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Home » » Three Key Indicators in Fundamental Stock Analysis

Three Key Indicators in Fundamental Stock Analysis

Fundamental stock analysis is a method used by investors to evaluate a company's performance before investing. The primary goal of this analysis is to assess the potential for long-term stock price appreciation, differing from technical analysis, which is more commonly used by traders for short-term trading.

Investors conducting fundamental analysis examine various ratios and indicators that reflect the company's financial health, operational performance, future prospects, and stock price valuation. This information is typically derived from the company's financial statements over the past five years. Through this analysis, investors can select high-quality stocks at reasonable prices. Below are three key indicators frequently used in fundamental stock analysis:

1. Price to Book Value (PBV)

Price to Book Value (PBV) is a ratio used to determine whether a company's stock price is considered expensive or cheap. This ratio serves as a critical reference for investors in assessing a company's valuation and making buy or sell decisions. The primary functions of PBV include:

  • Assessing the company's valuation.
  • Evaluating the risks and potential of an issuer in the future.
  • Comparing the book value per share with the current stock price.
  • Determining whether the stock price is expensive or still cheap.

The formula for PBV is:

To calculate the Book Value, an investor must divide the equity value by the number of outstanding shares.

2. Price to Earnings Ratio (PER)

Price to Earnings Ratio (PER) is a ratio used to evaluate the stock price based on the company's ability to generate net income per share. A high PER indicates that the company has significant potential for income growth; however, if the company fails to increase net income in the future, the stock could be considered overvalued.

The formula for PER is:

By calculating PER, investors can gauge the growth potential of the stock they intend to purchase. Although PER is an important indicator, it is not the only factor to consider when making investment decisions. PER helps investors make better decisions by providing insight into the potential profitability of the selected stock.

3. Earnings Per Share (EPS)

Earnings Per Share (EPS) is a financial ratio that shows the company's net income divided by the number of outstanding shares (excluding treasury stock). EPS is used to measure a company's profitability, with a higher EPS indicating that the company has substantial revenue.

The formula for EPS is:

EPS=Net Profit−Preferred DividendsTotal Outstanding SharesEPS = \frac{\text{Net Profit} - \text{Preferred Dividends}}{\text{Total Outstanding Shares}}

EPS calculations are based on income statements and balance sheets. EPS represents the portion of the company's earnings distributed to each outstanding common share. Several factors can lead to a decline in EPS, including:

  • The percentage increase in net profit is smaller than the percentage increase in the number of outstanding shares.
  • A decrease in the total number of outstanding shares and profits.
  • Rising profits despite a stagnant number of outstanding shares.
  • A decline in net profit along with a decrease in the number of outstanding shares.

In addition to the three fundamental analysis indicators above, there are other important indicators such as assets and liabilities, dividends, cash flow analysis, and debt ratios. Understanding these indicators is crucial before deciding to invest in stocks.

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