1. A Simple Introduction to Fundamentals.

Why do we do business ?
Although this is a part philosophical question and almost ridiculously simple to answer, this is a key question that leads us to the main point.
Why we do business ?
Well, in the beginning we had a system of “Bartering”, where you may have exchanged 4 goats for 1 cow, or 1 daughter for a flock of sheep. However as the feudal system crept into society along came money made from gold by the King himself.

With the concept of money, came the concept of profit. Although business today has obligations to its employees, customers, communities, even the environment, it is essentially in existence to make money and if it has shareholders they get to share it.
So, although it sounds callous to talk about money the main and distinctly most important measure of any company, is it ability to make money.

What are the Measures ?

• Revenue and more importantly revenue growth – the amount of money that went into the cash register of the company (before taxes, and expenses)
• Profit Margin – the percentage difference between, Net Profit (after tax) and Net Sales
• Earnings and more importantly earnings growth– Earnings are the revenue minus the expenses.
• Earnings per Share (EPS) – EPS is the company’s total earnings (after tax) Divided by the total ordinary shares outstanding in the market place.
• EPS = Earnings (after taxation) / Total ordinary shares

Filter out the junk stats!
If there is one industry that is full of stats, theories and 95% personal opinion, it is the Financial Industry, especially when it comes to investments. Even more so when it comes to Stock analysis.
If analysts on Bloomberg TV are not talking about the debt to asset ratio or volume of short term debt then it is the Current Ratio or even the P/E Ratio.
I even saw in the investors hot tips newsletter  a recommendation for a company called APD, amongst its impressive statistics were a 5-Year Estimated Earnings Growth: 2%
WOW, 2% earnings growth, let me have a piece of that pie……please please please
Anyway enough sarcasm.

The key fundamental factors about stock selection are in detail in future articles. But if you take one thing out of this article, it should be

• Companies that are making buckets of money (Revenue or Earnings) could be good targets.
• Companies that are making more money this year that last year are good targets.
• Companies that are making more money this quarter than the same quarter last year are good targets
• Companies that are making jumps in earnings that are larger percentages that the previous period, are “GREAT COMPANIES”

So when you hear the next hot tip, check out the EPS growth for the company.

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