Category: Fundamentals

This compares the assets to liabilities in the current year for a company. Before buying into a company it would be nice to know if the company has enough liquidity to pay for it’s current debts (debts due within a year).

If this number is below 1, then the company does not have enough cash to cover it’s debts due within a year. Different businesses will have different ratio’s based on their industry. Try comparing the company to other companies in the same business to get an idea of what the current ratio should be for the company in question.

Am I getting enough for this?

When considering the current value of the investment, be sure to include any dividends or other profits you’ve taken from the asset. When calculating the initial value, be sure to include things like trading commissions.

Simple Exercise: Take your house for example and calculate it’s value now, what you originally paid for it and what it cost. What you originally paid for it and what it cost should be the same.

Consider that the initial cost could be considered lower now than it was when you bought your home due to the payments. How does that affect your ROI?

Why fundamentals should matter to your investments regardless of the strategy you take

No matter how you invest a solid understanding of the fundamentals can put you in the best position to make money. Those who jump into an investment without this knowledge can put you in a position that can’t hold itself up.

“…a solid understanding of the fundamentals can put you in the position to make money…”

The question is how do we get to the place where we feel like we have a solid understanding of a companies financials? Most people look at a P/E and will say a company is good or bad based on that one metric, but is it enough to properly analyze a company?

What we want to do to be successful is take a number of ratio’s and see how they relate to actual financials and use enough of them to cover off some key aspects of the financial statements. The ratio’s should answer all the questions you would want to ask of a companies financials.

• Liquidity
• Turnover
• Operating Profits
• Business Risk
• Financial Risk
• Stability
• Coverage
• Control

We’ll take a look at grouping the information into the following categories.

• Income Statement
• Balance Sheet
• Profitability
• Debt
• Share Data

…and finally look at these metrics.

• Price/Earnings
• Price/Projected Earnings
• Price/Book
• Price/Sales
• Price/CashFlow
• Prce to Earngings/Growth
• Earnings Growth
• Sales Growth

The quick ratio is a way to look at how a company might (or might not) be able to handle it’s current short-term debt load.

This number tells you how many dollars(easily accessible) a company has per dollar of debt due the ‘current’ year. Occasionally inventory will be included but it is not easily accessible.

It should be immediately obvious that if an entity is not bringing in enough dollars to cover it’s short term expenses then it is not in the best possible financial shape. A more in depth look at how the entity is run may be in order. If the entity then sells off long-term assets to cover their short-term debt you may want to ask why current operations are not able to profit enough to do this.

P/E is a comparison of the price of a stock compared to it’s earnings per share(EPS). It creates a single number that tells you how much you pay per $1 earned at the company. A P/E of 15 means that you will pay $15 for every dollar earned by the company. Let’s break down P/E components even further and look at what could influence this number to be higher or lower.
First we can look at the Price of the stock. If the stock costs $21.94 a share we pay that money and get 1 share of stock. If the price of 1 share goes up we make money, if the share price goes down we lose money.
E – Earnings Per Share: This is where there are other factors that can influence you’re overall multiple in a big way and maybe not so obvious. Being the denominator in the equation means that the larger it is compared to price the smaller the multiple. How does one arrive at earnings per share?

Now it’s easier to see that a large amount of shares issued by the company can drive down the EPS, conversely a low number could drive the number up. Also if the company pays a preferred dividend(a dividend paid out before the common shareholder dividend) it can be driven lower.
Another factor to consider is how price can be used to determine the number of common shares issued.