Below are key principles of fundamental analysis:

1. Economic Factors

A company’s performance is often linked to the broader economic environment. For instance, businesses dependent on consumer spending may be influenced by changes in unemployment rates or household income. By analyzing indicators like GDP growth, inflation, and job data, investors can gauge the overall strength of the economy.

2. Financial Statements

These documents reveal a company's financial health. The balance sheet outlines what the company owns and owes at a given moment. The income statement details revenues and expenses over a specific timeframe. Meanwhile, the cash flow statement tracks how cash enters and exits the business.

3. Earnings

Earnings—or net income—represent a company’s profit, calculated by subtracting expenses from revenues. They are a critical measure because they influence both share prices and dividend payouts. If earnings exceed expectations, the stock price may rise.

4. Valuation Ratios

These ratios help determine if a stock is fairly priced. The price-to-earnings (P/E) ratio, for example, compares a company’s share price to its earnings per share (EPS). A high P/E might suggest the stock is overpriced, while a low P/E could signal it’s undervalued. Other useful ratios include the price-to-book (P/B) and price-to-sales (P/S) ratios.

5. Industry Analysis

Assessing a company’s industry is also important. This includes examining market demand, competitive dynamics, and regulatory conditions. Investors may look at growth opportunities, market risks, and the industry's overall stability when evaluating a business.