Fundamental analysis is not as complicated as many people think. The information investors need is widely available online, and the key principles are easy to grasp. In this article, we explain what you need to know to form your own opinion, instead of relying solely on others’ interpretations.
While a degree in economics can help you understand complex company balance sheets and read between the lines, it is not necessary to perform basic fundamental analysis or decide whether to buy or sell a stock.
Timing your purchases or sales should always consider chart patterns and market signals. You can find more on this in our series of articles on technical analysis. Fundamental analysis, however, serves a different purpose: it helps you make a preliminary selection. Which stocks are particularly promising for medium- to long-term investments? And when might it be wise to sell? Only the best stocks should remain in your portfolio. Once a stock no longer fits, fundamental analysis will signal this through a few key indicators, which we will explain here.
If fundamental analysis identifies a stock that is no longer worth holding, it may also be wise to tighten wide stop-loss levels. This lets your top-performing stocks—those you plan to hold longer—recover during minor corrections, while giving you flexibility to exit quickly if needed.
Let’s start with an overview of the fundamental analysis tools we will cover in this article:
Fundamental analysis – these factors tell you what you need to know:
When experts analyse a company from a fundamental perspective, it can feel like they deliberately use complex language and obscure abbreviations. In some cases, that’s true. Analysts aren’t always keen to give up their authority when interpreting company figures.
The good news is that if your goal is to focus on the fundamentals that actually matter to you as an investor, things become much simpler. You don’t need to get lost in jargon to determine whether a stock is solid and has strong long-term prospects.
A basic understanding of the following factors is usually enough:
- Industry and business model – Understand what the company does and how it earns money.
- Internal industry comparison – See how the company stacks up against competitors.
- Dividend and dividend yield – Check if it pays consistent dividends and the yield it offers.
- Revenue and profit growth – Look at how the company’s sales and profits have evolved over time.
- Earnings per share (EPS) and price-to-earnings (P/E) ratio – Gauge profitability and valuation.
- Analyst forecasts – Consider expert projections for revenue, profits, and market trends.
These elements provide a clear foundation for evaluating a company’s financial health and its potential as a long-term investment.
Industry and business model: Do as Warren Buffett does
Legendary investor Warren Buffett often shares one simple rule. Through Berkshire Hathaway, he only buys shares in businesses whose models he understands and whose long-term prospects he trusts. You can follow the same principle—no exceptions. A degree in economics isn’t necessary to apply it.
The core idea is simple. Never buy shares just because their price is rising or because “everyone else” seems to be buying. You can’t assume that others truly understand what they’re investing in. Too often, this mindset leads investors to jump on a bandwagon without knowing what’s really driving it.
That doesn’t mean you should avoid start-ups in complex fields like biotech, robotics, or space exploration, or limit yourself to traditional industries like food or car manufacturing. Instead, take advantage of the wealth of publicly available information and make the effort to understand what the business actually does. If you enjoy strategy and calculated risks in other areas of life, you might even unwind during breaks by trying games at ReveryPlay Casino, where you can test your decision-making skills in a fun setting.
Only then can you form your own judgment about whether a company is likely to grow and stay profitable. And here’s the most important rule: when it comes to your money and your portfolio, your opinion is what counts.
Once you’ve analysed a company and believe it has strong future potential and room for profit growth, its shares belong on your list of possible investments. From there, you can move on to the next step of fundamental analysis.
The internal industry comparison: the market leader does not have to be the first choice
Take a closer look at the industry where your potential investment operates. Who are the other players? Who are the direct competitors? And based on what you know, can the company you’re considering hold its ground? Sometimes, a closer internal industry comparison reveals another company you hadn’t thought about—one that could outperform your first choice. In that case, it makes sense to replace the weaker candidate with the stronger one.
For example, suppose you believe chip manufacturers have strong long-term prospects and you’ve shortlisted DAX-listed Infineon for your portfolio. The next step is to scan the sector for alternatives. You might find a stock that seems even more promising.
Many investors assume that the market leader is always the safest or best option. That’s misleading. Market leaders may have already hit their growth peak, while smaller, innovative competitors steadily gain market share. In these cases, the smaller companies deserve closer attention.
To compare companies meaningfully, you need some analytical tools, which we’ll cover soon. But it helps to start simple. Take a look at the price charts of Infineon and other major semiconductor stocks over the last one or two years. In investing, the overall trend matters far more than short-term fluctuations.
Alongside Infineon, you could consider Dialog Semiconductor, Intel, and Advanced Micro Devices (AMD). Over two years, Infineon performed well, but AMD clearly outperformed the rest. Does that automatically make AMD the better investment? Not so fast.
Your final decision should always be supported by chart analysis. For instance, while AMD outperformed other chip stocks until early 2017, its price has largely moved sideways since then. That alone isn’t a reason to rush in.
Performance comparisons are useful, but they’re not enough on their own. Before making any decisions, you need to examine the company’s most important fundamental factors. Let’s start with dividends.
