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 do we do business?
Well, in the beginning, we had a system of bartering, where you may have exchanged four goats for one cow or one daughter for a flock of sheep. However, as the feudal system crept into society along came money made from gold and silver 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 essential 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 its 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 common 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. This is especially the case 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.
The key fundamental factors about stock selection are in detail in future sections, 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 than 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 than the previous period are “GREAT COMPANIES.”
“Only buy Quality Stocks.”
” I want to win; therefore, I buy only Winners.”
The Liberated Stock Trader
This is simple advice, but it is so important.
One of the finest books on the topic of investing has to be without a doubt How to make money in Stocks by William J. O’Neil.
Anyway, to quote from Mr. O’Neil’s Book.
“The percentage increase in earnings per share is the single most important element in-stock selection today”*
He also drives home the message.
“My study of thousands of the most successful concerns in America proved that virtually every corporate stock with an outstanding price move, showed Accelerated Quarterly Earnings increases sometime in the previous 10 Quarters before the towering price advance began” *
* Excerpt from How to make money in Stocks by William J. O’Neil.