Beginning an investment especially for a beginner may be hard since there are several things to be considered such as how to begin, where to buy, or what method to be used. One of the factors that every investor should know is the fundamental analysis.Investopedia defines fundamental analysis as a method to evaluate a security’s value by examining some factors dealing with related economic, financial, and qualitative quantitative factors.
It scrutinizes all the factors which can affect the securities’ values such as economic and financial situation in general and company’s financial condition. This method is established with the assumption that stock market may value a company at a wrong price. The profit is made when an investor can figure out whether a company’s stock is underpriced or not. By evaluating the companies’ financial report, an investor could find out the value of the stock from various companies. This is called the ‘intrinsic value’ or the ‘true value’ of the company.
The opportunity of the investor is when there is a gap between the intrinsic price and the market price. If the stock market underpriced a company, then it is the time to buy the stock with the expectation that the price will rise toward the intrinsic value. On the other hand, if the market price is above the intrinsic price then the investor should sell that company’s stock.
As above mentioned, here are some factors to be considered in fundamental analysis.
Earnings are the important element to be examined if someone wants to be an investor of a particular company. Investor should know how much earnings that the company made and its profit for their shareholders.
2. Profit Margins
Earning is not the only thing that every investor should know. A prospective company should have a good number of profit margins. The formula of to calculate the profit margins is as follow:
3. Return of Equity (ROE)
According to Investopedia, return of equity is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The calculation can be done with this formula:
4. Price-to-Earnings (P/E)
It is used to know the stock’s value by means of dividing current market price by its earnings per share (EPS). A company with high P/E is expected to be prospective in the future. It can be calculated at the end of each quarter and at the end of period for each share outstanding. This ratio is usually used to contrasting companies within the same industry.
5. Price-to-Book (P/B)
Just as its name the calculation of price to book is to diving stock’s share price over its net assets. It is also known as price-equity ratio. It is used to reveal the high-growth companies which is priced by the market as undervalued companies.