Fundamental Analysis

In essence, fundamental analysis (FA) is a discipline that determines the intrinsic or fair value of a company’s share. This is done by examining the economic, industry, and financial factors that could affect the company.

Fundamental Analysis Terms

Earnings Per Share (EPS)

Earnings Per Share (EPS) serve as an indicator of a company's profitability. This would be the portion of a company's after-tax profit (or loss) allocated to each outstanding share. We can calculate earnings per share as EPS = (net income - dividends on preferred stock) / average outstanding Shares.

Earnings per share is also a major component used to calculate the price-to-earnings (P/E) valuation ratio, where the 'E' in P/E refers to EPS.

Price to Earnings ratio (P/E)

The Price to Earnings ratio (P/E) is probably one of the most popular stock selection tools used by novice investors and seasoned analysts in today's market.

Shares with high P/E ratios can indicate higher growth prospects but are not necessarily better investments than those with lower P/E ratios. However, a share with a high P/E ratio can mean that the stock is perceived as overvalued and may be sold off by investors.

Return on Equity (RoE)

Return on Equity (RoE) indicates a company's profitability and, more importantly, how it generated those profits. Investors can divide the company's net income by shareholder's equity to find its Return on Equity. A high RoE indicates that a company effectively converts its financing into profits.

Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA)

Investors and analysts alike calculate EBITDA to measure the underlying operating performance of a company, excluding the effects of financing, asset investment, taxes, and abnormal items. EBITDA indicates a company's financial performance and approximates earnings potential closely.

EBITDA's possible drawback is that it strips out the cost of debt capital and its tax effect by adding back interest and taxes to earnings.

Dividend Yield

The dividend yield is the ratio of a company's annual dividend compared to its share price. The dividend yield is shown as a percentage and calculated by dividing dividends paid in one year per share by the value of a share.

Shares Outstanding

Outstanding shares are shares held by shareholders and institutional investors and shares owned by the company's officers and insiders.

Market Capitalization or Market Cap

Market capitalization refers to the total value of a company's outstanding shares. A company's market capitalization is calculated by multiplying the price of one share by the outstanding shares. Market capitalization determines a company's size instead of sales or total asset figures.