What is Fundamental Analysis

Mohan · #1 16th March 2005, 10:10 AM

What is 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.

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.

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.

Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market.

Earnings per Share – EPS
Price to Earnings Ratio – P/E
Projected Earning Growth – PEG
Price to Sales – P/S
Price to Book – P/B
Dividend Payout Ratio
Dividend Yield
Book Value
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.

nkpanjiyar · #2 16th March 2005, 11:23 AM

Quote:

Originally Posted by Mohan

What is 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.

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.

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.

Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market.

Earnings per Share – EPS
Price to Earnings Ratio – P/E
Projected Earning Growth – PEG
Price to Sales – P/S
Price to Book – P/B
Dividend Payout Ratio
Dividend Yield
Book Value
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.

Thanks Mohan. Kindly elaborate the tools of fundamental analysis with live example of any company in your next post. It will benefit many including me in understanding the fineness.

Cheers,
nkpanjiyar

sh50 · #3 17th March 2005, 09:06 AM

Price to sales ratio is not something that one comes across commonly. Is there any fundamental analysis software or database by which one can make comparisons between different companies of the same indstry. One has to see things in a relative perspective- how does one know whether EPS or P/E ratio is normal/abnormal unless one compares with Industry standard.

pmathew · #4 17th March 2005, 10:01 AM

A nice article. Please continue to elaborate the pros and cons of fundamental analysis.

pmathew

anjaynay · #5 17th March 2005, 03:47 PM

Quote:

Originally Posted by Mohan

Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market.

Earnings per Share – EPS
Price to Earnings Ratio – P/E
Projected Earning Growth – PEG
Price to Sales – P/S
Price to Book – P/B
Dividend Payout Ratio
Dividend Yield
Book Value
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.

Mohan,
Can you please tell how to compare these parameter correctly?

sh50 · #6 18th March 2005, 08:47 AM

One has to observe all the ratios over a 3-5 year period and observe how they are increasing/decreasing.

One should also compare all with different companies of the same industry to get a good relative idea. For example the P/E ratio can be compared to the p/e ratios of other companies and p/e ratio of industry.

Another parameter is capital:Free reserves which makes the company a suitable bonus candiadate. Free reserves are out the the earnings of the company and not revaluation of assets.

anjaynay · #7 18th March 2005, 11:09 AM

sh50,
Thanks but can you please eloboratly explain how we can use Price to Book and how we can find Return on Equity for any equity.

Also I have seen in lots of companies even if P/E ratio is more compared to p/e of industry but still there price are increasing like TCS. infosys.

nanjil · #8 29th July 2005, 12:46 AM

What it is:
The P/E ratio, which is also referred to as an earnings multiple, is a core measure of a company's stock price in relation to its earnings.

You can calculate a firm's P/E ratio using the following formula:

Stock Price / Earnings Per Share = P/E Ratio

The result essentially indicates how much investors are willing to pay for each Rupee of a particular company's earnings. In general, most investors prefer purchase stocks with low P/E ratios as opposed to stocks with high P/E ratios. All other things being equal, the lower a firm's P/E ratio, the "cheaper" the stock is relative to its current earnings base.

chandru · #9 9th October 2005, 10:06 AM

Which P/E ratio we need to compare for fundamental Analysis. Meaning that based on past data or future projected data? I am very sorry If this is very basic level. I am new member and new to this stock world. But somewhere I read that P/E ratio can be computed based on past data and also future projected data. That is why this question comes into my mind.

alok · #10 11th November 2005, 01:11 PM

I think for buying purpose, PE should be based on current profits etc... Future projection is commonly used to understand how much growth you can expect...

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