Fundamental analysis allows investors to look at the fundamental financial level of a business. In other words, it examines the key ratios of that business in order to know its financial health. It also tells the investors the value of a company’s stock should be. Before using it, you have to know the top tools in fundamental analysis.
It is all about the earning
The most essential thing that every investor has to know is the current and future earning of a company. That earing is the profit of that company.
Even if that is complicated to calculate, that is still the most important part. Higher earing gives a higher stock price, and sometimes, a regular dividend.
Conversely, falling earning means dropping stock prices. Companies usually report their earning each quarter, then, analysts will follow it closely.
The Top Tools
Even if earning is the most essential part, yet, it can’t identify the market value of your stock. To do it, you need some fundamental analysis tools.
These tools focus on growth, earnings, and value in the market. These are the factors you may want to consider.
Earning per share (EPS)
Earnings per share are calculated by dividing the dividends on a preferred stock by the number of outstanding shares.
Price to earnings ratio (P/E)
P/E compares the company’s stock current price share to its per-share earnings.
Projected earnings growth (PEG)
It anticipates the stock’s one-year earnings growth rate.
Price to sales ratio (P/S)
It values the company’s stock price compared to its revenues. Sometimes investors also refer it as PSR, sales multiple, or revenue multiple.
Price to book ratio (P/B)
Sometimes investors also call it equity ratio, it compares the stock’s book value to its market value. To calculate it you need to divide the stock’s recent closing price by its last quarter’s book value per share.
Book value is the value of a particular asset in a company’s book. It is from the cost of each asset less cumulative depreciation.
Dividend payout ratio
This ratio compares dividend paid to the shareholders to the company’s total net income. It also retained earnings, the income that is kept.
Dividend yield
It compares yearly dividends to share price in percentage. To calculate it divide dividends paid within one year period by the value of a share.
Return on equity
To calculate it, divide the company’s net income by shareholders’ equity. Some other investors usually also call it as the company’s return on net worth.