Fundamental Analysis — How to Evaluate a Company on the GPW

What Is Fundamental Analysis?

Fundamental analysis is a method of assessing a company's value based on its real financial condition, market position, and growth prospects. Unlike technical analysis, which focuses on price charts, fundamental analysis answers the question: how much is this business truly worth?

The goal is to find companies whose market price is below their intrinsic value. If a share is trading at PLN 50 but your analysis suggests it is worth PLN 70, you have a potential investment opportunity — a so-called margin of safety.

On the GPW (Warsaw Stock Exchange), fundamental analysis is especially valuable because the Polish market abounds with undervalued companies compared with Western exchanges. Indices such as mWIG40 and sWIG80 contain many hidden gems that a systematic investor can uncover through rigorous analysis.

Top-Down vs Bottom-Up

Top-Down Approach

Start with the big picture and drill down:

1. Macroeconomic analysis — state of the economy, GDP, inflation, NBP interest rates, PLN exchange rate
2. Sector analysis — which industries have the best prospects?
3. Stock selection — which company in the chosen sector is the best?

Bottom-Up Approach

Start with an individual company and assess it independently of macroeconomic conditions. You look for firms with strong fundamentals regardless of where the business cycle stands.

In practice, it is worth combining both approaches. Understanding the macro backdrop helps, but ultimately it is company quality that determines investment success.

Where to Find Data on GPW Companies

Companies listed on the GPW are required to publish financial reports under KNF (financial regulator) supervision. Key sources:

• ESPI/EBI system — official current and periodic reports (available on gpw.pl)
• Investor-relations (IR) pages of individual companies — annual reports, presentations, operational data
• Bankier.pl, StockWatch.pl, Biznesradar.pl — portals aggregating financial data
• Notoria Serwis — a professional database of Polish company financials

Reporting Calendar

GPW companies publish:

• Quarterly reports — within 60 days of the quarter's end
• Half-year reports — within 3 months of the half-year's end
• Annual reports — within 4 months of the financial year's end

Tracking the reporting calendar is essential — share prices often react sharply to results announcements.

Analysing Financial Statements

Income Statement (P&L)

Shows how much the company earned (or lost) in a given period:

• Revenue — how much the company invoices. Revenue growth is a good sign, but quality and recurrence also matter.
• Operating costs — the cost of doing business. Costs rising faster than revenue is a warning signal.
• EBITDA — operating profit before depreciation and amortisation. A popular metric for comparing companies with different capital structures.
• Net profit — the bottom line after all costs and taxes. This drives earnings per share (EPS).

Balance Sheet

A snapshot of assets and liabilities on a given date:

• Non-current assets — machinery, property, intangibles (patents, trademarks)
• Current assets — cash, inventories, receivables
• Equity — shareholders' funds; the difference between assets and liabilities
• Liabilities — short- and long-term debts

A healthy company should have a reasonable ratio of liabilities to equity. Excessive debt is risky, especially when interest rates are rising.

Cash-Flow Statement

The most important statement — it shows the actual movement of cash:

• Operating cash flow — cash generated by core operations. Should be positive and growing.
• Investing cash flow — spending on growth (CAPEX). Negative values are normal for expanding firms.
• Financing cash flow — share issuances, borrowing/repaying debt, dividend payments.

Golden rule: net profit is an opinion, cash flow is a fact. A company can show profits on paper, but if it does not generate cash, it has a problem.

Key Valuation Ratios

P/E (Price to Earnings)

The most commonly used valuation metric. It shows how much the market pays for PLN 1 of earnings.

Formula: P/E = Share price / Earnings per share (EPS)

Interpretation:

• P/E < 10 — potentially undervalued (or the market sees risks)
• P/E 10–20 — typical GPW valuations
• P/E > 20 — expensive, or strong earnings growth is expected

On the GPW, the average P/E for WIG20 oscillates around 10–14, making the Polish market relatively cheap compared with the S&P 500 (P/E typically 18–25).

P/BV (Price to Book Value)

The ratio of the share price to book value per share.

