Fundamental analysis is the process of analyzing a company’s financial statements to determine the quality and fair value of its stock. By looking at historical data from the income statement, balance sheet, and cash flow statement, you can evaluate whether a company is high-quality and if its stock price is attractive compared to its intrinsic value.
Unlike technical analysis, there are no fixed rules for how to analyze a stock. Different industries require different approaches. For example:
- A deep value stock should be analyzed differently than a high-quality, fast-growing stock.
- Mature companies with stable free cash flow can be valued using a DCF intrinsic value calculator (see my free DCF calculator here).
In this guide, I’ll walk you through the key financial numbers to focus on when analyzing a high-quality company. I’ll also compare these metrics against a real-world example: Fastenal Company (FAST).
👉 If you want to speed up your analysis, you can use The Warren Buffett Spreadsheet. It automatically imports 10+ years of financial data and calculates all ratios for you in seconds.
Why You Need at Least 10 Years of Data
When doing fundamental analysis, always aim to review at least 10 years of financial history. A longer dataset helps you see:
- How predictable and stable the company’s earnings are.
- How the company performed during recessions.
- Whether earnings are cyclical or consistent.
You can find long-term financial data on Morningstar, GuruFocus, or QuickFS.
Key Metrics in Fundamental Analysis
1. Return on Total Capital (ROTC)
- Definition: Net income compared to total capital (equity + debt).
- Target: Above 12%.
- Why it matters: Measures profitability and efficiency.
✅ Fastenal’s ROTC: 26% (10-year median). Very strong and stable.
2. Free Cash Flow / Sales (FCF Margin)
- Definition: How efficiently the company converts sales into free cash flow.
- Target: Above 10%.
- Why it matters: High margins usually indicate a moat (sustainable competitive advantage).
✅ Fastenal’s FCF/Sales: 10% (10-year median). Growing steadily.
3. Margins (Gross, Operating, Net)
- What to look for:
- Positive and stable margins.
- High margins make companies less fragile in downturns.
✅ Fastenal’s margins:
- Gross: 49% (10-year avg)
- Operating: 21%
- Net: 14%
All stable and consistent – a sign of quality.
4. Earnings Growth
- Target: Above 10% annual growth.
- Fastenal’s 10-year growth rates:
- Free cash flow: 18%
- EPS: 10%
- Revenue: 8%
- Dividends: 13%
Fastenal has grown steadily across all major metrics.
5. Earnings Stability
- Look for companies with no negative EPS or free cash flow in the past 10 years.
- Exceptions: very fast-growing companies reinvesting heavily.
✅ Fastenal: 11/11 years with positive EPS and free cash flow. Stable and reliable.
6. Financial Strength
- Key ratios to check:
- Debt/Equity below 0.5
- Current ratio above 1.5
- Interest coverage above 5
✅ Fastenal:
- Debt/Equity: 0.2
- Current ratio: 4.1
- Interest coverage: 117x
This shows very low debt and strong financial resilience.
7. Capital Expenditures (Capex)
- Target: Capex below 30% of operating cash flow.
- Fastenal: 32% (slightly above, but manageable).
8. Share Buybacks & Insider Ownership
- Positive signal: Shares outstanding decrease over time (management is shareholder-friendly).
- Better signal: Insider ownership above 5% (skin in the game).
✅ Fastenal: Minor buybacks (+0.3% reduction over 10 years). Insider ownership low (0.3%), which is typical for large companies.
Case Study: Fastenal (FAST)
Fastenal is an excellent case of a high-quality company with a durable moat. Over the past 20 years, it has returned:
- +12,371% over 20 years
- +200% over 10 years
- +117% over 5 years
While currently priced above its estimated intrinsic value ($36 vs. $47 at the time of writing), it remains a stock worth watching.
👉 You can calculate intrinsic value yourself using my free DCF calculator.
Conclusion: How to Apply This in Your Investing
- Look for stability, profitability, and strong financial health.
- Always compare at least 10 years of data.
- Use intrinsic value analysis to decide if the stock is attractively priced.
If you want a faster way to screen companies like Fastenal, check out The Warren Buffett Spreadsheet. It automates fundamental analysis and intrinsic value calculations, saving you hours of manual work.
🔗 Further Reading