What is Fundamental Analysis?
Contributed by Ilene Slatko of DSS Consulting
In researching potential stocks, there are two types of analyses many investors perform: Fundamental Analysis and Technical Analysis. Here, we'll cover Fundamental Analysis (FA), which allows you to quickly get a snapshot of the financial health of a company.
Utilizing a few key metrics will help you to quickly determine if a particular company matches the profile you want when selecting your investments and what its future prospects might be.
One of the things that distinguish successful investors is that they are willing to do their due diligence (dd). And, no, that does not include taking advice from your best friend’s uncle’s college roommate! You might get lucky, but that is not dd.
FA is like your personal financial health, but on a company level: how much you make, how much you save, how much you spend on fixed costs, and how much cash you have on hand for emergencies. And FA doesn’t consider how popular you are (how the stock is trending). Analysts performing FA will also study market trends, industries, and the economy.
In this bite-sized lesson, we'll cover key key metrics so you can be on your way to analyzing stocks:
- Earnings per share (EPS). What it means and how to calculate it.
- Price to earnings ratio (P/E). Is a low or high P/E ratio better?
- The quick ratio. What it means and how to calculate it.
- Debt to equity. What is good vs. bad leverage?
- Outstanding vs. authorized shares
So, let’s dive in and peel back simple Fundamental Analysis that you can do without making it your life’s work!