FUNDAMENTAL ANALYSIS

Fundamental analysis (FA) is a method of measuring an assets intrinsic value by examining related economic and financial factors.

Fundamental analysts study anything that can affect the asset value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.

QUESTIONS ASKED


Is the company's revenue growing?

Does it actually make a profit?

Can it beat its competitors?

Can it repay its debt?

Is management covering up reality?

How long can it survive?

Can they keep the payout going long term?

Fundamental data/ratios example (Tesla)

FINANCIAL METRICS


Book Value (BV)


The difference between the company's total assets and total liabilities, and not its share price in the market.

Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.

Formula

Total assets - Total liabilities

KEY TAKEAWAYS

  • It's the net difference between that company's total assets and total liabilities, where book value reflects the total value of a company's assets, which shareholders of that company would receive if the company were to be liquidated.
  • An asset's book value is equivalent to its carrying value on the balance sheet.
  • If negative, it could indicate the company is heading for bankruptcy. 
  • Often lower than a company's or asset's market value.
  • Book value per share (BVPS) and the price-to-book (P/B) ratio all utilize book value in fundamental analysis.​

Source : Investopedia

Book Value Per Common Share (BVPS)


Calculates the per-share book value of a company based on common shareholders' equity in the company. 

Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.

Formula

(Total Shareholder Equity−Preferred Equity) / Total Outstanding Shares

KEY TAKEAWAYS

  • Book value per common share (BVPS) calculates the common stock per-share book value of a firm.
  • Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred equity is subtracted from shareholders equity to derive the equity available to common shareholders.
  • If a company’s BVPS is higher than its market value per share, then its stock may be considered to be undervalued.​

Source: Investopedia

Price To Book Ratio (P/B)


Compares the market capitalization to its book value.

It's calculated by dividing the company's stock price per share by its book value per share (BVPS). 

An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation.

Formula

Market Price per Share / Book Value per Share

KEY TAKEAWAYS

  • Measures the market's valuation of a company relative to its book value.
  • The market value of equity is typically higher than the book value of a company.
  • Used by value investors to identify potential investments.
  • Value < 1 = considered solid investments.

Source: ​Investopedia

Price to Earnings Ratio (P/E)


Determines whether the stock price is overvalued or undervalued, by comparing the stock price to the company earnings.

How much the market is willing to pay for a stock based on the company’s past and future earnings? 

In addition it can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 index.

Formula

Share Price / EPS (Earnings per share​)

KEY TAKEAWAYS

  • Relates a company's share price to its earnings per share.
  • A high ratio could mean that a company's stock is overvalued, or else that investors are expecting high growth rates in the future.
  • Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator.
  • Two kinds of P/E ratios - forward and trailing P/E - are used in practice.

Source: Investopedia

Price to Sales Ratio (P/S)


Determines whether the stock price is overvalued or undervalued, by comparing the stock price to the company revenues.

Indicates the value that financial markets have placed on each dollar of a company’s sales or revenues.

All things being equal, a low P/S is good news for investors, while a very high P/S can be a warning sign.

Formula

Market Value per Share / Sales per Share

KEY TAKEAWAYS

  • Shows how much investors are willing to pay per dollar of sales for a stock. 
  • Calculated by dividing the stock price by the underlying company's sales per share.
  • A low ratio could imply the stock is undervalued, while a ratio that is higher-than-average could indicate that the stock is overvalued.
  • Doesn’t take into account whether the company makes any earnings or whether it will ever make earnings.

Source: Investopedia

Earnings Per Share (EPS)


Calculated as the net income (also known as profits or earnings) divided by the available shares.

Formula

Net profits / Total numbers of shares
or
(Net Income − Preferred Dividends​) / End-of-Period Common Shares Outstanding

KEY TAKEAWAYS

  • The company's net profit divided by the number of common shares it has outstanding.
  • Indicates how much money a company makes for each share of its stock.
  • A higher EPS indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to its share price.
  • EPS can be arrived at in several forms, such as excluding extraordinary items or discontinued operations, or on a diluted basis.

Source: Investopedia

Forward Price to Earnings (Forward P/E)


The forecasted earnings used in the formula below are typically either projected earnings for the following 12 months or the next full-year fiscal (FY) period. The forward P/E can be contrasted with the trailing P/E ratio.

