This is part two of the three-part series, “How to analyse stocks”. If you haven’t read part one introducing analysis of stocks, jump onto that first. 

Okay, so in part one of this “How to analyse stocks” series we introduced the difference between fundamental analysis and technical analysis.

Now we’re going to get into what fundamental analysis REALLY is.

This method is based on the assumption that the stock price of a company doesn’t necessarily reflect its intrinsic value. 

Soooo investors look at both qualitative and quantitative factors to get an idea of how valuable the stock is.

The qualitative stuff investors look at:

Investors start off by getting to know what the company’s about first. 

Sussing their website, getting to know their leadership team and their goals.

They also have their eyes on what’s happening in the news cycle to see if any broader (aka macro) factors could affect the company:

• Is there anything happening globally or nationally that might impact this stock? Eg. natural disasters.
• Are there any regulatory changes that might affect this stock? Eg. trade restrictions
• Has the company announced anything that might impact its value? Eg. staff layoffs or management issues.

The quantitative stuff investors look at:

All publicly listed companies (the ones you can buy shares off in the stock market) are required to publish their financial statements.

That’s their balance sheet, profit and loss statement, and cash flow statement as part of an annual report and half-yearly reports in Australia.

Investors look at company financial reports to get an idea of how profitable they are, and how well they manage their money. 

This might also include financial ratios to get a snapshot of the company.

Financial ratios convert financial information to a standardised format so companies can easily be compared against each other and the broader industry

So if you’re starting to learn more about fundamental analysis, here are some of the most commonly used ratios are:

Earnings Per Share (EPS):

Earnings per share is a company’s net profit divided by the number of shares outstanding. 

And it gives you an idea of how much profit per share goes back to shareholders.

‍Price to earnings (PE) ratio:

The price to earnings ratio is related to the earnings per share ratio.

Think of it like working out how much an influencer’s clout is worth.

Basically the ratio shows, for each dollar earned, what the market is willing to pay for the stock. 

Debt to equity ratio (D/E ratio):

The previous ratios looked at analysing a company’s earnings - this one’s about their debt levels.

The debt to equity ratio is total debt divided by total shareholder equity. The higher the ratio, the more debt (and risk) the company’s taken on.

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This is part two of the three-part series, “How to analyse stocks”. Slide on over to part three on technical analysis.