Fundamental analysis describes the methodology used to establish a stock's value. The financial analyst or investor uses financial statements and information about the company. Fundamental analysis employs only those fluctuating variables relating to the company, such as cash flow, sales, earnings, debt, and dividends. Because fundamental analysis does not take the overall market into account, many financial analysts also use other qualitative and technical analysis methods and tools.
A client requests a portfolio review. The financial planner uses fundamental valuation tools to examine the investment holdings. She calculates the price-earnings ratio, the debt-equity ratio, the sales-equity ratio, and reviews the dividends collected from each stock. She uses only the information supplied by each corporation to determine whether each company's financial performance is on track to meet her client's suitability and investment objectives. She makes buy- and sell-recommendations based on fundamental analysis methods.