Formula

Current Share Price / Estimated Future Earnings per Share

KEY TAKEAWAYS

  • Forward P/E is a version of the ratio of price-to-earnings that uses forecasted earnings for the P/E calculation.
  • Because forward P/E uses estimated earnings per share (EPS), it may produce incorrect or biased results if actual earnings prove to be different.
  • Analysts often combine forward and trailing P/E estimates to make a better judgment.​

Source: Investopedia

Trailing Price To Earnings (Trailing P/E)


Determines a relative valuation multiple that is based on the last 12 months of actual earnings. It is calculated by taking the current stock price and dividing it by the trailing earnings per share (EPS) for the past 12 months.

Trailing P/E can be contrasted with the forward P/E, which instead uses projected future earnings to calculate the price-to-earnings ratio.

Formula

Current Share Price / Trailing 12-Month EPS

KEY TAKEAWAYS

  • The trailing price-to-earnings ratio looks at a company's share price in the market relative to its past year's earnings per share.
  • Trailing P/E is considered a useful indicator to standardize and compare relative share price between time periods and among companies.
  • Trailing P/E, though widespread in use, is limited in that past earnings may not accurately reflect the current or future earnings situation of the company.

Source: Investopedia

PRICE/Earnings to Growth Ratio (PEG)


Determines the stock value while also factoring in the company's expected earnings growth.

The (P/E) ratio divided by the growth rate of its earnings for a specified time period. 

It is thought to provide a more complete picture than the more standard P/E ratio.

Formula

Price (Earnings per share​)​ / Earnings per share​ growth

KEY TAKEAWAYS

  • Enhances the P/E ratio by adding in expected earnings growth into the calculation.
  • Considered indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.
  • The PEG for a given company may differ significantly from one reported source to another, depending on which growth estimate is used in the calculation, such as one-year or three-year projected growth.

Source: Investopedia

Return on Equity (ROE)


Measures financial performance, by dividing net income by shareholders equity. 

Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. 

Measures the profitability of a corporation in relation to stockholders’ equity.

Formula

Net Income​​ / Average Shareholders Equity​

KEY TAKEAWAYS

  • Measures the profitability of a corporation in relation to stockholders’ equity.
  • Whether an ROE is considered satisfactory will depend on what is normal for the industry or company peers.
  • As a shortcut, investors can consider an ROE near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor.

Source: Investopedia

DEBT TO EQUITY (D/E)


Evaluates a company's financial leverage and is calculated by dividing a company’s total liabilities by its shareholder equity.

It's an important metric used in corporate finance. It is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds. More specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

It's a particular type of gearing ratio.

Formula

Total Liabilities​ / Total Shareholders’ Equity

KEY TAKEAWAYS

  • The debt-to-equity (D/E) ratio compares a company’s total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using.
  • Higher-leverage ratios tend to indicate a company or stock with higher risk to shareholders.
  • However, the D/E ratio is difficult to compare across industry groups where ideal amounts of debt will vary.
  • Investors will often modify the D/E ratio to focus on long-term debt only because the risks associated with long-term liabilities are different than short-term debt and payables.

Source: Investopedia

Dividend Payout Ratio (DPR)


Provides indication of how much money a company is returning to shareholders versus how much it is keeping on hand to reinvest in growth, pay off debt, or add to cash reserves (retained earnings). 

A ratio for the total amount of dividends paid out to shareholders relative to the net income of the company. 

It is the percentage of earnings paid to shareholders in dividends. 

The amount not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations. It is sometimes simply referred to as the payout ratio.

Formula

Dividends Paid / Net Income

KEY TAKEAWAYS

  • Is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. 
  • Some companies pay out all their earnings to shareholders, while some only pay out a portion of their earnings. If a company pays out some of its earnings as dividends, the remaining portion is retained by the business. To measure the level of earnings retained, the retention ratio is calculated.
  • Several considerations go into interpreting the dividend payout ratio, most importantly the company's level of maturity. A new, growth-oriented company that aims to expand, develop new products, and move into new markets would be expected to reinvest most or all of its earnings and could be forgiven for having a low or even zero payout ratio.
  • A range of 35% to 55% is considered healthy and appropriate from a dividend investor's point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry.
  • The dividend payout ratio can be calculated as the yearly dividend per share divided by the earnings per share, or equivalently, the dividends divided by net income (as shown below).

Source: Investopedia

EBITDA Margin


Measures a company's operating profit as a percentage of its revenue. The adjusted operating earnings.

The acronym EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Knowing the EBITDA margin allows for a comparison of one company's real performance to others in its industry.

Formula

(Earnings before interest and tax + depreciation + amortization) / Total revenue

KEY TAKEAWAYS

  • Performance metric that measures a company's profitability from operations.
  • Earnings measure that focuses on the essentials of a business: its operating profitability and cash flows.
  • Calculated by dividing EBITDA by revenue.

Source: Investopedia


SOURCES

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