Valuing a company – Fundamental analysis

To value a company, we need to do at least two important pieces of analysis. One is the technical analysis of the momentum the share price is in; the other is a fundamental analysis of the company’s fundamentals (which is, arguably, the more important of the two, especially when we are talking about the long run). Here, as I promised in the ABC of investing in shares, I am going to explain the basic ideas of fundamental analysis and how we can run a quick assessment of a company that is a candidate for our portfolio.

To analyse a company’s fundamentals, the publication of results — quarterly, half-yearly or annual — is our best friend. In Europe, the law requires a listed company to publish annual and half-yearly accounts, and many publish every three months by their own choice; in the United States, the quarter is mandatory. One way or the other, we can get an idea of how the company is growing, what the strategy or plan for the future is, and what the biggest fears for its development are. Through this event we can assess the ideas I will explain below.

Fundamental analysis based on the results

There are several basic ideas we need to understand in order to decipher a company’s results. Among them are revenue, gross and net profit (or earnings), EBITDA (earnings before interest, taxes, depreciation and amortisation), gross and net debt, equity, and others. I am not going to explain them here; I intend to explain them in a space of their own.

Once we understand these ideas, we can see what the results are telling us about the company. Put simply, they let us understand whether the company is actually growing, and whether there is any warning sign we can spot a priori — falling margins, say, or debt rising exponentially.

We also have to understand the current macroeconomic situation and how it is likely to develop. There are cyclical companies, and companies whose revenue depends on the price of a commodity. For example — and talking about Portuguese companies to make it easier to follow — Altri depends on the price of paper pulp for its revenue to grow (if costs stay put and the pulp price falls, the margin falls too, and profits with it); Galp will probably increase its net profit if the oil price rises; EDP, with the price of electricity; and even Jerónimo Martins and Sonae, whose margins would be squeezed by food inflation that rose sharply and then slowed, or even turned negative, leaving revenue stagnant without costs coming down at the same pace.

That last case is the one most worth looking at slowly, because it happened, and because the place it showed up was not the one people expected. In the first half of 2026, Jerónimo Martins sold 5.1% more — 18.3 billion euros — and still earned 3.5% less, 260 million euros, in a half-year that Pedro Soares dos Santos described as significantly more demanding than expected. In Poland, Biedronka operated with deflation in the basket and comparable stores sold only 0.2% more, even though volumes grew around 5%. In other words: it sold considerably more product and took in almost the same money.

Except the margin did not go where people thought. Group EBITDA rose 7.6% and the margin improved from 6.6% to 6.8%, because the company changed the mix of sales and tightened costs. The deflation showed up in comparable sales, and the profit fell below EBITDA, not in the margin. And Sonae, in the same half-year, made 5.6 billion euros of revenue, 6.3% more, and increased profit 20.5%, to 123 million. Two companies from the same country, in the same sector and in the same half-year, with profit moving in opposite directions — which shows that the macroeconomic context explains a lot but never explains everything.

Beyond the above, there are also companies that are solid and, although they have no great growth prospects, may be very good investment options. And why? Basically because they give big returns to their shareholders, through dividends. Take NOS, which may struggle to grow, both because of the weight of the dividend it pays out and because of the Romanian operator Digi: on 8 May 2026 it paid a dividend of 0.45 euros a share, approved at the general meeting on 22 April. With the share price around 5.20 euros, that gives a dividend yield of about 8.7% gross. Note that the yield depends on the price you buy at, not on the price someone else bought at — so it is a sum each person has to do for themselves.

And there is a detail here worth looking at before we get excited about the 8.7%. Of those 0.45 euros, 0.35 are an ordinary dividend and 0.10 are an extraordinary one. An extraordinary dividend is, by definition, the part the company does not commit to repeating. Anyone doing sums about the future with that 8.7% is assuming it repeats. The big question here is whether NOS can hold its share price in the future, because on the ex-dividend day the share corrects by the dividend that is paid.

And Digi has stopped being a future threat and become a present one. It entered the Portuguese market in November 2024 and closed the first half of 2026 with around 960 thousand active services, 21.7% more than a year earlier. On the other side, NOS closed the same half-year with telecommunications revenue falling 0.7%, and consumer revenue — which is where Digi hits — falling 0.3%.

But group revenue rose 1.0%, to 918.5 million euros, because what was lost in telecommunications was gained in the business and information technology arms. And EBITDA rose 2.3%, with the margin going from 44.0% to 44.6%. Anyone looking only at the top line would say Digi had done NOS no harm at all, and anyone looking only at consumer would say the opposite. Both things are in the same set of accounts, and that is why reading results means opening up the segments.

Expectations

It all seems very simple, doesn’t it? Well, you are wrong if you think so. Because the market is always «ahead» of the present, and big moves in market prices correspond to changes in the market’s view of the long run, whatever the event.

Have you never wondered why companies that post quite significant increases in profit have colossal falls in the days after the results? Well, that has everything to do with market expectations. A company can present good results, but if they are below the market’s expectations for that company, there will probably be shareholders wanting to sell their shares and swap them for shares in more promising companies.

It is always important to study the analysts’ expectations before looking at a company’s results, because that estimate, positive or negative, is very probably already reflected in the current share price.

Guidance

Last and not least, there is the company’s guidance, given by the company when it presents its results, which is nothing more and nothing less than the strategy or plan for the company’s future and the biggest fears for its development. It can happen that the financial statements (in terms of revenue, margins, profits and so on) are better than expected, but the guidance the company gives is worse than expected — and then we can see these companies’ share prices fall.

Conclusion

Fundamental analysis is very important for choosing the «right horses», and it is as important as it is complex, because macroeconomic factors are dynamic and constantly changing.

I hope I have managed to convey what the basics of fundamental analysis are, improving your sense and understanding of what it means to value a company. There were many more subjects I could have laid out here, but I have stuck to what I think is most essential to understand.

There is still another kind of analysis that needs doing before we choose a company to invest in — the technical analysis!

Thank you for your time!