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Fundamental Analysis

This document provides an overview of fundamental analysis for evaluating stocks. It discusses analyzing a company's financial statements including the income statement, balance sheet, and cash flow statement. It also covers various financial ratios used to analyze companies such as price to earnings, price to book, gross profit margin, and return on equity. These tools are used to evaluate a company's profitability, liquidity, leverage, and stock valuation. However, no single metric provides all the information needed to determine if a stock is a good investment.

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Rajalakshmi Aroumougame
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107 views22 pages

Fundamental Analysis

This document provides an overview of fundamental analysis for evaluating stocks. It discusses analyzing a company's financial statements including the income statement, balance sheet, and cash flow statement. It also covers various financial ratios used to analyze companies such as price to earnings, price to book, gross profit margin, and return on equity. These tools are used to evaluate a company's profitability, liquidity, leverage, and stock valuation. However, no single metric provides all the information needed to determine if a stock is a good investment.

Uploaded by

Rajalakshmi Aroumougame
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Fundamental Analysis of Stocks

Fundamental Analysis of a business y g its financial statements involves analyzing and health, its management and competitive advantages, and its competitors and market.

Financial Statements
Income Statement: Shows whether or not a company made a profit. Balance Sheet: Shows a companies current financial position. This shows the total worth of a company. Cash Flow: Shows the flow of cash for a company and how much cash it has on hand.

Income Statement

Balance Sheet
Must M t balance b l Assets-Liabilities=Owners equity

Cash Flow

Ratios
Used to Compare Strengths and Weaknesses of Different Companies Type
Price to Earnings(P/E) Price to Book Price to Sales Gross Profit Margin Return On Equity Current Debt to Assets

P/E Ratio
=Price/Earnings Per share Indicates growth in a company A high P/E ratio can mean greater growth C Companies i that h are not growing i do d not have h a P/E ratio

Price To Book
=Price/(Total Tangible Asset-Liabilities) A high P/B ratio can mean that a stock is undervalued. Commonly used to compare banks
Higher P/B expect more value from a given set of assets

Price To Sales
=Per Share Price/ Revenue per share Lower P/S means investors are paying less for each sale Used to calculate performance More indicative of a stocks performance b because sales l are less l easy to manipulate i l than other areas such as earnings

Gross Profit Margin


=(Revenue-Cost of Goods Sold)/Revenue X 100 Evaluate efficiency Used to compare different companies. companies Discount Retailers have a lower Gross P fi Margin Profit M i because b they h can operate at tiny margins

Return on Equity
=Net Income-Preferred Dividends/Average Common Stocks Equity q y Measure Profitability of Stocks

Current
=Current Assets/Current Liabilities Measures Liquidity: ability to pay short term liabilities

Debt To Assets
=Total Debt/Total Assets Measure Leverage: How much a company relies on debt for its financial needs Can help determine risk

EPS = Net Earnings/Outstanding Shares


Tool of comparison Companies p within the same industry y 3 types of EPS
Trailing EPS (only actual EPS) Current EPS Forward EPS

This tool alone doesnt tell you if its a good y stock to buy.

Project Earnings Growth (PEG)


PEG = P/E / (projected growth in earnings) Important things to note about PEG
It is about year-to-year earnings growth It relies on projections projections, which may not always be accurate.

Dividend Payout Ratio (DPR)


Measurement of what a company pays out to investors in the form of dividends DPR = (Annual ( l dividends di id d per share) h ) (Earnings Per Share) Must M t compare thi this ratio ti in i context t t of f the th company or industry. If it is a growth company expect little to none, none however if the company is in a mature industry with little growth we are expecting a high DPR.

Dividend Yield
Key metric of value investors Dividend Yield = annual dividend per share stocks price per share Typically T i ll a more established bli h d company will ill have a consistent dividend yield, which is important to note.

Understanding Book Value


The question to ask is How much is a company worth and is that value reflected in stock price? Book Value = Assets Liabilities Typically Market Value > Book Value

S what So h can we take k f from all ll these h tools? l?


Is there a single tell all figure? They serve as benchmarks when looking at the entire picture of a stock to determine the worth of potential investments. investments

Management
Share a sense of ownership in the company Long Long-term term view Board of outsiders that can objectively measure the performance of management An often overlooked factor is the view of shareholders h h ld whether h h short-termed h d or longl termed investors

Questions??

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