5-2.5 |
Banks look "leveraged" because customer deposits are recorded as liabilities — they're assessed through capital indicators, not through this ratio.
How many times over the company can pay its interest out of profit. Like checking how many times your salary covers your rent: five times over = you sleep easy; barely covering it = any weak month puts you in trouble.
Below 1 = risk of insolvency · below 1.5 = high risk · above 2 = minimally healthy · above 5 = solid. Loan agreements frequently require around 3.
Liquidity: the current ratio and the quick ratio
The current ratio (current assets ÷ current liabilities) between 1.5 and 3 is healthy; below 1 is a warning sign. The quick ratio, which strips inventory out of the calculation, is good around 1. Watch out, though: retail works fine even below 1, and subscription companies often have low ratios because of revenue collected in advance — not necessarily a problem, just the way the business is built.
What it's actually worth: valuation
The indicators so far compare the company with its price and with other firms. Valuation takes a step further: it tries to answer what the business is actually worth, independent of what the market says today. Price is what the market is asking now; value is an estimate of what it should cost.
Discounting future cash flows. Rigorous, but very sensitive to assumptions.
The discounted dividend model, for consistent dividend payers.
Benchmarking against similar companies in the same sector.
Two slightly different assumptions can produce completely different values for the same company. The result is only as good as the assumptions behind it.
What the numbers don't show
The numbers tell you what happened; the qualitative factors tell you whether it can happen again. These are the things that don't show up in a table, but decide whether a good company stays good. Four of them deserve your attention every time.
First: a durable competitive advantage — known in English as a "moat," the defensive trench around a castle, a concept popularized by Warren Buffett and Charlie Munger. The question is simple: what stops a well-funded competitor from copying the business and stealing its customers? Good answers sound something like this: a brand people pay more for (Coca-Cola), high switching costs — it would be expensive or complicated for the customer to leave for a competitor, the network effect — the service becomes more valuable with every new user, or economies of scale — the giant produces more cheaply than anyone entering the market can. A company with no such moat can have gorgeous numbers today and devastating competition tomorrow.
Second: the quality of management. "Capital allocation" sounds abstract, but it means something very concrete: what does leadership do with the money it earns? Does it reinvest intelligently in growth, return it to shareholders at the right moments — or squander it on expensive acquisitions that bring nothing? The track record of past decisions is visible in past years' reports. Just as important: honesty in communication — management that admits its mistakes in letters to shareholders is more credible than one that always finds an external culprit.
Third: its position in the industry. Professor Michael Porter of Harvard formulated the classic "five forces" framework that determines how much profit a company can retain from its industry: how intense existing competition is, how easily new players can enter, whether substitute products exist, how much bargaining power suppliers have and how much buyers have. You don't need to run an academic analysis — but at least ask yourself: is this an industry where everyone competes on price, or one where a few stable players quietly share the market?
Fourth: company-specific risks. Every company discloses these itself in its annual report, in the risk factors section — it's worth reading. Typical ones: dependence on a single product or customer (if half of revenue comes from one source, any problem there hits everything), regulatory changes, and new technologies that could make the product irrelevant.
The role of earnings reports and news
Analyzing a company isn't a snapshot taken once and set aside. The numbers change, and the price reacts not only to fundamentals but also to new information that keeps coming out. Four things are worth understanding here.
Listed companies publish their results once every three months — moments called "earnings." That's when the indicators on this page — P/E, margin, ROE — get recalculated with fresh data. For U.S. companies, the quarterly report is called Form 10-Q, and the annual one 10-K. Reporting dates are known in advance — you'll find them in the economic calendar, where company reports (the earnings calendar), central bank meetings and key economic indicators are scheduled.
Second, and less intuitive: expectations matter more than the number itself. The price doesn't react to the absolute result, but to the difference from what the market expected — the analyst consensus. A company can report record profit and still see its stock fall, because the market was expecting even more. Conversely, a company with losses can rise if the loss is smaller than the market feared.
Third: not everything that moves the price is scheduled. Alongside calendar events, unexpected ones also happen — a lawsuit, an executive's resignation, a geopolitical event. You can't anticipate these; you can only assess them when they happen, with the same tools.
And fourth, perhaps the most valuable: noise or signal? After a weak report, a stock can drop sharply. This is where fundamental analysis proves its worth: it helps you tell apart a momentary reaction — a number below expectations, but with fundamentals intact — from a real signal, where the fundamentals have actually deteriorated: shrinking margins, an eroded advantage, rising debt. The difference isn't decided by how much the price fell, but by retracing the steps in this guide. The market's immediate reaction is often emotional and overdone in both directions; analysis is what filters it out.
