Friday, 5 October 2018

The Big 5 - Fundamentals

A summary from Simon Brown’s: Taming the big five. Starting by looking at fundamentals, understanding and starting with these basic five points:



1.       A low Price Earnings (PE) ratio value is best

Earnings per Share (EPS) = Profit / Shares

PE = Price / EPS


2.       Price Earnings Growth (PEG), a number below 1 implies vale and above potentially expensive

PEG = PE / EPS expected (the risky part, it might not realise)


3.       Dividend Yield (DY) around 5%

DY = Price / Dividend


4.       Dividend Cover %, how much of the profit pays out

Operating Profit = Profit / (All Revenue – All Direct Cost)  {cost exclude tax and interest and others}


5.       Operating Margin is compared to previous years and peers in the same industry


These five are a great start for anybody wanting to analyse a company to decide if it’s worth investing into.

When fundamentalists (those analysts and investors who believe they can determine value from such fixed verities as earnings, cash flow, etc.) are confronted with new paradigms. Are stock prices (values) to be determined by dividing price by earnings to establish a reasonable price/earnings (p/e) ratio? Or should sales be used, or cash flow, or the phase of the moon? Technicians are not obliged to worry about this kind of financial legerdemain. The stock is worth what it can be sold for today in the market. See the following post:  How to Trade Chart Patterns

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