Fundamental Analysis
Fundamental analysis is the process of looking at a business at
the basic or fundamental financial level. This type of analysis examines key
ratios of a business to determine its financial health and gives you an idea of
the value its stock.
Many investors use fundamental
analysis alone or in combination with other tools to evaluate stocks for
investment purposes. The goal is to determine the current worth and, more
importantly, how the market values the stock.
This article focuses on the key tools of fundamental analysis and what they
tell you. Even if you don’t plan to do in-depth fundamental analysis yourself,
it will help you follow stocks more closely if you understand the key ratios
and terms.
Earnings
It’s all about earnings. When
you come to the bottom line, that’s what investors want to know. How much money
is the company making and how much is it going to make in the future.
Earnings are profits. It may be complicated to calculate, but
that’s what buying a company is about. Increasing earnings generally leads to a
higher stock price and, in some cases, a regular dividend.
When earnings fall short, the market
may hammer the stock. Every quarter, companies report earnings. Analysts follow
major companies closely and if they fall short of projected earnings, sound the
alarm. For more information on earnings, see my article: It’s the
Earnings.
While
earnings are important, by themselves they don’t tell you anything about how
the market values the stock. To begin building a picture of how the stock is
valued you need to use some fundamental analysis tools. These ratios are easy
to calculate, but you can find most of them already done on sites like :-MONEYCONTROL.COM , economictimes.indiatimes.com/
SCREENER.IN,
Fundamental Analysis Tools
These are the most
popular tools of fundamental analysis. They focus on earnings, growth, and
value in the market. For convenience, I have broken them into separate
articles. Each article discusses related ratios. There are links in each
article to the other articles and back to this article.
The articles are:
1.
Earnings per Share – EPS
2.
Price to Earnings Ratio – P/E
3.
Projected Earning Growth – PEG
4.
Price to Sales – P/S
5.
Price to Book – P/B
6.
Dividend Payout Ratio
7.
Dividend Yield
8.
Book Value
9.
Return on Equity
No single number from this list is a magic bullet that will give you a buy or sell recommendation by itself, however as you begin developing a picture of what you want in a stock, these numbers will become benchmarks to measure the worth of potential investments.
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