01Start with a goal and risk
Goal
Define what the money is for and in which currency. A home purchase in two years has different requirements from retirement far in the future.
Time and liquidity
Separate money for current needs and unexpected expenses. A volatile price may force you to sell at a loss when cash is needed.
Risk
Capacity to bear a loss concerns your finances; willingness to accept it concerns emotions. A long horizon does not guarantee a positive return.
02What are you buying?
Stock = company ownership
Returns depend on the business, purchase price and subsequent valuation. Dividends are optional. Shareholders may recover nothing in bankruptcy.
Bond = a loan
The issuer promises payments under the bond’s terms. Check creditworthiness, maturity and currency. A fixed-coupon bond’s price generally falls when required yields rise. Repayment depends on the issuer’s ability to pay.
Fund and ETF = a portfolio
A fund pools investors’ money. An ETF trades on an exchange and may track an index or be actively managed. A narrow sector ETF is not as diversified as a broad portfolio. Read its holdings, fees and risk disclosures.
03Understand the business model
Fundamental analysis examines what a company sells, how it earns money, the cash it generates and its risks. It then compares a possible business value with the share price. A good business can be a poor investment at an excessive price.
- Customer and product: who pays, for what and how often? Is revenue recurring?
- Competitive advantage: brand, scale, switching costs or network effects. Look for evidence in margins and customer retention, beyond management claims.
- Risks: dependence on one customer, supplier, country or product; competition, regulation and the economic cycle.
- Management and capital: does investment create value? Do acquisitions, share issuance and buybacks benefit existing shareholders?
04Read the financial statements
Income statement
Shows revenue, expenses and profit over a period. Check whether improvement comes from sales, margins or a one-off event.
Balance sheet
Shows assets, liabilities and equity on a particular date. Check cash, debt, maturities and obligations disclosed in the notes.
Cash flow statement
Shows actual cash flows from operating, investing and financing activities. Accounting profit is not the same as available cash.
Also read the statement of changes in equity, notes, risk disclosures and management discussion. Compare several years and matching periods. Quarterly, annual, trailing-twelve-month (TTM) and forecast earnings are different measures. Verify the report on the issuer’s investor-relations site or an official registry such as SEC EDGAR.
05Financial ratios explained
A ratio starts a question; it does not finish the analysis. Compare sector, period, currency and accounting basis. There is no universally correct P/E or safe debt level for every company.
| Measure | Calculation | Interpretation |
|---|---|---|
| P/E | Share price ÷ earnings per share (EPS) | Trailing uses the last 12 months’ earnings. Forward uses a forecast that may be wrong. With a loss, P/E is not a useful comparable valuation. |
| Operating margin | Operating profit ÷ revenue | Shows the share of sales left after operating expenses. Compare consistent definitions and similar businesses. |
| FCF | Operating cash flow − capital expenditure (capex) | A simplified definition of free cash flow. Check the issuer’s reconciliation, leases and share-based pay; FCF is not a uniformly defined accounting line. |
| Net debt / EBITDA | (Interest-bearing debt − cash) ÷ EBITDA | EBITDA is earnings before interest, tax, depreciation and amortisation, not cash. Also check maturities, currencies and interest. This ratio is usually unsuitable for banks. |
| ROIC | After-tax operating profit ÷ average invested capital | Helps assess capital efficiency. Definitions vary; capital-intensive businesses and banks need separate treatment. Compare with the cost of capital and past results. |
| Dividend yield | Annual dividend per share ÷ share price | A dividend can be cut. A high yield after a price fall may signal risk. Paying a dividend is not free additional wealth. |
06A worked example
Fictional company — classroom inputs only. Amounts cover one full year and are in millions of PLN, except the share price and per-share dividend. There are 10 million shares, unchanged during the year. These are not any issuer’s quotes or forecasts.
| Measure | Calculation | Result | What does it tell us? |
|---|---|---|---|
| Earnings per share (EPS) | 100 / 10 | 10 PLN | Share count matters: new issuance can dilute per-share earnings. |
| P/E | 200 / 10 | 20× | 20 times reported earnings, without an automatic cheap/expensive verdict. |
| Operating margin | 150 / 1,000 | 15% | 15 out of every PLN 100 of sales is operating profit. |
| FCF | 130 − 50 | 80 million PLN | Net income is 100 million, but cash after investment is 80 million. |
| Net debt / EBITDA | (300 − 100) / 200 | 1× | 1× does not eliminate risk: the repayment schedule still matters. |
| Dividend yield | 3 / 200 | 1.5% | Positive dividend income does not protect against a falling share price. |
Analytical conclusion: this example is profitable and generates cash. Assessing its price still requires growth prospects, margin durability, future investment and risks. Ratios alone do not support a decision.
