Fundamental analysis of the securities market
Fundamental analysis is the cornerstone of investments in securities markets. A huge number of fundamental factors that can be found in the stock market, ultimately boils down to the study of the financial statements of certain companies. Main sections of the statements are:
- balance sheet;
- profit and loss statement;
- сash flow
These reports might give clients of Forex companies and investors an idea about financial and economic activities of a company for a certain period of time (short-term or long-term).
Companies are legally required to report this data once a quarter. By reviewing these reports, the clients can evaluate real cost of the assets and determine if they are undervalued or overvalued. Using key fundamental parameters, the clients can compare stocks with each other and choose those that have greater investment potential.
Main fundamental indicators of securities
Here are some of the key indicators that fundamental analysts usually use to compare stocks:
Size of earnings per share (EPS)
he most commonly used fundamental factor is earnings per share (EPS). The EPS is a direct measure of a company’s profit, which is calculated as follows: net profit minus dividends from privileged shares divided by a weighted number of shares outstanding. Importance of the EPS indicator is that it determines cash cost of earnings per share, and is also used in calculation of another parameter – price-earnings ratio (P/E). If not to go into details, it is believed that the higher the EPS, the more profit a company will receive in future.
Price-earnings ratio (P/E)
Price-earnings ratio (or P/E coefficient) is defined as the market value of a share (Price) divided by earnings per share (EPS). This indicator is used to determine if price of a share is too high. Essentially, P/E means two things. The first is how many dollars an investor is willing to invest in a company in order to get one dollar profit. And the second – how many years he will have to wait in order to return the investment at expense of current profit (profit in a form of dividends is assumed).
In other words, the P/E indicator talks about confidence of an investor in future of the firm. Small values of the coefficient talks about low confidence in the company, and large ones shows optimism on this occasion. However, at the same time, a high P/E indicates an overvaluation of a firm. Therefore, one should not get involved in securities with excessively large P/E.
And finally, the dividend yield indicator shows how many dividends a company pays every year in relation to the price of shares. This indicator is calculated by dividing the size of the annual dividend by the price of one share. In essence, the “dividend yield” indicator shows how much money you get for every dollar invested in shares of this company. This can be considered as interest received from investments, and more often, the higher the dividend yield, the better. However, the high dividend yield has one drawback – limited growth potential of the company itself.