Getting Started: Fundamental Analysis

The income statement subtracts expenses from revenue to get the company's income or profit . The balance sheet compares a company's assets against its liabilities and stockholders' equity (they balance each other, hence the name of the statement). Lastly, the statement of cash flows breaks down money taken in and doled out by its purpose (for example, operating, financing, or investing activities).

Financial statements are integral to fundamental analysis since they provide you with the numbers you'll make use of in your analysis.

But numbers aren't everything in fundamental analysis. In addition to quantitative performance measures (like the numbers you'll find in the statements), companies provide investors with a wealth of qualitative information as well. In every public company's annual report , management has an opportunity to explain their performance (or lack thereof) over the past year as well as plans for the future.

This management communication shouldn't be taken lightly. It could provide you with an understanding of why numbers were the way they were and what to expect in the future ("Talking to Management, Part 1: The Big Questions, Part 2: Gleaning Financial Subtleties").

What Is Performance?

When you hear about a company's fundamental performance, its stock price doesn't really enter into the equation. In the context of fundamental analysis, performance refers to the efficiency with which a company moves toward its goals. The degree of that performance is what we use to categorize a company as healthy (investment potential) or unhealthy (investment poison).