Stock Fundamental Analysis
Stock Fundamental Analysis is the business of analyzing the financial statements for a stock, determining it's health, competitive advantages, competitors and markets.
As an investor, you perform this type of analysis on historical and present data, with an overall goal of making financial forecasts.
Here are some of the basic analytical pieces that comprise the fundamentals of a stock:
The number of shares traded in a given session provide a snapshot of a stock's liquidity. In general, the higher the daily volume, the less likely a stock will be subject to extreme volatility and wild price swings.
The change in price - in dollars - from the previous day's close.
Earnings per share, or the company's net income divided by the number of shares outstanding, boils the net income number down to the shareholder level.
The price/earnings ratio - calculated by dividing the share price by EPS - can help indicate whether a stock's price is high or low relative to its earnings. A company with a very high P/E ratio may be overvalued in many investors' eyes.
This is a modified P/E calculation that helps determine whether a high P/E may, in fact, not be such a bad thing by taking into account the company's prospects for growth. PEG is probably more useful than P/E when looking at smaller companies.
Debt and Debt/Equity
Is the company highly leveraged? Too much debt can put a company on a shaky foundation. These figures can help explain how much of a company is built upon both short- and long-term debt obligations.
Price to sales is a revenue measure that divides the share price by sales per share. P/S can be more valuable than P/E when evaluating young companies that may be performing well, but have little to show in the way of earnings just yet.
Book Value / Share
The book value of the company (assets minus liabilities) divided by the number of shares outstanding.
Price to book
A helpful tool for weeding out stocks that may be considered undervalued or overvalued, price-to-book is calculated by dividing the current share price by the book value per share.
How efficiently is a company running? This calculation of operating income divided by total revenue can tell how well a particular company manages its fixed costs to deliver gross margin.
The Return on Assets figure - calculated by dividing net income by total assets - can tell an investor how much profit a company generated for each dollar of assets.
Does this company have the means to pursue new acquisitions or business ventures? It's tough to grow and expand without a healthy free cash flow, which represents operating capital minus capital expenditures.
A figure calculated by dividing short interest - that is, investors looking to sell - by the average daily volume in a stock. Many investors see a higher short ratio as a signal of an impending upward move, as short sellers may come in as buyers to cover their positions.
A popular ratio used to gauge a stock's price volatility in relation to the rest of the market. Investors with weak stomachs may not have the constitution to endure a high-beta stock.
A firm's gross income minus expenses is the "bottom line" in any analysis. Quite simply, is the firm making money?
Return on Equity (ROE)
Dividing net income by book value, ROE helps determine how efficiently a company is using its assets to produce earnings.