• P/BV < 1 — the share costs less than the company's net asset value (potential bargain)
• P/BV > 3 — the market values the company far above its asset base

On the GPW, many banking and commodity stocks trade below book value, which may signal opportunities or structural problems.

EV/EBITDA

Ratio of Enterprise Value to EBITDA. More universal than P/E because it accounts for debt.

Formula: EV/EBITDA = (Market cap + Net debt) / EBITDA

• EV/EBITDA < 6 — potentially cheap
• EV/EBITDA 6–12 — typical valuation
• EV/EBITDA > 12 — expensive

Dividend Yield

Annual dividend per share divided by the share price. On the GPW many companies offer 3–7 percent yields, which is attractive compared with deposit rates.

ROE (Return on Equity)

How much profit the company generates from shareholders' funds.

Formula: ROE = Net profit / Equity × 100%

ROE above 15 percent is an excellent result. Companies with consistently high ROE (e.g. Dino Polska, LPP) tend to be market favourites.

Debt-to-Equity (D/E)

Ratio of total liabilities to equity. D/E > 1 means the company carries more debt than equity.

Qualitative Analysis — Beyond the Numbers

Numbers are not everything. Effective fundamental analysis also considers qualitative factors:

Economic Moat

A term popularised by Warren Buffett. A moat is a durable competitive advantage:

• Strong brand — e.g. CD Projekt (Witcher/Cyberpunk), LPP (Reserved, Cropp)
• Economies of scale — e.g. Biedronka (Jeronimo Martins Polska), Orlen
• Switching costs — e.g. ERP systems from Asseco, Comarch
• Network effect — e.g. Allegro (more users = greater platform value)
• Licences and regulation — e.g. banks (KNF regulates market entry)

Management

Who is at the helm? Check:

• Experience and track record
• Does management hold company shares (skin in the game)?
• Stability — frequent management changes are a bad sign
• Strategy — is it clear and consistently executed?

Shareholder Structure

Many GPW companies have a dominant shareholder (Treasury, strategic investor). This can be both an advantage and a drawback:

• A stable shareholder provides predictability
• The Treasury may pursue political goals at the expense of minority shareholders
• A large free float ensures better liquidity

DCF Model — Advanced Valuation

The Discounted Cash Flow model is the most commonly used valuation method among professional analysts. It involves forecasting a company's future cash flows and discounting them to present value.

Simplified Steps:

1. Forecast free cash flows (FCF) for 5–10 years
2. Calculate terminal value — the company's value beyond the forecast period
3. Discount cash flows and terminal value using WACC (weighted average cost of capital)
4. Sum of discounted flows = intrinsic value of the company
5. Divide by the number of shares = intrinsic value per share

DCF is a powerful tool but requires many assumptions — a small change in the discount rate or growth rate can drastically alter the result. Treat it as one element of your analysis, not the only one.

Sector Analysis on the GPW

Banks (mBank, PKO BP, Pekao)

• Net interest margin (NIM) — the key profit driver
• Cost-to-income ratio (C/I)
• Non-performing loan ratio (NPL)
• KNF regulations and capital requirements

Commodity Companies (KGHM, JSW)

• Global commodity prices
• Extraction costs (AISC for copper, cash cost for coal)
• USD/PLN exchange rate (commodities priced in dollars)

Retail (Dino, LPP, CCC)

• Like-for-like (LFL) sales growth
• Network-expansion pace
• Gross and operating margins

Technology (CD Projekt, Asseco, LiveChat)

• Recurring revenue (SaaS, subscriptions)
• R&D spending
• Product pipeline

Practical Example — Analysing a GPW Company

Imagine you are evaluating a food producer listed on mWIG40:

Step 1: Revenue and Profits

• Revenue growing 10 percent year-on-year for five years — stable growth
• Net margin: 8 percent (above the sector average of 5 percent)
• EPS rising consistently

Step 2: Balance Sheet

• D/E: 0.3 — low debt
• Net cash (zero net debt) — strong position
• ROE: 18 percent — excellent

Step 3: Cash Flow

• Positive and growing operating cash flow
• Investing in new production capacity (negative investing cash flow)
• Regular dividend payments

Step 4: Valuation

• P/E: 12 (sector average 15) — potentially undervalued
• EV/EBITDA: 8 — reasonable
• Dividend yield: 4 percent

Step 5: Qualitative

• Strong consumer-facing brand
• Export expansion into Western Europe
• Stable management with 15 years of experience
• Shareholder structure: 60 percent family founders (skin in the game)

Conclusion: A company with solid fundamentals, reasonable valuation, and good prospects. Worth considering for purchase with a stop loss in case market conditions deteriorate.

