Fundamental Analysis

PEG ratio

The EPS growth number is provided by the company and is their forecast of how much additional earnings they anticipate in the coming reporting period.  Although nowhere near as widely used as the basic P/E Ratio, many financial experts feel the PEG gives a better measure of whether the share price is undervalued or overvalued….

Market valuation ratios

To give you a working example, ere are the numbers for two stocks in the biotech sector (as at 29th May 2011):   SRX CSL Sector Price to Earnings (P/E) 25.31 19.2 14.8 Price to Earnings Growth (PEG) 10 2.06 10 Price to Book (P/B) 5.65 4.42 2.03 Price to Sales (P/S) 4.51 2.24 8.57…

Current Ratio

With liquidity ratios, higher numbers represent safer financial cushions against economic shocks.  A company with a high current ratio should have no trouble meeting its short-term debt obligations without sacrificing operational capability. However, taking the Current Ratio at face value without considering the nature of the company’s assets can lead to trouble.  This ratio assumes…

Profitability ratios

Return on Equity (ROE) tells us how a company utilises investor dollars to generate earnings growth, with ROEs between 15% and 20% indicating good performance. Return on Assets (ROA) tells us how well the company uses its assets to generate earnings growth, and dividend yield shows how much the company pays out in dividends for…

Debt to equity

Lower numbers here mean a company is using less leverage, or debt, to operate. Although larger companies can generally handle larger debt loads, the D/E Ratio taken in isolation doesn’t tell you anything about possible trends in the use of debt.  Has the company’s debt been steadily increasing over the past years?    If so,…

Annual Report

At the end of each fiscal year, companies and mutual funds issue their annual reports. These contain detailed information on the operations and financial picture for the company during the  past year, both in text and graphic form. Normally, all annual reports contain: Resumé of the financial year in question;Short presentation (text, graphics, tables);Management position/analysis/letter…

Breakout

Normally traders would buy the assets when the price breaks above the resistance point (its previous high price) and sell when it breaks below (previous low price). Once a resistance is broken, it will become the next support level. Breakouts are usually followed by large trading volumes of the shares in question and high volatility….

Book Value

We often want to buy a stock on the cheap – and to do this we need to find how much the company’s shares should be worth. But how do you know if the current share price is too high or too low? There are many valuation methods around that attempt to calculate the ‘true’…

Price-to-Book Ratio

A handy measure used to assess whether a company’s share price is justified or not is the Price-To-Book Ratio (P/B ratio). The P/B ratio is calculated by dividing the closing price of the stock by the company’s latest book value per share (from its quarterly or annual statements). Many of you would be familiar with…

EBIT

EBIT stands for Earnings Before Interest and Taxes and is used by stock analysts to value and compare companies. In short, the EBIT shows how profitable a company is from an operational standpoint, or from the day to day running of its business. Some analysts prefer EBIT to the net profit figure, which we analysed…