An Introduction to

Fundamental Analysis
What is Fundamental Analysis?
 A method of valuing a security by measuring its
intrinsic value.
 Economic Factors
 Financial Statements
 Industry Conditions
 Quantitative and Qualitative Factors
 Quantitative
 Analyzes key ratios.
 Provides concrete data for analysis.
 Qualitative
 Analyzes intangible data.
 Patents, management, talented workers, etc.
 Difficult to measure numerically.
Why use fundamental analysis?
 The goal is to produce a value that
investors can compare with the current
price.
 If it is undervalued you should buy; sell if it
is overvalued.
 One of the most famous users of
fundamental analysis, Warren Buffett, has
successfully used this method to turn
himself into a billionaire.
Ratios
Quick Ratio Current Ratio
Debt to Equity ROE

EPS ROA

Revenues PEG
Alpha
P/E
Net Profit Margin
Beta
Revenues
 Money that a company collects from
customers for the sale of a product or
service. When you subtract out all costs
from revenues, you get profits or
earnings.
Market Capitalization
 The total dollar value of all outstanding
shares, calculated by multiplying the price
of a single share by the total number of
shares outstanding.
1. Mega Cap: Market cap of $200 billion and greater
2. Big/Large Cap: $10-$200 billion
3. Mid Cap: $2 billion to $10 billion
4. Small Cap: $300 million to $2 billion
5. Micro Cap: $50 million to $300 million
6. Nano Cap: Under $50 million
Net Profit Margin
 Net income as a percentage of sales. You get
this by dividing net income by sales. Since it's a
percentage, it tells you how many cents on each
dollar of sales is pure profit.
 The higher a company’s profit margin compared
to its competitors, the better.
Earnings Per Share (EPS)
 A very important fundamental, calculated:

 Basically, this will tell you if and how profitable

the company is.
 What’s preferred stock?
A class of ownership in a corporation with a stated
dividend that must be paid before dividends to
common stock holders.
Price/Earnings Ratio (P/E)
 One of the favorite ratios, it is simply:

 EPS from the last four quarters is called trailing P/E

 EPS taken from the estimates of earnings expected in
the next four quarters is called forward P/E
 P/E is referred to as the "multiple," because it shows
how much investors are willing to pay per dollar of
earnings.
 High P/E means high projected earnings in the future.
 It's usually only useful to compare the P/E ratios of companies in
the same industry, or to the market in general, or against the
company's own historical P/E
Price-to-Sales
 Price to sales is calculated by dividing a
stock's current price by its revenue per
share.
 The price-to-sales ratio can vary
substantially across industries; therefore,
it's useful mainly when comparing similar
companies. Also, it does not account for
DEBT!
Price-to-Book
 Price to book is calculated by dividing the
current closing price of the stock by the
latest quarter's book value (book value is
simply total assets minus intangible
assets and liabilities).
 A low P/B ratio could mean the stock is
undervalued, or something is very wrong
with the company.
Debt-to-Equity
 A relative measure of how much debt a
company has:

 Essentially: long-term funds provided by

creditors divided by funds provided by
shareholders.
 A higher debt/equity ratio generally means that a
company has been aggressive in financing its
growth with debt. This can result in volatile
earnings.
Current Ratio
 A good measure of liquidity of a company, or
how easily it can ‘cough up’ cash.
 AKA - Indicator of company's ability to pay short-
term obligations; calculated by dividing current
assets by current liabilities.
 The higher the ratio, the more liquid the
company!
 What types of companies might this ratio be
VERY important?
Quick Ratio
 Like current ratio, this gives a measure of a
company’s financial strength:

 It is a measure of how quickly a company's

assets can be turned in cash.
 You subtract inventories so you can check and
see if a company has sufficient liquid assets to
meet short-term operating needs. (Note that
current ratio did not subtract inventories.)
Return on Assets (ROA)
 Also sometimes called “Return on
Investment” or ROI, this is a measure
what earnings were generated from capital
investment back into the company.

 Always given as a percentage

 Think of it as “How much money (income)
was generated from a company’s
investment into itself (capital investment or
company assets)?”
Return on Equity (ROE)
 It is a measure of how much in earnings a
company generates in four quarters compared to
its shareholders' equity and is a good measure
of profitability.

 It is also measured as a percentage.

 For instance, if XYZ Corp. made $1 million in the
past year and has shareholders' equity of $10
million, then the ROE is 10%. Some use ROE as
a screen to find companies that can generate
large profits with little shareholder
investment in the company.
Beta (β)
 A measure of a security's or portfolio's volatility,
or systematic risk, in comparison to the market
as a whole. (usually calculated with S&P 500
Index)
 Think of beta as the tendency of a security's
returns to respond to swings in the market. A
beta of 1 indicates that the security's price will
move EXACTLY with the market. A beta less
than 1 means that the security will be LESS
volatile than the market. A beta greater than 1
indicates that the security's price will be MORE
volatile than the market.
Price/Earnings to Growth (PEG)
 It is:

 Can give you an idea of a stock potential growth,

since it divides by Earnings Per Share (EPS)
annual growth rate – but is based on analysts
ESTIMATES!
 If a company has a P/E of 20 and analysts
expect its earnings will grow 15% annually over
the next few years, you'd say it has a PEG of
1.33. Anything above 1 is suspect since that
means the company is trading at a premium to
its growth rate.