Start with what it sells. End with what is left.
- What it sells → revenue → margins → cash → debt, in order
- Rising revenue with falling margins is growth being bought
- Write down what has to be true before you buy
What this is about
Fundamental analysis asks a different question from anything in the previous chapter. Not "what has the price been doing" but "what does this business earn, how reliably, and what am I being asked to pay for it".
This lesson is the method. The three that follow go deeper into the numbers it uses. Throughout this chapter the worked example is Northwind Components, a fictional company — the figures are constructed so you can follow the arithmetic, and no real company is being discussed.
The order that works
Most people start with the share price. That is the wrong end. The price is the last thing you need, because it is the only thing you cannot understand without the others.
1. What does it sell, and to whom?
Before any number. A business you cannot describe in a sentence is one you cannot judge. If the answer is vague, stop — the numbers will not rescue you, and a confident-sounding story from somebody else is not a substitute.
2. Is revenue growing, and how steadily?
Northwind Components — revenue 2022 412m 2023 468m +13.6% 2024 541m +15.6% 2025 602m +11.3%
Growing, and consistently. Note that steadiness matters as much as the rate: a company alternating +40% and −15% is a different proposition from one compounding 12% a year, even if the average matches.
3. Does the revenue become profit?
Revenue is not money kept. Follow it down:
Northwind Components — 2025 Revenue 602m Gross profit 241m 40.0% margin Operating income 84m 14.0% margin Net income 61m 10.1% margin
Three margins, three questions. Gross margin asks whether the product itself is profitable. Operating margin asks whether the business around it is efficient. Net margin is what actually reaches the owners after interest and tax.
Track margins over years, not in isolation. Revenue rising while margins fall means growth is being bought — with discounts, or with costs rising faster than sales. That pattern is common and is easy to miss if you only read the top line.
4. Is the profit real cash?
Profit is an accounting figure and involves judgement. Cash is harder to argue with. If net income rises for years while free cash flow does not follow, that gap is the most important question about the company — and it is the one most often skipped.
5. What does it owe?
Debt is not bad. Debt that requires everything to keep going well is. The rough test: compare total debt against annual operating income. Debt of 2× operating income is ordinary; 8× means the business must perform to survive, and a bad year stops being a bad year and becomes a crisis.
6. Only now, the price.
Share price £34.00 Shares outstanding 40m Market cap £1,360m Net income £61m P/E 22.3×
You are being asked to pay about 22 times one year's profit. Whether that is reasonable depends entirely on steps 1–5, which is exactly why the price comes last.
The question that ties it together
What has to be true for this to be a good purchase?
At 22× earnings with 11% revenue growth, you are paying for growth to continue. Write that down. It converts a vague opinion into a claim that can later be checked — and checking it is the only way you ever learn whether your analysis was any good or you were simply in a rising market.
What this does not tell you
It does not tell you the shares will rise. A good business at too high a price is a bad investment, and a mediocre business at a low enough price can be a good one. Quality and price are separate judgements and both are required.
It does not tell you the market has missed something. Everything above is in public filings that thousands of professionals read. Concluding a company is obviously cheap should prompt "what do they know that I do not", not satisfaction.
It does not protect you from a fraud. These figures are what the company reported. Fundamental analysis assumes the numbers are honest, and the rare occasions when they are not are exactly when it fails hardest — see Spotting a pump.
It does not work on a timetable. Being right about a business and wrong for three years is common and feels identical to being wrong.
Where to see this in the app
Chart → Financials is steps 2 to 5 for any company: revenue, gross profit, operating income, net income, EPS, margins, debt and free cash flow, by year. It is the tab that lets you do this properly, and it is the least visited one.
Chart → Key stats carries market cap, P/E and the rest — step 6.
Earnings hub shows what was expected against what arrived, which is where step 2's steadiness either holds up or does not.
Chart → Analyst rating shows what professionals published. Read it after forming your own view, not before, or it is not your view.