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Fundamental Analysis

Fundamental analysis is a method used to determine the value of a stock by analyzing the financial data that is ‘fundamental’ to the company. That means that Fundamental analysis takes into consideration only those variables that are directly related to the company itself, such as its earnings, its dividends, and its sales. It focuses exclusively on the company's business in order to determine whether or not the stock should be bought or sold.

Earnings

Earnings are how much profit (or loss) a company has made after subtracting expenses, during a specific period of time. Earnings are important to investors because they give an indication of the company’s expected dividends and its potential for growth and capital appreciation.

Earnings Per Share

EPS is calculated by taking a company’s net earnings and dividing by the number of outstanding shares of stock the company has. For example, if a company reports $10 million in net earnings for the previous year and has 5 million shares of stock outstanding, then that company has an EPS of $2 per share.

Price /Earning Ratio

The price/earnings (P/E) ratio is a measure used by investors to tell whether a stock is underpriced or overpriced. The P/E ratio relates a firm's current market price to its net earnings for the past year. Calculating a P/E ratio is fairly simple to do. You simply take a firm's current market price and divide it by net earnings per share for the last 12 months.

For instance, if a stock is priced at $50 per share and it has an EPS of $5 per share, then it has a P/E ratio of 10. (Or equivalently, you could calculate the P/E ratio by dividing the company's total market cap by the company's total earnings; this would result in the same number.)

PEG

PEG is another ratio that you can use that takes into consideration a stock’s projected earnings growth: it’s called the PEG. PEG is calculated by taking a stock’s P/E ratio and dividing by its expected percentage earnings growth for the next year. So, a stock with a P/E ratio of 40 that is expected to grow its earnings by 20% the next year would have a PEG of 2.

Dividend Yield

The dividend yield measures what percentage return a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock's price. For example, if a stock pays out $2 in dividends over the course of a year and trades at $40, then it has a dividend yield of 5%.

Dividend Payout Ratio

The dividend payout ratio shows what percentage of a company’s earnings it is paying out to investors in the form of dividends. It is calculated by taking the company's annual dividends per share and dividing by its annual earnings per share (EPS). So, if a company pays out $1 per share annually in dividends and it has an EPS of $2 for the year, then that company has a dividend payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends.

Book Value

The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. This is how much the company would have left over in assets if it went out of business immediately. In order to compare book values across companies, you should use book value per share, which is simply the company's last quarterly book value divided by the number of shares of stock it has outstanding.

Price / Book

A company's price-to-book ratio (P/B ratio) is determined by taking the company's per share stock price and dividing by the company's book value per share. For instance, if a company currently trades at $100 and has a book value per share of $5, then that company has a P/B ratio of 20.

Price/Sales Ratio

The price-to-sales ratio (P/S or PSR) can be calculated by taking the stock's current price and dividing by the company's total sales per share for the past year (or equivalently, by dividing the entire company's market cap by its total sales). That means that a company whose stock trades at $1 per share and which had $2 per share in sales last year will have a P/S of 0.5.

Return on Equity (ROE)

ROE is a measure of how well a company used reinvested earnings to generate additional earnings, equal to its Net Income over a 12-month (4 Quarters) period divided by share holders equity, expressed as a percentage. It is used as a general indication of the company's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with returns on equity that are high and growing.

Formula:

Return on Assets (ROA)

ROA is a measure of a company's profitability, equal to Net Income over a 12-month period (4 Quarters) divided by its total assets, expressed as a percentage.

Formula:

Beta

A quantitative measure of a stock volatility relative to a benchmark over a period of time.

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