Fundamental analysis of the company

In the previous review, a macroeconomic analysis algorithm was briefly considered, which allows assessing the prospects for the industry as a whole. Analysts recommend investing in the stock market at the time of its bottom – wait for a recession with a fall in GDP and, at the time of the first positive macroeconomic statistics, buy securities with a horizon of at least 1-2 years. In addition to macroeconomics, the fundamental analysis of the company itself also plays a role. The main multipliers are discussed in this review.

Multipliers for assessing the financial condition of the company

Information about the financial condition of the company is available on the websites of both the companies themselves and aggregators. For example, Simply Wall St, Finviz, Gurufocus aggregators are suitable for the US stock market. Their drawback is different data, sometimes not coinciding with the data on the websites of the companies themselves. The reasons are different frequency of data updates, different approaches to assessment. The financial statements will be the same, but manually calculating multipliers does not make sense.

The main criteria and multipliers of the fundamental analysis of the company:

• Share type. Dividend and growth stocks have different amplitudes of price movements. Dividend stocks are less volatile – they are bought for the long term. Rising stocks can show price breakouts, as profits are directed not to dividends, but to development. But at the same time, they get rid of them first.
• Index DSI. An indicator of the stability of dividend payments. Ideally, it should tend to unity. This suggests that dividends have been paid consistently and have been growing over the past 10 years. In the US, companies with stable payments for more than 25 years are called “dividend aristocrats”. An example is Coca-Cola.
• Parameter payout. The share of profits that is used to pay dividends. The higher it is, the worse. If the entire income of the company is directed to dividends, it does not have money left for development. The company is forced to either cut dividend payments or look for other sources of funding, including loans.
• Market capitalization. It is calculated as the product of the share price by the number of shares on the exchange. Blue chips have higher liquidity, but this does not always mean sustainability.
• R/E. The ratio of the share price to the company’s net profit per share. Negative value – investment is excluded. The indicator is compared with similar companies in the sector and the industry average. If the multiplier is significantly higher than the industry average, then there are two options: the company is overvalued or investors expect something unique from it in the near future. Similar situations are found in the biotechnology sector.
• P/b. The price of a company in relation to its balance sheet. A value greater than 1 indicates that the company is overvalued, less than one – the company’s valuation is lower than the value of assets on its balance sheet. Exceptions are companies with a specific business. For example, energy companies may have power lines, transformers, substations on their balance sheets. They are displayed in the financial statements at book value, but they do not represent value for the investor – it is difficult to sell them in the event of a company bankruptcy. P/B will be low, but this does not mean that the company is undervalued.
• Debt/Equ. The ratio of credit funds to equity capital. The optimal value of the coefficient depends on the industry. For example, in the banking sector, the excess of debt over equity is the norm. In developed countries, the use of loans indicates the dynamic development of companies and the rational use of funds. For example, agricultural companies take out loans at the time of the sowing season, without withdrawing their money from circulation.
• Liquidity ratios. In particular, the short-term liquidity ratio indicates the company’s ability to quickly pay off short-term debts at the expense of its liquid assets.
• Net margin. net profitability. The indicator is compared with companies in its sector, since its average value is different in different sectors. Dynamics is also important – if profitability is gradually growing, this indicates effective management.
• ROE. A parameter showing the efficiency of using investors’ money. A kind of analogue of the deposit rate – a percentage of the invested amount per share, which the investor will receive over time. The value of the indicator should exceed the yield rates for conservative instruments – bonds, treasury securities.

Also, different services can have their own separate analytical indicators. For example, visualization of net income per share, forecast indicators of profit, profitability, etc.

Fundamental analysis of the company is carried out in conjunction with forecast values, which are often included in the price of shares. Therefore, the task of the investor is reduced to the analysis of current performance in comparison with individual companies in the segment, the average performance of the sector and the development potential of the industry as a whole.