Fundamental Analysis – How to Value a Company

Continuing from Series 1: How to Value a Stock – for Average Individual Investors

Wall Street stock analysts take various elements into consideration when they value a company using Fundamental Analysis. These include:

• The company’s financial, operational and business variables;
• Overall economic conditions (such as GDP, Inflation rate, Interest rates etc.); and,
• State of the industry within which the company operates.

All of this information is used to decide whether a company holds value for investors. In this article we will present the different variables, ratios and elements that you should consider when conducting your own fundamental analysis to value a company.

At the end, we will visit this article: “Is GE Stock a Buy, Sell or Hold – Value Proposition for Investors”, posted by MarketConsensus News. The article uses the same fundamental analysis variables discussed below to value whether General Electric (GE) is a good buy, sell or short for stock investors.

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The most important sources available for conducting fundamental analysis include a company's financial statements: the Balance Sheet, Income Statement and Cash Flow statement. By using a series of Ratios and Multiples based on those statements, an investor is able to value a company and assess whether the stock of the company is worth investing in.

Fundamental Analysts interpret the quantitative ratios, and many qualitative measures such as reputation of the company's management, to build an investment thesis about the valuation and growth potential of the company, both in the near term as well as the longer term.      

Some of the highlights of Fundamental Analysis include:

• Threshold Analysis: Measuring the results against predetermined factors or values. For instance, a Price/Book valuation of less than 1 (usually) indicates a stock that's undervalued
• Vertical Analysis: Assessing one set of ratios (e.g. Price/Earnings) against others (e.g. Price/ Earnings Growth)
• Horizontal Analysis: Analyzing the ratios and multiples over more than one year for a given company
• Peer Analysis: Comparing a company's ratios and multiples against those of its industry peers
• Benchmark Analysis: Assessing a company's ratios and multiples across an entire industry or another appropriate benchmark  

Here are some of the key metrics used when evaluating the fundamentals of a company.

Name	How to calculate	What to look for
Earnings Per Share or EPS: How much of the company's earnings are allocated to each share	Earnings / Shares Outstanding	Generally, higher values are preferred
Price/Sales or P/S: How much you are paying for every $ of sale	Stock Price / Sales Per Share	Generally, a lower value is preferred
Price/Book or P/B: How much are you paying for a $ of the company's assets	Stock Price / Book Value Per Share	Generally, a lower value is preferred
Price/Earnings or P/E: Shows how much investors value the company's earnings	Stock Price/ Earnings Per Share	Generally, a lower value is preferred Higher values indicate shareholder willingness to pay more for a dollar of earnings Higher values signal greater future potential growth prospects Carefully study the "E" part for any anomalies or distortions
Price/Earnings Growth or PEG: Ties a company's P/E to its future Earnings Growth	Forward P/E Ratio / 5-Year EPS Growth Rate	Generally, a lower value is preferred Carefully study capital requirements for growth, and how realistic the growth rate specified is to achieve

Check out this article that applies the above ratios, metrics and analysis discussed above: Is GE Stock a Buy, Sell or Hold – Value Proposition for Investors

Stock Valuation Series

Series 1: How to Value a Stock – for Average Individual Investors

Series 2: Fundamental Analysis – How to Value a Company

Series 3: 4 Major Valuation Ratios to Value a Stock – For Individual Investors

(By: Monty R. – MarketConsensus News Contributor)