Fundamental Analysis Cheatsheet: Ten Popular Fundamental Analysis Tools And What They Mean For Your Investing

Analysing a company’s balance sheet is one of the oldest and most common ways to analyse a stock market share.  Many new investors start out with this method because it makes sense.  After all, if a company is doing well financially on its balance sheet, the respective share price should go up, right?  Well, while there are often other factors involved, it is certainly a great place to start.

The likes of Benjamin Graham, Phil Fisher, Warren Buffett have all used and advocated the use of company statistics and fundamentals in their investing success.  Below are ten popular fundamental analysis tools, and what they mean.  Enjoy!

1: Dividend Yield And Franking Credit

The dividend yield is the amount the company has paid out as a dividend percentage over the last 12 months.  A great piece of information for people who invest for yearly income, the most common dividend yield is between 2% and 7% when a company has one.

Also in this information is the company’s franking amount.  As a company often pays tax on its earnings (at around 30%), often this amount can be offset when they distribute a dividend, by way of a franking credit.  A company with 100% franking, for example, can give you the full 30% credit against the dividend payment on your next tax return.

2: Earnings Per Share

The Earnings Per Share or EPS is how many cents the company earns per share.  For example, a company with an EPS of 120 will have earned 120 cents or $1.20 for each share in the last 12 months.

This is a good measure to see if the company is earning its way effectively.  Obviously, the higher a company’s earnings relative to its share price, the better buy it may be.

3: Earnings Per Share 1 Year Growth

It is good to see a company with solid earnings per share, but we also want our company to be growing and not going backwards.

Therefore, a company with a good EPS 1 Year Growth percentage is a good thing to look out for.  Obviously one that is growing at 50% might be a better buy than one that is growing at only 5%.

4: Cashflow Per Share

Cashflow is often used to gauge a company’s performance, and has been referred to as the life blood of any business.  Many analysts believe that it is easy to manipulate earnings per share, but much more difficult to manipulate the cash on hand.  Also, if a company does not have enough cash on hand to support its operations, it is more likely to become insolvent.

5: Cashflow 1 Year Growth

As it is important for a company to have ample cash on hand, so too it is important to see that the cashflow of a company is growing.

6: Price to Book (PB) Ratio

The Price to Book ratio is the price of the share relative to all of the company’s assets.  If the P/B ratio is less than one then it is said that the share price is less than that of its combined assets, and a candidate for good “value”.  Of course a Price to Book ratio of greater than one indicates that the market is taking into consideration other factors, like potential future earnings.

A study by a United States account found that investing with the Price to Book ratio alone (less than 1) yielded a success rate of 44% wins overall.  However the annual return on those wins was so great that it made up for all the the companies that went down and resulted in a stunning annual performance of 23% p.a. over 20 years.

7: Price to Earnings (PE) Ratio

The Price to Earnings Ratio is one of the best known financial ratios in Fundamental Analysis.  As it is the price relative to the company earnings per share, often investors will advocate that the lower the ratio the better.

For example, a company with earnings of 20 cents per share, trading at $1.00 per share, will have a ratio of (100 / 20 = 5) five.  Obviously if you could invest in a company that was making 20 cents in the dollar it would be seen as a good buy.  The average P/E Ratio over the years is around 14, and many value investors will go for a ratio of less than 10.

8: P/E Growth Ratio

The P/E Growth ratio or PEG ratio is the P/E of a share divided by its annual EPS growth.  It can be done using the current EPS growth or projected EPS growth.

For example, a company with a P/E of  11 and 39% 1 Year EPS Growth would be: 11 / 39 = 0.28.  It is said that a company with a PEG of 1 is at fair value, less than one would be considered good value, and greater than one would be considered “expensive”.

9: Interest Cover

The Interest Cover is the amount of times a company’s earnings (before interest and tax) covers the interest on their debts.  For example a company that earns 50 cents per share and pays out 5 cents per share in interest on its debts, would have an interest cover of 10.

A negative interest cover is often to be avoided when looking at shares using fundamental analysis, as it may mean that the company is not earning enough to meet its current fixed interest obligations.

10: Debt To Equity Ratio

Often displayed as a percentage, the debt to equity ratio is the percentage of debt to a company’s equity.  For example a company with a debt to equity of 38% will have just that: 38% of debt against its equity.

Obviously some debt is good and healthy, but significant debt can be toxic.  Many investors will look for amounts around 20% to 50%.

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What Else Would You Add? 

What financial ratios or data do you use?  Which ratios do you steer clear of?  Comment below in the comments section.

December 21, 2011  Tags: , , , , ,   Posted in: Articles On Building Wealth

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