Fundamental Analysis — How to Evaluate a Company
How to read financial statements. P/E, P/B, ROE, margins — practical fundamental analysis guide.
12 min czytaniaFundamental Analysis — How to Evaluate a Company
Fundamental analysis answers one question: what is this company actually worth, and is the stock cheap, expensive, or fair? Instead of watching the chart, you examine the business — revenues, profits, debt, competitive advantages, management.
Who this guide is for
- You're starting out on WSE (GPW) or global markets and want to pick stocks deliberately.
- You've seen P/E mentioned but don't know when P/E = 6 is a bargain vs a value trap.
- You want to read quarterly reports without a finance degree.
After reading you'll be able to: calculate key ratios, read a balance sheet and income statement, assess earnings quality, and build a basic peer-comparison valuation.
What is fundamental analysis
A method of estimating a company's intrinsic value using financial and qualitative data. Rooted in Benjamin Graham (The Intelligent Investor) and Warren Buffett. Core assumption: in the long term, the stock price converges to intrinsic value; in the short term it can diverge because of emotions, supply/demand, and news.
Two approaches:
- Top-down — start with the economy (GDP, rates, cycle), then industry, then company.
- Bottom-up — start with the company regardless of environment (Buffett's style).
Key ratios — formulas and interpretation
P/E (Price to Earnings)
P/E = share price / earnings per share (EPS)
- Trailing P/E — based on last 12 months' earnings.
- Forward P/E — based on forecasted earnings.
- Polish blue chips (WIG20) historically: P/E 8–14. US S&P 500: 18–22.
- Low P/E = cheap OR the market expects earnings to drop (value trap).
P/BV (Price to Book Value)
P/BV = market cap / shareholders' equity
Typical for banks and asset-heavy companies. Polish banks: P/BV 0.8–1.5. P/BV < 1 = trading below book value (could be a bargain or a warning).
P/S (Price to Sales)
P/S = market cap / annual revenue
Useful for growth companies without profits (tech, biotech). CD Projekt hit P/S > 10 during the Cyberpunk hype.
PEG (P/E to Growth)
PEG = P/E / expected EPS growth (%)
PEG < 1 = cheap relative to growth. Peter Lynch's go-to metric.
ROE (Return on Equity)
ROE = net income / equity × 100%
Measures return on shareholder capital. ROE > 15% sustainably = high quality. Dino Polska: 25–30%. PZU: 18–22%.
ROIC (Return on Invested Capital)
ROIC = NOPAT / (debt + equity) × 100%
Better than ROE because it includes debt. ROIC > WACC = company creates value.
Debt / EBITDA
Net debt / EBITDA
Safe: < 3× for cyclicals, < 4× for stable businesses. Above 5× = red flag.
How to read a financial report
Polish companies publish quarterly (Q1–Q4), semi-annual, and annual reports on InfoStrefa and investor relations pages. Three documents you must learn to read:
- Income statement (P&L) — revenue → costs → operating profit (EBIT) → net income. Watch YoY dynamics and margins (gross, operating, net).
- Balance sheet — assets = liabilities (equity + debt). Check: cash, inventory, receivables, debt.
- Cash flow statement — operating, investing, financing. Operating CF > net income = healthy. Reverse = creative accounting.
Red flags: inventory growing faster than sales, ballooning receivables, margins falling 4 quarters in a row, debt rising without investment.
Industry analysis — Porter's 5 Forces
Michael Porter's framework:
- Internal rivalry — how many competitors, how aggressively?
- Threat of new entrants — barriers (capital, regulation, brand)?
- Supplier power — can they dictate prices?
- Buyer power — can customers negotiate?
- Substitutes — alternative products?
Dino Polska has low entry barriers in retail but a location moat (small towns). CD Projekt competes globally but owns the Witcher brand.
DCF — Discounted Cash Flow
Simplified formula:
Value = Σ (FCF_t / (1 + WACC)^t) + terminal value
Forecast free cash flow for 5–10 years, discount by WACC (cost of capital, typically 8–12% for Polish stocks), add terminal value. DCF is highly sensitive to assumptions — change growth by 1 pp and valuation moves 20%.
Example: PKN Orlen (WSE)
Approximate 2025 figures:
- Market cap: ~70B PLN
- EPS: ~8 PLN → P/E ≈ 8
- Book value per share: ~85 PLN → P/BV ≈ 0.7
- Dividend: 4.5 PLN → yield ≈ 7%
- ROE: ~10%
- Net debt / EBITDA: ~1.5×
Interpretation: Orlen looks cheap (P/E 8, P/BV 0.7) but is a cyclical (refining, petchem) with strong state influence. The low multiple reflects political risk and cyclicality. Not a pure bargain — the valuation prices in the risks.
Comparison with alternatives
| Approach | Horizon | Tools | For whom |
|---|---|---|---|
| Fundamental | 1–10 years | Reports, ratios | Long-term investors |
| Technical | Days–months | Charts, RSI, MACD | Traders, swing |
| Growth | 3–7 years | Growth rate, TAM | Higher-multiple tolerant |
| Value | 3–10 years | Low P/E, P/BV | Bargain hunters |
Common mistakes
- Looking only at P/E without industry context.
- Ignoring earnings quality (operating CF vs net income).
- DCF with "magical" assumptions like 10% growth forever.
- No peer comparison (P/E 12 is a lot for retail, little for software).
- Falling in love with a stock — confirmation bias.
- Underestimating debt at low rates (which bites after hikes).
Tools for the Polish investor
- Stooq.pl — free data, ratios, charts, history.
- Bankier.pl — reports, analyst commentary, dividend calendar.
- InfoStrefa / ESPI — official current and periodic reports.
- BiznesRadar.pl — advanced screeners and ratios.
- TradingView — great for comparisons and charts.
- Notoria / Analizy.pl — for funds and advanced users.
FAQ
How long does analyzing one company take?
First proper analysis: 4–8 hours (reading annual report, management discussion, computing ratios). Subsequent quarters: 30–60 minutes.
Does fundamental analysis work on WSE?
Yes, but slower than in the US. WSE is thinner, fewer analysts, more retail. Inefficiencies last longer — but stocks can also stay "cheap" for years without a catalyst.
Which ratios matter most for beginners?
P/E, P/BV, ROE, debt/EBITDA, dividend yield. These five cover ~80% of decisions.
Can I combine fundamental and technical analysis?
Yes — fundamentals tell you WHAT to buy, technicals tell you WHEN. Common swing-trader approach.
Where can I find Polish company financials?
InfoStrefa.pl (ESPI/EBI), company IR pages, KNF, plus summaries on Bankier and Stooq.
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