# Understanding Fundamentals: Types, Ratios, and Real-World Examples

## What Are Fundamentals?

Fundamentals provide essential qualitative and quantitative data that define a company's financial health and economic standing. This article explores how fundamentals can set the financial [value](https://www.investopedia.com/terms/v/valuation.asp) of a company or currency through [qualitative](https://www.investopedia.com/terms/q/qualitativeanalysis.asp) insights and [quantitative analysis](https://www.investopedia.com/terms/q/quantitativeanalysis.asp). It discusses macroeconomic and microeconomic fundamentals, showcasing how these underpin assessments of profitability, revenue, and growth potential. Readers will also learn about key financial ratios to evaluate investments accurately.

### Key Takeaways

*   Fundamentals provide both qualitative and quantitative data that underlie the financial and economic health of a company.
*   Key aspects of businesses like profitability, revenue, and liabilities are critical in evaluating financial fundamentals.
*   Macroeconomic fundamentals affect the economy at large, while microeconomic fundamentals focus on smaller segments like markets or sectors.
*   Fundamental analysis uses various financial ratios to assess a company's value, risk, and growth potential relative to industry peers.
*   Differences in fundamentals, as seen between companies like Microsoft and Apple, are crucial in investment decisions.  
    

## Gaining Insight into Economic Fundamentals

In business and economics, fundamentals represent the primary characteristics and financial data necessary to determine the stability and health of an [asset](https://www.investopedia.com/terms/a/asset.asp). This data can include [macroeconomic](https://www.investopedia.com/terms/m/macroeconomics.asp), or large-scale factors, and [microeconomic](https://www.investopedia.com/terms/m/microeconomics.asp), or small-scale factors to set a value on securities or businesses.

Analysts and investors study these fundamentals to decide if an asset is a good investment and fairly valued in the market. In businesses, fundamentals include profitability, revenue, assets, liabilities, and growth potential. Fundamental analysis allows you to calculate a company's financial ratios to assess investment feasibility.

Fundamentals usually apply to businesses or securities, but national economies and currencies also have analyzable fundamentals. For instance, interest rates, GDP growth, trade balances, and inflation are considered fundamentals of a nation's value.

## Exploring Macroeconomic vs. Microeconomic Fundamentals

Macroeconomic fundamentals are topics that affect an economy at large, including statistics regarding [unemployment](https://www.investopedia.com/terms/u/unemployment.asp), [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp), growth, and [inflation](https://www.investopedia.com/terms/i/inflation.asp), as well as considerations for monetary or fiscal policy and international trade. These categories apply to analyzing whole economies or individual businesses influenced by macroeconomics. Large scale, macroeconomic fundamentals are also part of the [top-down analysis](https://www.investopedia.com/terms/t/topdowninvesting.asp) of individual companies.

Microeconomic fundamentals focus on the activities within smaller segments of the economy, such as a particular market or sector. This focus includes supply and demand, labor, and consumer and firm theories in specific segments. [Consumer theory](https://www.investopedia.com/terms/c/consumer-theory.asp) investigates how people spend within their particular budget restraints. The [theory of the firm](https://www.investopedia.com/terms/t/theory-firm.asp) states that a business exists and makes decisions to earn profits.

## Evaluating Business Fundamentals for Investment

By looking at the economics of a business, including the overall management and the [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp), investors are looking at a company's fundamentals. Not only do these data points show the health of the business, but they also indicate the probability of further growth. A company with little [debt](https://www.investopedia.com/terms/d/debt.asp) and sufficient cash is considered to have strong fundamentals.

Strong fundamentals indicate a business has a solid financial and structural framework. Conversely, those with weak fundamentals may have issues in the areas of debt obligation management, cost control, or overall organizational management. Businesses with strong fundamentals are more likely to survive economic recessions or depressions than weaker ones. Also, strength may indicate less risk should an investor consider purchasing securities associated with the businesses mentioned.