07Price, value and assumptions
Price is what the market quotes. Value is an estimate built on assumptions. Multiples compare a company with similar businesses; discounted cash flow (DCF) brings future cash flows into today’s value. The result should be a range of scenarios rather than an apparently certain target price.
- A higher discount rate reduces the value of the same future cash flows.
- Higher growth may increase value, but usually requires investment and cannot accelerate without limit forever.
- For cash flows to the whole firm, use its cost of capital and bridge enterprise value to equity value. For equity cash flows, use the cost of equity. Keep the approaches consistent.
See how assumptions change the result
A simplified perpetuity: PLN 100 million available to shareholders next year, growing at 2% annually forever. This is a separate example, not a valuation of the fictional company above. Equity value = CF₁ / (r − g), where r is the cost of equity, g is growth, and r must exceed g.
| r | g | Equity value (million PLN) |
|---|---|---|
| 8% | 2% | 1,667 |
| 10% | 2% | 1,250 |
| 12% | 2% | 1,000 |
This is a mathematical demonstration without an issuer or target price. Constant growth and an infinite horizon are strong simplifications; a full model needs forecasts, reinvestment and risk analysis. A margin of safety is a buffer for mistaken assumptions, not a capital guarantee.
08Returns, costs and diversification
Total return includes price changes and distributions. Account for commissions, fund expenses, spreads, currency conversion and taxes relevant to your situation. Compare returns in the same currency and allow for inflation. Diversification reduces single-position risk but does not eliminate a market-wide decline.
Loss and recovery
−50% → +100%
PLN 100 falling by 50% becomes PLN 50. Returning to PLN 100 requires a 100% gain from the lower base.
Real return
5% − inflation 3% ≈ 1.94%
Exactly: (1 + nominal return) / (1 + inflation) − 1. This example excludes costs and taxes.
Compounding
10,000 → 26,533 PLN
Hypothetical 5% annually for 20 years, reinvested, without contributions, costs, tax or inflation. Actual returns fluctuate; 5% is not a forecast.
Common mistakes include following a rising price, treating a familiar brand as low risk, ignoring fees and confusing a business-quality rating with a buy recommendation. The number of funds does not show whether their holdings overlap. Leverage can magnify losses and force positions to close.
09Questions before a decision
- Can I explain in my own words how this business earns money?
- Have I checked the original report, period and metric definitions?
- Does profit growth translate into cash and per-share results?
- When does debt mature, in which currency, and can the company service it?
- What does the price already assume, and what would invalidate my analysis?
- What does a weaker scenario look like, and how much capital could I lose?
- Do I understand costs, taxes, liquidity and currency risk?
- Would this position duplicate an already large portfolio exposure?
Where can I find these topics in the Atlas?
- Stocks & indices — basic figures with dates and sources.
- Business Quality Ratings — business-model strength, independent of the share price.
- Global debt — debt, currency and maturity context, with explicit data coverage.
- Market commentary — analysis and historical context with publication dates.
Sources and further learning
The basics draw on educational resources from the SEC, Investor.gov and FINRA, and Aswath Damodaran’s NYU Stern lectures. Explanations and numerical examples were prepared for this guide. Linking these sources does not imply their endorsement of the Atlas.
- SEC · Beginners’ Guide to Financial Statements — new tab
- Investor.gov · Stocks — new tab
- Investor.gov · Bonds — new tab
- Investor.gov · Asset Allocation and Diversification — new tab
- Investor.gov · Understanding Fees — new tab
- Investor.gov · Compound Interest Calculator — new tab
- FINRA · Stocks and evaluating company performance — new tab
- NYU Stern · Aswath Damodaran · The FCFE Discount Model — new tab
- NYU Stern · Aswath Damodaran · Valuation — new tab