Fundamental Analysis on stocks: How do you do it?

Dividend stocks

Fundamental Stocks Analysis

When you do a fundamental stocks analysis, all you want to gain out of it is to understand how the company operates, their strategy, the success rate of their strategy, the financial health of the business and the company  future plans. By reading and analysing reports you will know how the company is performing and how healthy the company is in the current market condition. If you read the reports of the competitors as well then you will what position your company is on the market.

Why do people use fundamental stocks analysis?

There is an idea in the markets that the stock market may value a company wrong from time to time. Profits can be made by finding stocks that are underpriced. According to the methodology of fundamental stocks analysis the market will eventually value the stock at the right price.

One way of performing a fundamental analysis on stocks is to analysing the financial reports from companies. Each quarter the company gives out their financial result that they have achieved in the previous quarter. By analysing these financial reports, you will gain a better understanding and insight of the value of different company and you will understand how they got priced in the stock market. By doing this you will get to know if a stock is overpriced or underpriced.

5 key factors of a fundamental stocks analysis to look at

  1. Earnings

The first key element to look at when doing a fundamental analysis on stocks is earnings. You need to know what the earnings are. When you know what the earnings are, check it and compare it to the forecasted earning that was done by the CEO of that company. This way you will know if the company strategy is working good. And if the company is profitable or not. Future earnings are a key factor as the future prospects of the company’s business and potential growth opportunities often determines the stock price.

When you are performing a fundamental stocks analysis on you will find out that the factors that determines the earnings of a company are revenue, cost , assets and liabilities. In order to get a simple view on the earnings is too look at the earnings per share (EPS). The EPS is calculated as follow: The total earnings of a company divided by the numbers of the outstanding shares of a company.

  1. Profit Margins

The next key factor to look at in the fundamental stocks analysis is the Profit Margins. Now there is one thing that you need to know first and that is that the total revenue of a company doesn’t tell you the whole story of how well the financial situation is of a company. When you look at the profit margin of company it gives you a new information insight on the financial situation of a company. For instance a profit margin can tell you how much money a company keeps from it’s revenue. This profit measure is therefore extremely useful for comparing similar companies that operates in the same markets. It’s one of the best method to determine which company performs better in a certain market

A high profit margin indicates that a company has lower cost and therefore more profit. Some professional investors and hedgefund managers use the profit margins to see which company has a better control of cost in the same market.

  1. Return on Equity (ROE)

Return on equity is a financial ratio in the fundamental stocks analysis that measure how much profit is being made with the current available equity of the company. Basically it tells how much profit is being made with your investment.


Company A and company B are both making a profit of $10 million. However company A has a equity of $100 million while company B has an equity of $500 million. In this case the ROE of company A will be 10% and the ROE of company B will be 5%. What this tell us is that company A make the same profit as company B but with lesser equity. If company A had the same equity as company B, company A would have made much more profit. In this case based only on the ROE it would be a good idea for a investor to invest in company A as he gets more profit.

  1. Price-to-Earnings (P/E)

Price to earnings (P/E) is a other very popular financial ratio in the fundamental stocks analysis. What the P/E does is that it tells you quickly what the value is of a stock. The calculation of the value P/E value goes as follow: current market price divided by the earnings per share (EPS).

What does the value of a P/E of a stock tell?

A low P/E value means that a stock is under valued. When a stock is under valued it basically means that the current stock price is cheap and it hasn’t reach the price that it should be.  A high P/E means that the current stock price is more expensive. Now you might think that when a stock has a high P/E value that the stock price will go down. But often it doesn’t go down. As the stock price includes many factors such as earnings, profit margin and growth potential. Often a high a P/E of a stock indicates that many traders and investors believes the current stock value is under valued as they believe that the company will earn a lot more in the future. Therefore although the P/E is high they still see it as cheap compare to the future worth.

  1. Price-to-Book (P/B)

Price to book ratio is a financial ratio in the fundamental analysis stocks that compare the stock market value against its book value of the company. The calculation for this financial ratio is as follow: current share price divided by the book value per share (according to the latest financial statement) or use the market capitalisation of the company and divided it by all the shareholders equity.

So what does this financial ratio tells you about the company? What the ratio tells you is that if you are paying too much or too little for a stock as it denotes the residual value if the company went bankrupt today. A higher P/B ratio than 1 denotes that the share price is higher than what the company’s assed would be sold for. The difference indicates what investors think about the future growth potential of the company.

What is the right price to buy?

The thing with fundamental stocks analysis is that in the long run the stock price will be reflected through its fundamental true value. However in the short- term the stock price of a company might go in the wrong direction. This because that there are still factors that can have influence such as news releases and changes in the future outlook of the company. Trends, investors emotions also effects the short term price fluctuations which results that the current share price is different from its true value.

What is the best way to make money with fundamental stocks analysis?


If you are using the fundamental analysis on the right way you can make a lot of profit in the long term. For example in the article I wrote about Starbucks of why I invested it for long term was based on based on the fundamental analysis on shares/stocks. However for entering the buying price I used the technical analyses. I have bought the shares in 2014 and currently my return on investment is over 70%.

Short term 

Not many knows this but you can make a lot of money on short term with using fundamental analysis stocks especially when you are going short or when a company seems to be hit by bad news that barely effects the company revenue. For example if you that something has changed in the fundamental analysis stocks that can have influence on the companies revenue, then the first thing you need to do is check the technical analysis to see what the current price trend is of that stock. Then check if the stock price is near support level or the resistance level. A change in the fundamental analysis stocks will break many support levels or  many resistance levels.

The best way to make money from stocks in my experience is too use a combination of fundamental stocks analysis with technical analysis for entry and exiting. The fundamental stocks analysis is best use to determine why the stock should get more or less value in the future. And the technical analysis is best to use for understanding the price movement( that is based on the past) to determine whether it is a good time to buy or sell the stock for a certain price.

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