Basics of Fundamental Stock Analysis

Definition of fundamental analysis

Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices.

The critical information that is analyzed can include a company’s financial reports and nonfinancial information, such as estimates of demand growth for competing products, industry comparisons, and economy-wide changes.

General Strategy of the Fundamentalists

For a fundamentalist, the market price of a stock tends to move towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would buy the stock, and if the intrinsic value of a stock was below the current market price, the investor would sell the stock.

To begin with, a fundamentalist takes a look at the overall current and future health of the economy as a whole. In this step, he should try to determine the direction and level of interest rates.

After looking at the economy as a whole, look at individual companies. You need to look at the factors that give the company a competitive advantage in its industry, such as managerial experience, performance history, growth potential, low-cost producer, etc.

Fundamental Analysis Expressions

To start, I describe some fundamental stock analysis expressions that are most important:

#1- EPS: (Earnings per share)

The portion of a company’s earnings allocated to each outstanding common share. The amount is calculated by dividing net earnings by the number of common shares outstanding. For example, a corporation that earned $10 million last year and has 10 million shares outstanding would report earnings per share of $1.

#two- P/E Ratio: (Price/EPS)

Also called an “earnings multiple,” a share’s price divided by its earnings per share. The P/E ratio can use last year’s reported earnings or use an analyst’s forecast of next year’s earnings. P/E gives investors an idea of ​​how much they are paying for a company’s purchasing power.

An important caveat here is that ultimately the P/E ratio is not an objective measure; a high P/E ratio could show an overvalued stock or could reflect a company with high growth potential.

#3- dividend

Dividend is an amount of earnings that a company pays to people who own shares in the company. When a company makes a profit, some of this money is usually reinvested in the business and is called retained earnings, and some may be paid to its shareholders as a dividend.