The price chart: what accounting doesn't tell you
Everything you've read so far — financial statements, indicators, earnings reports — answers the questions "what to buy" and "at what price." But there's a second major school of analysis that looks at something entirely different: the price chart.
Technical (or chart) analysis studies how the price has moved over time — trendlines, levels the price has bounced off in the past, patterns that repeat — and is used mainly to choose the timing: when to enter, when to wait, when a move looks like it's about to reverse or continue. The two approaches don't exclude each other; in practice they complement one another: fundamental analysis tells you what's worth buying, chart analysis helps with timing. And the moments where a price move reverses or continues are, more often than not, decided right there on the chart.
An example from our own practice: in the article "When to Invest in the Stock Market" we identified, based on chart analysis, a favorable moment to enter the market — followed afterward by a period of growth. Past examples don't guarantee future results, but they show how the tool is used.
Technical analysis is a big topic, with its own rules and limits, and deserves its own dedicated treatment — we'll cover it in a separate piece, and we teach it in the most detailed and applied way in our courses.
Where to start your analysis
There are two legitimate ways to start. Top-down starts from the top: you look first at the economy (growth, interest rates, inflation), pick the sectors favored by that context, then the best companies within them. Bottom-up starts the other way around, directly from the company — you look for good businesses at reasonable prices, regardless of the broader context.
Layered on top of these approaches are two classic philosophies: value investing (Graham — you look for companies trading below their intrinsic value) and growth investing (you look for fast growth and accept paying more for it). In practice, most analysts combine elements of both.
The checklist before you invest
The steps a disciplined investor follows, in order. Each step builds on the chapters above.
- 1Understand what the company does: how it makes its money, who its customers are and what protects it from competition.
- 2Open the financial statements — the annual report (Form 10-K) is free on EDGAR — and look at revenue, net profit and operating cash flow.
- 3Check the 3-5 year trend: do revenue and profits grow steadily, or do they jump around erratically from one year to the next?
- 4Measure profitability: calculate ROE, ROA and net margin, then compare them with the company's sector average, not with other industries.
- 5Check solidity: is debt within the sector norm? Does operating profit cover interest at least twice over? Can the company pay its short-term bills?
- 6Judge the price: compare P/E, P/B, EV/EBITDA and PEG with the sector average and with the company's own history.
- 7Compare the company with its direct competitors, not with the market in general — a supermarket is compared with supermarkets, not with software firms.
- 8Estimate what the business is actually worth and buy only if the price leaves you a margin of safety below that estimate.
- 9Write down your reasons for the decision on paper. When the market gets turbulent, your notes keep you anchored in the cold analysis you did, not in the emotions of the moment.
Example: putting the analysis together
Educational example — not a recommendationTheory clicks once you apply it. Below we follow how someone thinks when analyzing two very different companies, using the same four indicators, in the same order for both — net margin, ROE, ROA, P/E — so you can compare them easily. One note: these four indicators are the quick-orientation version, enough for a first impression; for a real decision you'd go through every step in the checklist.
We start with the first question from the guide: is it a good business? Net margin: nearly 27% — out of every dollar taken in, more than a quarter stays as clean profit. Very high for a company that also sells a lot of physical products. First checkmark.
Moving on: ROE tops 150% — a figure that seems unbelievable. And here the alarm from chapter 06 goes off: Apple has bought back massive amounts of its own shares for years running, which shrank its equity to around 74 billion dollars — small for a company of this size. The small denominator inflates the result. So we check ROA, which can't be fooled by operations like that: around 31%. Conclusion: the efficiency is real and very high, but the ROE figure, taken on its own, would have overstated the story.
Second question: how much are you paying? Earnings per share came in at 7.46 dollars; at around 210 dollars, P/E works out to around 28 — above the historical average. You're paying up, for the growth the market still expects. And what doesn't show up in the numbers? A clear durable advantage — the ecosystem users find hard to leave — but also a concentration risk: the iPhone brings in roughly half of revenue.
The bottom line — not "buy" or "don't buy," but: an excellent business, at a price that assumes it will keep growing. Now you know exactly what you're getting and what you're betting on.
Same framework, same indicators, same order — on a completely different type of company. This is where the page's central lesson shows most clearly.
Net margin: net profit of 58.5 billion on revenue of roughly 178 billion dollars about 33% — even higher than Apple's. But at a bank, margin reads differently: their "product" is money, and real profitability is judged through the next two indicators.
ROE: 18%. After Apple's dizzying figure it looks modest — but for a bank it's solid, with the sector sitting around 10-13%. And unlike Apple, here the number isn't inflated: it's the real return on capital.
