There are two main ways to analyze the performance of an asset. Technical analysis utilizes indicators in order to attempt to make a prediction about the future performance based on the asset’s past movement and volume. This type of analysis is often combined with fundamental analysis. Fundamental analysis is a method of measuring the intrinsic value of an asset by examining the relevant economic and financial factors. It’s important to assess the fundamental indicators for stocks when picking assets for trading.
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The goal of such evaluation is to estimate a number, a value, that traders can then compare to the current price of the asset and understand whether it is overpriced or undervalued.
While it sounds uncomplicated, often it is quite hard to understand the factors one should be evaluating in order to build an objective opinion regarding an asset’s true value.
Quantitative vs. qualitative
All the economic factors can be split in two categories.
Quantitative fundamentals refer to everything that can be presented in hard numbers, these are the measurable characteristics of the business or field.
Qualitative characteristics focus more on the quality of the company’s technology, brand name recognition, key executives and other, perhaps less obvious, but important features.
Let’s take a look at the crucial factors that you may need to consider when looking into fundamental indicators for stocks trading.
How to Analyze Fundamental Indicators for Stocks?
Using a company’s balance sheet, income statement and cash flow statement, investors can get an idea of the stock’s value. Fundamental analysts use stock analysis data to understand a company’s position in relation to its industry, economy and competitors.
While some factors may be considered “more important”, like the company’s earnings, in reality, traders need to evaluate the company as a whole in order to make a well-informed decision. Both qualitative and quantitative factors can shift the situation and have an impact on the stock performance.
Qualitative Factors
Some key qualitative factors one may consider when purchasing or selling stocks, as well as trading CFDs on stocks are, for instance:
- Business Model
What does the company specialize in? What causes it to gain or lose money? It is crucial to understand the company’s position in the market in order to evaluate its prospects.
- Competition
Does the company have a competitive advantage? Is it unique in the service it provides? Some companies, without doubt, rule the industry and when the company can keep competitors at bay, it allows it, as well as its shareholders, to enjoy growth and profits on a long-term basis. When evaluating the company at this step, try to be impartial, not giving advantage to the companies you personally prefer, for example.
- Company management and management style
Strong leadership is extremely important for any company, and a change in management might radically influence its performance, in both good and bad ways.
- Industry
Take a step back and evaluate the industry in which the company operates as a whole. Is it an industry with potential? How might it possibly change in the next year? Whether it is a big or small company, its position in the industry is what influences it the most.
Quantitative Factors
Some important fundamental quantitative factors are expressed in the following ratios:
- EPS (earnings per share)
This number specifies the company’s profit divided by the number of shares. The higher the EPS, the more profitable the company.
- P/E ratio
This key valuation ratio compares EPS to the current value of the stock. If P/E is high, it may signal that the stock is overvalued, whereas a low P/E ratio may signal that the company is either undervalued or is an unattractive investment.
- PEG (price to earnings growth)
It is calculated by dividing the company’s P/E ratio by the annual earnings growth rate per share. This ratio is used to evaluate the company’s performance over time.
- ROA (return on assets)
ROA is calculated by dividing a company’s total income by total assets, and it shows how efficient the company is at transforming assets into income.
- ROE (return on equity)
This ratio measures how good the company is at returning income to shareholders.
How to Learn About a Company’s Fundamentals?
Public companies offer information about their financial state to the public, so it’s usually available online. To find the company’s earnings reports, information about the management structure and other details, it is always best to visit their official website. The earnings reports are usually published according to a schedule, so you may find this information in the economic calendar.
The news can also be a valuable source of information about different assets. To learn more about how to use economic news for trading, have a look at this video explainer.
Having a look at the company’s social media might also be a good move: it might give you an idea of their customer focus and reveal further details regarding the company’s products and services.
Conclusion
Depending on how meticulous you want to be, there are many more fundamental indicators for stocks to consider when evaluating these assets. However, these core fundamentals are sufficient for an overview to pick those that perform well and fit into your trading method.
