Understanding the basics of fundamental analysis is important, especially when analyzing a stock.
This video looks at why we do business, how we can measure the success of a business and how to find winning stocks by understanding the basic measures of a company.
This Video looks at some very important measures of a company,
- Earnings Per Share (EPS) and why it is important.
- Profit Margin
Fundamentals Video 1
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Why do we do business?
Although this is a part philosophical question and almost ridiculously simple to answer, this is a key question.
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.
Then Along Came 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 its ability to make money.
What are Key Fundamental 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 marketplace.
- EPS = Earnings (after taxation) / Total ordinary shares
Fundamentals Video 2
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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 an investor’s 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 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”
To find companies with great fundamentals you need to understand stock screening, the best tools and some tips on how to screen for stocks.
So when you hear the next hot tip, check out the EPS growth for the company.
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To your success!
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