When it comes to stock market investing, there are two main approaches to choosing which shares to buy: technical analysis (looking at charts and price trends) and fundamental analysis (looking at the company’s financial health, management, and future potential).
Fundamental analysis is all about evaluating a company’s intrinsic value — its real worth — based on facts and figures. It’s the method used by legendary investors like Warren Buffett and is a core part of long-term investing in the UK market.
This guide will walk you through how to analyse UK stocks using fundamental analysis in plain, practical terms.
1. What is Fundamental Analysis?
Fundamental analysis is the process of assessing a company’s financials, business model, competitive position, and external factors to decide whether its shares are undervalued, overvalued, or fairly priced.
The goal is to answer the question:
“Is this company worth investing in at its current share price?”
2. Key Components of Fundamental Analysis
There are three layers to proper fundamental analysis:
🔹 A. Quantitative Analysis – the numbers
- Company financial statements
- Ratios like P/E, ROE, and debt levels
🔹 B. Qualitative Analysis – the story behind the numbers
- Business model, leadership, market position
🔹 C. Macroeconomic & Industry Factors
- Sector trends
- Economic conditions
- Regulatory environment
Let’s break each one down step by step.
3. Quantitative Analysis – Understanding the Numbers
🔸 A. Income Statement
Shows profit and loss over time. Key figures to analyse:
- Revenue (sales): Is it growing year-on-year?
- Net profit: Is the company profitable?
- Operating margin: Efficiency of operations
🔸 B. Balance Sheet
Shows what a company owns vs. what it owes.
- Assets: Cash, property, inventory
- Liabilities: Debt, loans, accounts payable
- Equity: Shareholder value
A strong balance sheet usually means the company can survive tough times.
🔸 C. Cash Flow Statement
Reveals how cash is moving in and out of the business.
- Operating cash flow: Is it generating real cash from operations?
- Free cash flow: Cash available after spending on capital
Tip: A company can show profits on paper but still run out of cash — always check cash flow.
4. Key Financial Ratios to Know
🔸 Price-to-Earnings (P/E) Ratio
Compares share price to earnings per share.
- Low P/E could mean undervalued — or a struggling company
- High P/E could mean overvalued — or high growth expectations
🔸 Earnings Per Share (EPS)
How much profit the company makes per share.
- Look for consistent growth in EPS over time
🔸 Return on Equity (ROE)
Shows how efficiently the company uses shareholders’ money.
- A higher ROE (e.g., 15%+) is generally better
🔸 Debt-to-Equity Ratio
How much debt the company uses to fund operations.
- Lower is usually safer, but capital-intensive sectors (e.g., utilities) may carry more debt
🔸 Dividend Yield
How much income the stock pays relative to price.
- Good for income investors, but make sure dividends are sustainable
Use websites like London Stock Exchange (LSE), Yahoo Finance UK, or company investor reports to find these figures.
5. Qualitative Analysis – Beyond the Numbers
🔸 A. Business Model
How does the company make money? Is it scalable, diversified, and defensible?
Example:
- Tesco’s strength is in scale and supermarket distribution
- Rightmove’s model relies on recurring revenue and dominant market share
🔸 B. Competitive Advantage (Moat)
What makes the company hard to beat?
- Brand loyalty (e.g., Rolls-Royce)
- Patents or intellectual property (e.g., AstraZeneca)
- Network effects (e.g., Deliveroo’s growing user base)
🔸 C. Management Quality
Look at:
- CEO background and track record
- Insider ownership (do they own shares?)
- Past decisions and capital allocation
🔸 D. Sustainability & ESG Factors
Is the company ethical and future-proof?
- Environmental impact
- Governance practices
- Social responsibility
These factors increasingly influence institutional and retail investors in the UK.
6. Industry & Economic Context
Even a great company can underperform if the wider sector or economy is struggling.
🔸 Industry Analysis:
- Is the sector growing or shrinking?
- Who are the key competitors?
- Are there technological or regulatory disruptions?
🔸 Economic Indicators:
- UK interest rates (affect company borrowing and consumer spending)
- Inflation and consumer confidence
- Government policy (e.g., green investment, Brexit-related trade)
Example: Rising interest rates might hurt UK housebuilders, while energy stocks could benefit from higher oil prices.
7. Create an Investment Thesis
Once you’ve analysed the numbers and story, pull it together into a clear thesis:
“I believe Greggs is undervalued at 1800p because of its strong cash flow, dividend history, and ongoing expansion into travel hubs. It has room to grow, and I expect 10% annual returns over the next 5 years.”
Your thesis should be:
- Based on evidence
- Aligned with your goals (growth, income, value)
- Time-based and measurable
8. Tools for Analysing UK Stocks
Free Tools:
- Yahoo Finance UK
- Google Finance
- Morningstar UK
- Simply Wall St (visual stock analysis)
- Company investor relations pages
Paid Tools:
- Stockopedia (excellent UK stock screener)
- SharePad / ShareScope (used by serious private investors)
- Hargreaves Lansdown & AJ Bell platforms (with integrated research)
9. Common Mistakes to Avoid
- Focusing only on share price – Always look at valuation and fundamentals.
- Chasing high dividends blindly – High yields can be unsustainable.
- Ignoring debt levels – Even profitable companies can go bust if overleveraged.
- Not reading company updates – Interim results, trading statements, and annual reports are key.
- Over-analysing and never acting – At some point, you have to take a decision.
Final Checklist for Analysing a UK Stock
| Step | Question to Ask |
|---|---|
| Revenue and earnings | Are they growing consistently? |
| Profit margins | Is the company efficient at turning sales into profit? |
| Balance sheet | Is the company financially stable and not overleveraged? |
| Cash flow | Is it generating strong and positive cash flow? |
| P/E & other ratios | Is the share cheap or expensive relative to peers? |
| Industry outlook | Is the sector growing or facing headwinds? |
| Competitive edge | What gives this business a long-term advantage? |
| Management quality | Do the leaders have a good track record? |
Final Thoughts
Analysing UK stocks using fundamental analysis is not just for City professionals or fund managers — it’s a vital skill for any private investor looking to build long-term wealth. The key is patience, consistency, and discipline.
It’s not about finding the next “hot stock”, but about choosing companies with solid foundations, reliable growth, and the ability to thrive through good times and bad.
Whether you’re investing via a Stocks and Shares ISA or a general trading account, building your portfolio on solid analysis will always pay off in the long run.