Why Bother with Fundamental Analysis?

Let’s be honest: stock picking is intimidating. There are thousands of tickers and everyone’s got a hot tip. But if your goal is to buy and hold two stocks for the long run, hype won’t cut it. You need to know if a company is financially sound and likely to grow. That’s where fundamental analysis comes in. It’s about understanding the nuts and bolts—revenue, earnings, debts, and future potential.

To quote Warren Buffett: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”

Step 1: Start with the Earnings—But Don’t Stop There

My first mistake was focusing just on the latest earnings-per-share (EPS) numbers. Yeah, a high EPS is nice, but it’s the trend that matters. Is the company consistently profitable? I use Yahoo Finance for this (see screenshot below).

Look at the past five years. For example, I compared Apple (AAPL) and IBM. Apple’s net income has grown almost every year, while IBM’s was flat or declining. That’s a red flag for IBM if you want to hold it for a decade.

Tip: Don’t just grab one good year. Look for a pattern of steady or growing earnings.

Step 2: Growth Potential—What’s the Story?

It’s easy to get lost in numbers, but companies are more than spreadsheets. You want to know: is this business positioned for the future? Here’s where I made a classic blunder: I picked a high-growth company without checking if that growth was sustainable.

Here’s what I do now:

• Read the 10-K filings on SEC EDGAR for management discussion and risk factors.
• Check analyst growth forecasts on Morningstar or Yahoo Finance.
• Follow industry news. For tech, I love TechCrunch.

For instance, when I considered Nvidia (NVDA), I dug into their AI chip roadmap and saw consensus among analysts (like Gartner’s 2023 forecast) that AI demand would keep rising. Meanwhile, a friend hyped up a biotech stock with one promising drug, but their pipeline was thin—too risky for my taste.

Step 3: Balance Sheet Reality Check (Don’t Skip This!)

Earnings and growth stories are great, but if a company is drowning in debt or burning cash, it’s a no-go for long-term holding. I learned this the hard way with a retail chain that looked fine on paper—until I saw their debt ratios.

Here’s my quick process (using Morningstar Financials):

• Check total debt vs. equity. A debt/equity ratio above 1 means more debt than equity—risky.
• Look at current ratio (current assets/current liabilities). Less than 1? The company might struggle to pay its bills.
• See if cash flow from operations is positive and stable.

For example, Microsoft (MSFT) has a debt/equity ratio well below 1, tons of cash, and strong operational cash flow. Compare that to a speculative electric vehicle startup—often, they’re cash flow negative and loaded with debt.

Step 4: Two Stock Picks—Real-World Example

After all this, how do you actually pick two stocks? Here’s my process from a recent round of analysis (and yes, I got a few things wrong before getting it right).

I shortlisted:

• Apple (AAPL): Consistent earnings growth, huge cash reserves, low debt, and a massive, sticky ecosystem.
• Nvidia (NVDA): Explosive growth in AI chips, strong balance sheet, and positive analyst outlook.

I almost picked Peloton, but their negative cash flow and ballooning debt made me stop. Instead, I used the Apple 10-K to verify their financials and industry position.

Screenshot from Apple 2023 10-K:

What Do the Experts Say?

To get an outside view, I checked comments from CNBC’s 2024 investing panel. Most agreed: “Balance sheet strength and earnings visibility are non-negotiable for long-term holdings.” That matches my findings—no one wants to wake up to a stock collapse because of hidden debt.

A Twist: How Regulations and International Standards Come Into Play

Here’s something most retail investors ignore: differences in accounting and disclosure standards can mess with your analysis, especially for foreign stocks. For example, the IFRS (used in Europe) vs. US GAAP (used in the US) can lead to different reported earnings or asset values.

For instance, when looking at Siemens (Germany, IFRS) versus Honeywell (US, GAAP), reported profits and debt might not be apples-to-apples. Here’s a quick table:

Standard Name	Legal Basis	Enforcement Body	Notable Differences
US GAAP	Securities Exchange Act (1934)	SEC	Stricter revenue recognition, more emphasis on historical cost
IFRS	EU IAS Regulation (EC No 1606/2002)	ESMA, National Regulators	Allows revaluation of assets, more principles-based

Source: IFRS Jurisdictional Profiles

In practice, this means always double-checking which accounting rules a company follows before comparing metrics. I once made the mistake of comparing net income from a Chinese ADR (reporting under IFRS) directly with a US peer—turned out I was missing adjustments for asset revaluations.

Case Study: US–EU Dispute on “Verified Trade” Standards

Here’s a real-world clash: In 2018, the US and EU disagreed on the mutual recognition of financial statements for cross-listed companies. The US SEC only partially recognizes IFRS, meaning EU firms listing in the US have to reconcile accounts to GAAP. This can delay filings and create uncertainty for investors.

Expert voice: According to OECD guidelines, “Transparent and comparable financial reporting is essential for investor confidence in international markets.” Yet, as an investor, you need to be alert to these mismatches.

Wrapping Up: What I’d Do Differently—And What You Should Watch Out For

Here’s the honest takeaway: fundamental analysis is messy, sometimes boring, and you will make mistakes. But it’s also the only reliable way I’ve found to avoid disasters and find stocks that can actually go the distance.

• Always check multi-year earnings and cash flow trends.
• Dig into the company’s growth story beyond the headlines.
• Never skip the balance sheet—debt can kill even the fastest-growing business.
• Pay attention to international accounting quirks if you go global.

My two picks, Apple and Nvidia, weren’t just lucky guesses—they passed these tests after my share of rookie mistakes. Next time, I’ll spend even more time reading annual reports and less time on hype cycles.

If you want to dig deeper, check out the links above or just grab a company’s 10-K and start reading. Trust me, it’s worth it—and if you get stuck, don’t hesitate to hit up forums like r/investing for real-world tips and war stories.

Next step? Pick two stocks yourself, run them through this process, and see how your conclusions compare to mine. If you get different results, dig into why—that’s where you’ll really learn what matters in the long run.