Dividend yield: an extra that should not be underestimated
Dividends are one way a company shares its profits with shareholders. After all, owning a stock means owning part of the business. In many countries, companies pay dividends once a year after their annual general meeting. In the United States, quarterly payouts are more common.
So, can the size of a dividend decide whether you should buy a stock? Should you automatically pick the company with the highest dividend yield in a sector, like Intel in our example? Not quite. Dividend yield is just one piece of the puzzle. It can add an extra source of return and provide a steady income for long-term investors. But it’s important to read the numbers carefully. A missing dividend doesn’t automatically mean a stock is bad, and a high dividend yield isn’t always good news either.
Why’s that? Fast-growing companies often reinvest profits into expanding their business, innovating, or gaining market share. They might not pay dividends now, but that doesn’t mean they won’t reward shareholders later. These companies can sometimes deliver higher long-term gains than firms that already pay out big dividends.
Of course, the reason for skipping dividends matters. If a company consistently loses money, it may not deserve a spot on your watchlist. Only consider non-dividend payers if they are growing fast and have a clear path to profitability. Avoid companies whose best days are behind them.
Dividend yield alone doesn’t tell you which semiconductor stock is the best choice. To get a clearer picture, we also need to examine profit growth. Fast and consistent growth in revenue and profits usually suggests the company can continue expanding and that its stock price may rise over time.
It’s not about total revenue. The market leader isn’t automatically the best option. What matters is momentum—how steadily revenues grow year after year. Let’s compare our four semiconductor stocks over three years, with analyst forecasts for a fourth year added.
Some interesting patterns emerge. Intel is huge but growing slowly. Infineon shows consistent growth. AMD had a sharp revenue drop in 2015 but has been making a strong comeback since.
High revenue doesn’t automatically mean high profits. We need to look at efficiency and margins. Using pre-tax profit as a reference, we can compare results more clearly.
Once again, the market leader isn’t always on top. Looking at forecast profits for 2018, Infineon shows strong growth with no declining years. AMD also shows momentum but only recently returned to profitability after losses. Its 2018 forecast still needs to be proven.
Based on revenue and profit trends, Infineon starts to stand out. But strong operations alone don’t guarantee the best potential stock. To judge price growth potential, profits need to be evaluated relative to the current share price. If too many investors are already on board, the stock could be fully priced.
And that brings us to the next step in fundamental analysis.
Earnings per share & price/earnings ratio
Let’s take a look at earnings per share (EPS). Keep in mind, EPS growth doesn’t always match total profits perfectly. Things like share buybacks or capital increases can distort the picture. Buybacks concentrate profits across fewer shares, while new share issues spread profits thinner.
Looking at the numbers, Infineon seems relatively “expensive” compared to its peers. Its price/earnings (P/E) ratio currently sits at 25. But what does that actually mean? Simply put, the P/E ratio shows how many times the company’s annual earnings you are paying for when buying the stock. For example, a P/E of 25 means you are paying 25 times what the company earns per share in a year.
So, what can we learn from this? Dialog Semiconductor and Intel appear much cheaper than Infineon if we judge purely by P/E. But the P/E ratio isn’t the full story. To make a smart choice, we also need to look at expectations for the future.
Analyst forecasts: never let anyone else make the decision for you!
Analysts dig deep into companies and produce detailed reports. At first glance, this might make you think you don’t need to do your own research. After all, the experts have done it all for you. But relying only on analysts can be risky.
Here’s why: analysts aren’t crystal balls. Their profit estimates, price targets, and ratings are based on assumptions, which means different analysts can reach very different conclusions. Blindly following the most optimistic forecast can backfire, because sceptical analysts often have solid reasons for caution.
That said, analyst opinions can be useful—they give you context and a sense of what the market expects. The key is to use their insights to inform your thinking, not to replace your own judgment. In the end, your own analysis and understanding should guide the investment decision.
Conclusion: Select the overall winner and wait for the technical chart entry opportunity
Let’s wrap up what we’ve learned. A simple scoring system can help: give four points to the strongest company in each category and one point to the weakest. When we do that, Infineon comes out on top overall. It looks like the best pick for investors aiming for a longer-term investment with moderate risk.
If you’re chasing a higher-risk, potentially higher-reward opportunity, AMD is worth a look. Its revenue and profit growth momentum is impressive, but turnaround stocks can swing both ways—and that risk is real.
For anyone focused on investing rather than aggressive speculation, Infineon seems like the most sensible choice. But does that mean you should buy it right now? Absolutely not.
At this stage, you’ve only determined that Infineon is the most attractive candidate within the semiconductor sector from a fundamental perspective. The timing of the actual purchase should come from technical analysis—chart patterns, market signals, and trend confirmation. Even a fundamentally strong stock can lose value if bought at the wrong moment.
The key is patience. Be ready, watch the charts, and wait for the right entry point. Don’t rush—smart timing often makes the difference between good and great returns.
