Stock Research Using Fundamental Analysis: Part I
Fundamental analysis is the most popular and “widely” used tool investors use for researching their stocks. This type of analysis consists of studying the company’s fundamentals (statistics), financial statements, quarterly and annual reports, and management.
An investor should educate themselves on the company’s fundamentals (statistics) “before” buying stock in any company. These statistics are conveniently provided for an investor on financial websites such as Yahoo Finance or Google Finance. It is important to monitor these statistics periodically to note any changes in the company’s stock. A great way to check the progress of your companies statistics is to set up spreadsheets for each one of your companies. This will alert you to any major changes in your company’s performance over time.
The first important statistic I will address is the Price/Earnings ratio or P/E. The P/E is the price of the stock divided by its earnings per share. For example, if a stock were trading at $50. per share, with an EPS of $5., then the company’s P/E ratio would be 10. The P/E is conveniently listed online for the investor.
The P/E ratio can tell an investor how expensive the company’s stock is in relation to other companies stocks. Normally, a “low” P/E is preferable; however, some large growth stocks have triple-digit P/E’s and continue to do very well! (An example of a growth stock would be Amazon. As of this writing, Amazon has P/E of 235.56).
Be aware that a stock’s P/E fluctuates from day to day. And, also, that you should not base your entire stock decision on a company’s P/E. There are many other statistics to take into consideration as well.
Another important statistic is the earnings per share. EPS takes what a company earned and divides it by the number of stock shares outstanding. EPS is listed under a company’s statistics and income statement online. An investor wants to see the company’s EPS increasing over time! If the investor sees a “negative” EPS…they will know the company is losing money.
Another fundamental stock measurement is the dividend yield. For example, if a company pays a quarterly dividend of $.15…then your annual(per share) dividend would be: $.60. If you divide the .60 by 15…you would get a yield of .04. This will be displayed also for you on one of the financial websites.
Ideally, an investor wants to see a company with a 10-year (and up) “history” of paying consistent and rising dividends. Companies take pride in their dividends and some have been paying them out for 50 years and up. Remember dividends are cash in an investor’s pocket!
An investor should also be familiar with the dividend payout ratio. This ratio is the percentage of the company’s earnings paid to the investor in dividends. Any amounts not paid to shareholders are retained for the company either to pay off debt or finance future growth. Many companies in older industries, with little room for future growth, usually make the best use of their profits by paying higher dividends.
Obtaining companies with good fundamentals and dividends can be the “best of both worlds!” With a successful company, an investor not only receives the capital appreciation from their stocks but also, the quarterly dividends.
The three “key” financial statements to study are the Balance Sheet, Income statement, and Statement of Cash Flows. (Some good “basic” accounting knowledge is helpful, however; not absolutely necessary). These financial statements are also provided for investors on financial websites such as Yahoo Finance and Google Finance. I will explain these financial statements in future articles.
An investor should also familiarize themselves with the company’s quarterly and annual reports. These reports provide very useful information for the investor on the company’s performance during the preceding year. Some of the basics the reports include are: the company’s line of industry, audited financial statements, and notes.
A company’s quarterly report is known as a Form 10-Q and the annual report as the 10-K. Publicly traded corporations are required to file these reports by the SEC. Both of these reports can easily be accessed online.
In conclusion, it is very important for an investor to research stocks using fundamental analysis “before” they buy a company’s stock! The investor needs to look at the company’s P/E, Earnings Per Share and Dividend Yield in their analysis of the company. This analysis allows the investor to study the underlying factors of the company. It also gives them an indication of the company’s future performance. An investor should also study the company’s financial statements, quarterly and annual reports, and management. Adequate research tools are conveniently provided online for the investor.