Common Mistakes in Fundamental Analysis

1. Looking only at P/E — a low P/E can mean a cheap stock or a company in trouble
2. Ignoring cash flow — rising profits but negative operating cash flow is a red flag
3. Over-optimistic forecasts — in a DCF model you can justify any price by tweaking assumptions
4. No sector comparison — ratios only make sense in an industry context
5. Overlooking risks — KNF regulation, currency risk, technological disruption

Tools for Fundamental Analysis

Monitoring financial metrics requires discipline. Just as tracking personal finances in Freenance helps you stay on top of your budget, regularly analysing the fundamentals of stocks in your portfolio enables more informed investment decisions.

Recommended tools:

• Biznesradar.pl — free ratios and charts for GPW stocks
• StockWatch.pl — rankings and fundamental analyses
• Notoria Serwis — professional database
• Broker research reports — available from XTB, Bossa, mBank, and others

Summary

Fundamental analysis is an art that combines numbers with business intuition. On the GPW, where many companies are undervalued relative to Western markets, the ability to read financial statements and assess valuation ratios gives you a real edge.

Start with simple ratios (P/E, P/BV, ROE, dividend yield), learn to read financial statements, and deepen your knowledge over time. Fundamental analysis will eventually become your most important investment tool.

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FAQ

What does the P/E ratio actually tell me about a company?

The P/E ratio compares a company's share price to its earnings per share, showing roughly how much investors are paying for one złoty of current earnings. A lower P/E can indicate that the stock is cheap relative to earnings, but it can equally signal that the market expects earnings to decline; a higher P/E often reflects expectations of growth. Because what counts as "normal" varies sharply by sector, comparisons are most useful within an industry rather than against the broad market.

When is the P/B (price-to-book) ratio most relevant for evaluating a company?

P/B compares the share price to the company's book value per share and is most informative for asset-heavy businesses such as banks, insurers, and industrial firms, where reported assets reasonably approximate economic value. A P/B below 1 means the market values the company below its accounting net assets — sometimes an opportunity, sometimes a signal of structural problems. For asset-light businesses (software, services), P/B is less meaningful because most of the value sits in intangibles that may not appear on the balance sheet.

How do I judge whether a company's debt level is dangerous?

Useful starting points are the debt-to-equity ratio, net debt to EBITDA, and the interest coverage ratio (operating profit divided by interest expense). A debt-to-equity below 0.5 is often described as conservative, 0.5–1.0 as moderate, and above 2.0 as highly leveraged — but capital-intensive sectors such as banking, real estate, and utilities naturally carry more debt, so comparisons should be made within the industry. Rising debt combined with falling cash flow and weak interest coverage is the more important warning, regardless of the absolute ratio.

Should valuation ratios be compared across sectors or within them?

Within them. A P/E of 15 may look expensive for a regulated utility and cheap for a fast-growing software company, because each sector has different growth rates, margins, capital intensity, and risk. Benchmarking a company against direct peers — and against its own historical range — gives a far more reliable read than comparing it to a broad index average. Sector context is also crucial when interpreting P/B, EV/EBITDA, and debt ratios.

Can a stock be "cheap" on every ratio and still be a bad investment?

Yes — a phenomenon often called a value trap. Low P/E, low P/B, and high dividend yield can all coexist with declining earnings, shrinking market share, or structural disruption in the business model, which justifies the depressed valuation. Ratios summarise the past; investors are pricing the future. Combining quantitative metrics with an honest qualitative review of the company's competitive position, management, and industry trends helps reduce the risk of buying something that looks cheap only because it deserves to be.