Fundamental analysis tools

Stocks are becoming more popular due to technological accessibility. If you do your research on the security, investing in shares can yield great returns. Before trading stocks, there are two types you can use. These are:

1. Technical stock analysis

2. Fundamental stock analysis

Technical stock analysis analyzes historical market data on price and volume, and forecasts the direction that prices will move. Fundamental analysis evaluates primary information at both the macroeconomic as well as the microeconomic levels to determine the stock's intrinsic worth. It studies the company's performance at the microeconomic level. At the macro level it tracks the industry conditions and the economic policies that affect the sector.

These tools allow you to analyze these economic and financial factors.

What's fundamental analysis?

To assess a business's financial health, fundamental analysis examines it at its most basic level. To determine whether the stock's price is too high or low, it examines key ratios within a company. It projects the company's future growth and health. Fundamental analysis is essential for investors. Fundamental analysis helps investors determine the company's value. The following components are considered in fundamental analysis:

1. Financial reports of the company

2. Management effectiveness

3. Asset management

4. The product is in high demand

5. Press releases from the company

6. Review of global industry

7. Trade agreements

8. The government's external policies

9. News releases

10. Analyse of competitors

If the analysis shows that the stock's current price is different from fundamental and market sentiments, there may be an investment opportunity.

Before you consider other components, the most important data point to look at is earnings. The company's earnings is its profit. All analysts monitor the financial statements of companies, which are usually announced every quarter. Share prices are affected by earnings. Share prices will rise if a company announces an increase in profits. Share prices will fall if the company fails to meet earnings expectations. A company's earnings can be a great source of dividends.

The market's value of a stock is not determined by its revenues alone. You will need to do a deeper analysis of the stock to get a better idea about its market value.

What types of fundamental analysis tools are there?

Some of the most popular fundamental analysis tools include:

1. Earnings per Share or EPS

2. Ratio price-to-earnings

3. Return on equity

4. Ratio Price-to-Book (P/B).

5. Beta

6. Price-to-sales ratio

7. Dividend payout ratio

8. Dividend yield ratio

9. Projectioned growth in earnings

Earnings Per Share or EPS

The EPS represents the profit allocated to each stock in a company. It is calculated by multiplying the total revenue or gain of the company with the number of outstanding shares. It can be summarized as follows:

EPS = Net income after taxes / total outstanding shares

Higher EPS equals higher returns for investors, as it is a sign of company health.

Basic and diluted EPS are possible. Basic EPS is based on the total number of outstanding shares. Diluted EPS considers shares that the company has and shares that could be issued to investors in future.

Other than this, EPS can also be divided into forward, current, and trailing EPS. A trailing EPS refers to the fiscal's actual EPS. The current EPS is the projected EPS for the current fiscal. Forward EPS is a projection for the EPS in the upcoming fiscal.

To determine which company to invest in, one company's EPS can be compared with another company in the same industry. A higher EPS can lead to lower earnings or stock prices that are back to normal.

Even though a company makes a lot of profit, its EPS might be lower. If a company has 5 lakh shares and 10000 outstanding shares, its earnings per share (EPS) would be 500000 / 10000 = 50. An EPS of 10 will be earned by another company that earns Rs 10 Lakh and has 1,00,000. The EPS of a second company that earns Rs 10 lakh and has total outstanding shares of 1,00,000.00 will be 10.

Price-to Earnings (P/E).

The P/E ratio is an essential tool for fundamental stock analysis. It is the ratio of company payouts to stock price. This will allow you to determine if the stock shares you purchase pay a good price. The P/E ratio is calculated by dividing share price by EPS. The P/E ratio of a company with a share price of Rs 50 and an EPS of 5, is 10 A lower P/E ratio indicates higher earnings than the stock price. A low P/E ratio could indicate a lower share price relative to earnings. This indicates that the stock is undervalued, and has potential to rise in the future. A higher P/E ratio is in the opposite direction.

The following can be classified as the P/E ratio:

1. The trailing P/E Ratio is the ratio of P/E over the last 12 months

2. Forward P/E Ratio is the P/E rate for the next 12 month.

A decrease in earnings may occur if the forward P/E ratio exceeds the trailing one. The forward P/E ratio should be lower than the trailing one to increase profits.