ROA: 1.4%. For Apple, a figure like that would have been catastrophic. For a bank, it's very good — banks work with enormous assets (loans made to customers), so profit relative to total assets naturally comes out small. Comparing the two companies on ROA makes no sense at all; each is measured against its own sector.
P/E: around 12, at the price at the end of 2024. Small next to Apple's 28 — and completely normal: the market doesn't expect explosive growth from a mature bank, so it doesn't pay up for it.
Two banking quirks: liabilities look enormous — but customer deposits are recorded on the books as liabilities; a bank's health is judged through capital indicators (CET1 around 15.7%, above requirements). And the steady dividend — 4.80 dollars per share in 2024 — is the sign of a mature business returning cash to shareholders.
What the contrast teaches you
There's no universal "good P/E" or "good ROE." A P/E of 12 is low for Apple and normal for a bank. An ROA of 1.4% is weak for tech and healthy for a bank. Analysis means comparing each company with its own sector, not anything with anything.
Quick reference: key abbreviations
If you're back on this page just to remember an abbreviation, here's the quick list. The full definition and formula are in the glossary.
| Abbreviation | Full name | What it shows, in short |
|---|---|---|
| P/E | price/earnings | What you pay for a year's worth of profit |
| EPS | earnings per share | Net profit divided by the number of shares |
| P/B | price/book value | Price relative to the "paper" value |
| EV/EBITDA | enterprise value / operating profit | Valuation neutral to debt |
| PEG | price/earnings adjusted for growth | Whether the price is justified by growth |
| ROE | return on equity | Profit relative to shareholders' money |
| ROA | return on assets | Profit relative to all assets |
| D/E | debt/equity | How much of the financing comes from debt |
| DCF | discounted cash flow | A method for estimating value |
| 10-K / 10-Q | annual / quarterly report | Where to find the official figures (U.S.) |
A few of the people who defined the field
The field of fundamental analysis has dozens of important names; four of them are worth knowing for any beginner, because their ideas show up throughout this page.
Benjamin Graham is considered the father of fundamental analysis and value investing. A professor at Columbia University, he published "Security Analysis" in 1934 — the book that turned picking stocks from intuition into a discipline — and later "The Intelligent Investor," written for the general public. The principle of the margin of safety comes from him: you buy below the estimated value, as a cushion for your own mistakes.
Warren Buffett and Charlie Munger ran Berkshire Hathaway together for decades and took Graham's ideas a step further: instead of mediocre companies at very low prices, excellent companies at fair prices. The emphasis on a durable competitive advantage — the "moat" from chapter 09 — comes from them.
Aswath Damodaran, a professor at the Stern School of Business (New York University), is the leading contemporary authority on valuation. Every year he publishes, for free, sector data and valuation models used by analysts around the world — including the sector benchmarks in this page's tables.
Michael Porter, a professor at Harvard, formulated the five forces framework that explains why some industries are structurally more profitable than others — the tool from the chapter on qualitative analysis.
Frequently asked questions
There's no "right" amount for everyone — you can start with just a few hundred dollars or euros. Consistency matters more than the initial amount. With small amounts, watch out for currency-conversion costs and fees, which weigh proportionally more. See the Start investing guide for the concrete steps.
It depends on the depth. A quick check with four indicators (net margin, ROE, ROA, P/E) takes a few minutes and gives you a first impression. A complete analysis — the three financial statements, the qualitative factors and a value estimate — takes a few hours and relies on every step in the checklist.
Fundamental analysis tells you what's worth buying and at what price, but not the timing. Many investors round it out with chart analysis to choose their entry points and with risk-management rules (diversification, position sizing). No method eliminates market risk — past performance does not guarantee future results.
On the company's investor relations page and, for U.S. companies, in the public EDGAR database run by the regulator (SEC) — the annual report (Form 10-K) and the quarterly report (Form 10-Q). Broker platforms usually aggregate them, with the indicators already calculated.
A serious analysis takes preparation
Let's be direct: doing fundamental analysis properly isn't simple for someone without a background in finance or accounting. That's exactly why many investors do it in ultra-simplified versions — looking at a single indicator, out of context — or do it wrong and draw false conclusions with total confidence. This page has given you the basics; if you want to go further in a structured way, we offer three paths: the financial education page for the broader fundamentals, investment courses for applied, step-by-step learning, and consultations if you'd rather talk through your specific questions with someone directly.
Put the analysis into practice
Open an investment account and analyze real companies, with up-to-date data from official reports.
This material is for educational purposes only and does not constitute investment advice or personalized guidance. The company examples are illustrative of the analysis methodology. Investing in financial instruments involves risks, including the loss of invested capital, and past performance does not guarantee future results.