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What is Fundamental Analysis of Stocks?

What is Fundamental Analysis of Stocks?

 

Fundamental Analysis of Stocks

The Fundamental Analysis is a technique through which the real value of the company’s stocks (whether overvalued, undervalued, or correctly valued) is determined by assessing the factors that affects the company’s business model and its future prospects. The fundamental analyst uses several valuation models such as dividend models (focus on expected dividends), earnings models (focus on expected earnings) and assets models (focus on the company’s assets) to forecast the future value of the company’s stocks.

Factors assessed in Fundamental Analysis

  • Net profit margin: The Net profit margin is also known as a profitability ratio of a company which indicates that how much profit a company is able to squeeze out of each dollar of sales. It is calculated by dividing the net income by total sales. The company having net profit margin 25% means $0.25 of every $1.00 in sales is realized in the profits.
  • P/E Ratio: The P/E Ratio is also known as Price/Earnings Ratio which indicates that how much an investor must pay to buy $1 of the company’s earnings. It is calculated by dividing the current stock prices by the previous four quarter’s earnings per share. If current stock price is $10 and last four quarter’s earnings is $2 then the P/E Ratio is $5 (i.e.10/2=5).
  • Book Value per Share: The Book Value per Share is a price ratio which indicates whether a stock is overpriced or underpriced. It is calculated by dividing total new assets (i.e. total assets except liabilities) by total shares outstanding.
What is Fundamental Analysis of Stocks?
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