7.3 Why apply fundamental analysis?

One of the approaches of deciding whether to buy or not to buy a stock could be using fundamental analysis.

This means you evaluate the fundamentals, think about how much profit the company is making, how much debt the company has but also, as an investor, how many times you will pay the profit also known as the price/earnings or P/E ratio which we will explain in the next chapter.

An important indicator is also to look at how much money the company needs to reach a certain profit. This is also known as the cost ratio.

If company A has to incur 70 € of costs to earn 100€ then that company is less efficient than company B that has to incur 40 € of costs to earn the same 100€. Company A has a higher capital requirement to be profitable.