Investors may differ in their understanding of the significance of the P/E ratio. The P/E ratio is a measure of how much you are willing to pay for company earnings. You may have a different willingness than another investor.

Return On Equity

The Return on Equity, or RoE, is a measure of how efficient a company is at generating profits from shareholder investments. This is calculated by subtracting net earnings after taxes from shareholders' equity. The ROE for a company that has earned Rs 50 lakh in this financial year, with shareholders' equity of 5 lakh, is 5000000/500000 = 10%. ROE is expressed as a percentage. Higher ROE means a company is more efficient. This means that the company can increase its profitability with no additional capital. A company with fewer assets may have a higher ROE. Companies with a higher ROE may not be suitable for investment. It is best to compare ROE between companies in the same industry. A good ROE is one that falls within the 13-15 range.

Price to-book (P/B), ratio

The price to book ratio, also known as stockholders equity, is the ratio of a stock’s market value and its book value. Book value is the total cost of an asset less its cumulative depreciation. You can calculate the P/B ratio by subtracting the closing price from the book value per share for the preceding quarter. This tells us how much the company will have if it pays all its debts and liquidates its assets. Stocks that have a lower P/B ratio are considered undervalued. The stock is considered overvalued if the rate is higher than one. The P/B ratio, which tells you how comparable the company's assets to the stock's value, is crucial. This ratio is more important for companies that have higher liquid assets, such as investment, banking and finance. The P/B ratio does not apply to companies with higher fixed assets or R&D expenditures.

Beta refers to the industry-specific correlation between the stock price and its industry. The benchmark index can be used to calculate Beta. The Beta oscillates between -1 to 1. It can fluctuate between -1 and 1. A beta value of 0 indicates that the stock is correlated with the benchmark index. Lower beta values indicate that shares are not inversely related. Higher beta indicates greater volatility and higher risk assets. Lower beta means lower volatility.

Price-to-sales (P/S) ratio:

The price-to-sales ratio is a comparison of a company's stock prices and its revenue. The P/S ratio can be calculated by subtracting market capitalisation from income, or by using the following formula:

P/S ratio = Per share stock price/Per share revenue

A lower ratio of P/S indicates undervaluation. Anything above the average is indicative of overvaluation.

Lower P/S ratios are better as they mean investors will pay less per unit. This indicator does not include expenses or debt. A company with a higher ratio of P/S can be considered unprofitable.

Dividend payout rate

The dividend payout ratio is a measure of how much money the company has made and how much it is giving out as dividends. This ratio can be calculated by multiplying the total dividend amount by the company's net income. Because there is little growth potential, a company may choose to distribute its profits as a dividend. Dividend payout ratio is the percentage of income retained by a company for future growth, debt repayment and cash reserve.

Dividend yield ratio

Dividend yield ratio refers to the amount that a company pays its shareholders in dividends relative to its share price. Divide the stock's annual dividend by the current share price to calculate the dividend yield ratio. This is expressed in percentage terms. Investors who seek to earn dividends from a company need to know the dividend yield ratio. This measure is not applicable to all companies, as not all companies use their profits to pay dividends. Some companies keep the profits for future growth.

Projectioned earnings growth ratio

The projected earnings growth is the amount you will have to pay for each unit future growth in earnings. This is calculated by subtracting the P/E ratio from projected revenue growth. The amount that will be paid for each unit future earnings growth is lower if the projected earnings growth is lower. A stock with a lower PEG ratio is fundamentally more solid as it has greater projected earnings growth. Investors tend to avoid stocks with a higher PEG.


Fundamental analysis tools are used by analysts to estimate the future value of a stock's price. Analysts who expect a higher future price than the current stock market price will have a better chance of purchasing a stock. Analysts who believe the stock's intrinsic worth is less than the current price may recommend selling the stock.

Some investors are not able to do a thorough fundamental analysis on a stock. Understanding the fundamental analysis tools can help you monitor stocks more closely and accurately.

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