Introduction to Fundamentals
Fundamental analysis evaluates a company's intrinsic value through financial statements. It involves understanding the business, industry, and wider economic factors that influence a company's performance.
Earnings Per Share (EPS)
EPS measures a company's profitability, dividing net earnings by outstanding shares. A rising EPS suggests growth, however, buybacks can distort this metric. Always consider EPS in conjunction with other indicators.
Price-to-Earnings (P/E) Ratio
The P/E ratio compares a company’s share price to its EPS. A high P/E can indicate overvaluation or market optimism for future growth. Sector comparisons are essential, as P/E varies widely across industries.
Debt-to-Equity (D/E) Ratio
The D/E ratio indicates financial leverage, comparing total liabilities to shareholders' equity. A high D/E may suggest higher risk. However, some industries, like utilities, naturally have higher D/E ratios due to large infrastructure investments.
Free Cash Flow (FCF)
FCF represents the cash a company generates after capital expenditures. It’s a key indicator of financial health, signaling the ability to repay debt, pay dividends, and fund growth. Volatile FCF can be a red flag.
Return on Equity (ROE)
ROE measures a company's ability to generate profits from shareholders' equity. A consistent ROE outperforming peers typically indicates competitive advantage and operational efficiency. Beware of inflated ROE due to high debts.
Analyzing Management Quality
Quality of management is less tangible but crucial. It involves assessing leadership's experience, governance practices, and shareholder communication. Companies with strong management often navigate challenges more effectively.