## Conducting a Comprehensive Fundamental Analysis

Investors and financial analysts are interested in evaluating the fundamentals of a company to compare its economic position relative to its industry peers, to the broader market, or to itself over time. Fundamental analysis involves digging deep into a company's financial statements to extract its profit and growth potential, relative riskiness, and to ultimately decide if its shares are over, under, or fairly valued in the market.

Often fundamental analysis involves computing and analyzing ratios to make apples-to-apples comparisons. Some common fundamental analysis ratios are listed below.

*   The [debt-to-equity ratio](https://www.investopedia.com/terms/d/debtequityratio.asp) (DE) measures how a company is financing its operations. 
*   The [quick ratio](https://www.investopedia.com/terms/q/quickratio.asp) measures the company’s ability to meet its short-term obligations.
*   The [degree of financial leverage](https://www.investopedia.com/terms/d/dfl.asp) (DFL) measures the stability or volatility of the earnings per share (EPS).
*   The [price-to-earnings](https://www.investopedia.com/terms/p/price-earningsratio.asp) (P/E) ratio compares investment to earnings dollars.
*   The [DuPont analysis](https://www.investopedia.com/terms/d/dupontanalysis.asp) looks at return on equity (ROE) by looking at asset use efficiency, operating efficiency, and financial leverage.

Fundamental analysis should be carried out with a holistic approach, utilizing several ratios and including a bottom-up as well as a top-down analysis to come to specific conclusions and actions.

## Real-World Example: Microsoft vs. Apple Fundamentals

In the fourth quarter of 2018, large-cap tech companies Microsoft and Apple had similar market caps for the first time since 2010. Although the two companies had similar market caps of about $850 billion, they had very different fundamentals. For example, Microsoft was trading at 45X [earnings](https://www.investopedia.com/terms/e/earnings.asp) while Apple was trading at 15X earnings.

Also, while Microsoft’s earnings were predicated on software as a service (SaaS) and software sales, Apple’s were still primarily dependent on hardware sales. Apple’s revenue base is about 2½ times Microsoft’s; the global market for its devices is far more saturated than the global market for Microsoft’s software.

Though both companies had a similar market cap, they had very different fundamentals, which would need to be considered when choosing them as potential investments, particularly in determining future growth prospects.

## What's the Difference Between Macroeconoic and Microeconomic Fundamentals?

The main difference relies on the scale of the subjects that the fundamentals are applied to. Macroeconomic fundamentals include the broad trends that have implications for the global economy, seen as a whole, like GDP, inflation, unemployment, growth, and international trade. Microeconomics fundamentals are those factors that affect smaller segments of the economy, such as a particular market, sector, or entity. For example, supply/demand, labor, and price levels within a specific segment.  

## What's the Difference Between Quantitative and Qualitative Analysis?

Quantitative analysis applies mathematics and statistics and uses hard data and numbers. Qualitative analysis, on the other hand, involves elements that cannot be measured or expressed as a number. It can include features that are subjective and opinions.  

## What's the Main Benefit of Fundamental Analysis in Business?

Investors can use fundamental analysis to get insights into a company's value, risk, and growth potential, and thus make informed decisions.

## The Bottom Line

Understanding fundamentals involves analyzing the core qualitative and quantitative data that indicate a company’s financial health and economic standing. Fundamental analysis provides a framework to evaluate a company by examining key metrics such as profitability, revenue, and growth potential.

This detailed assessment helps investors make informed decisions by comparing a company's value relative to its industry peers, determining whether an investment is over, under, or fairly valued, and identifying potential risks and opportunities in the market.

> **Article Sources**
>
> 1.  MarketWatch. "[Microsoft Surpasses Apple as Most valuable U.S. Company](https://www.marketwatch.com/story/microsoft-surpasses-apple-as-most-valuable-us-company-2018-11-30)."
>     
> 2.  MarketWatch. "[Opinion: Apple is the New Microsoft, and That's bullish For the Stock](https://www.marketwatch.com/story/apple-is-the-new-microsoft-and-thats-bullish-for-the-stock-2018-06-04)."