Fundamental analysis is one of the most used methods of stock analysis. With the help of fundamental analysis, you can evaluate
the intrinsic value
(i.e. the true value) of a stock. Fundamental analysis involves studying the financial health
of a company along with its future outlook
to determine the long term price of a stock. To do the fundamental analysis, you must know how to read the cash flow statement, profit and loss statement, balances sheet, financial ratios, etc.
Things to Look While Doing Fundamental Analysis
While doing the fundamental analysis you may look into the following factors;
Earnings Per Share (EPS)
Earnings per share represent the company’s profit assigned to each share of stock. The calculation of EPS is done by dividing the net income with the number of outstanding shares
. EPS is the most commonly used ratio for fundamental analysis.
- Price to Earnings Ratio (P/E)
PE ratio is another important tool for doing fundamental analysis. Using this ratio you can compare the current price
of the company’s stock to it’s per share earnings
- Price to Sales Ratio (P/S)
Using the price to sales ratio, you can evaluate
the price of a company’s stock price
in comparison to its revenue
- Price to Book Ratio (P/B)
This ratio compares the stock’s book value with its market value
. This fundamental tool can be used by dividing the recent closing price of the stock with the previous quarter’s book value per share.
- Return on Capital Employed (ROCE)
Return on capital employed is a profitability ratio
used for fundamental analysis of a company. By using this ratio the investor can measure the efficiency
at which the company is generating profits with the capital employed
by comparing the net operating profit to capital employed.
The dividend payout ratio compares
the dividend paid
to the stakeholders against the total net income of a company.
The dividend yield compares the yearly dividend
with the share price. This fundamental analysis tool is expressed in the form of a percentage. You can arrive at this ratio by dividing the dividend payment per share in a single year with the value of a share.
Return on equity expresses the return of a company on its net worth
. It can be used for fundamental analysis by dividing the net income of the company with the shareholder's equity.
The above mentioned are some of the fundamental analysis tools that an investor may use before investing in stocks.