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.
[newsletter1][/newsletter1]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 |
|
Price/Sales or P/S: How much you are paying for every $ of sale
|
Stock Price / Sales Per Share |
|
Price/Book or P/B: How much are you paying for a $ of the company's assets |
Stock Price / Book Value Per Share |
|
Price/Earnings or P/E: Shows how much investors value the company's earnings |
Stock Price/ Earnings Per Share |
|
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 |
|
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)