The Top 5 Fundamental Analysis Tools to Understand

March 8, 2019, By fierce,

Fundamental analysis is key to understanding the underlying nuts and bolts of a company’s engine.  Without it, you’re often just blindly buying a stock, hoping for the best.

Think of fundamental analysis as a must for gauging company health.

A fundamental analyst is simply trying to understand the intrinsic value of a company stock – or the true value of a stock by fundamentals.  We do that by focusing on five key numbers.

No. 1 — Earnings

Earnings are the bottom line.  Earnings give an indication of future potential.  Without earnings, a stock is on life support. This is the lifeblood of any company success.  If a company isn’t making money, we have to identify where the value is.  Will it make money in the future?

No. 2 – Price to Earnings (P/E)

This ratio examines the underlying relationship between the stock price and earnings.  For example, a stock trading at $20 and EPS of 4 would have a P/E ratio of 5, or $20 / 4. This gives a fundamental analyst an idea of just how much the stock market is willing to pay for one share of said stock.

No. 3 – Price to Earnings Growth (PEG)

When it comes to the PEG ratio, we’re looking for anything less than 1.0 to tip us off that something may be off.  A read greater than 1.0 tells an analyst the stock may be overvalued.  A read under 1.0 may be a strong indication of undervaluation.

No. 4 — Price to Sales (P/S)

Price to sales allows an analyst to value a stock relative to total sales over a 12-month period (or the last four quarters). This is often found by dividing a market cap of a stock by total revenue generated.  It reflects the value placed on sales figures by the market.

No. 5 — Price to Book (P/B)

The P/B ratio is an estimate of the price of a company relative to the book value of the assets it owns after accounting for debt, depreciation, and other factors.  If a company has a P/B ratio of 1.0, it’s selling at exactly book value. A high P/B ratio means a stock is expensive and low P/B ratio means it’s cheap.

These are just a few key numbers to be aware of as a fundamental investor.

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