Getting Started: Fundamental Analysis

 

Depending on what metric you're looking at, performance can be measured in a number of different ways. If you want to look at a company as a whole, then its ability to generate a profit profit is a sensible measure to review (see earnings  earnings). However, if you want to be more specific in your assessment, you can be. For example, if you want to check the performance of certain assets asset, then you would want to look at a metric like return return on assets (ROA).

There are several numbers and ratios that can be used to gauge a company's performance. Metrics like the price-to-earnings price-to-earnings-ratio-p-e ratio ("Booyah Breakdown: The Ratio King"), earnings per share earnings-per-share-eps and gross margin gross-margin are all useful in determining a company's relative health.

Comparables Rule

When comparing the performance of two companies, it is important to remember that comparisons aren't absolute. For example, looking at a technology company like Google (GOOG), whose P/E on any given day is almost four times as high as that of U.S. Steel (X), won't tell you as much as you'd think. While a lower P/E is generally more favorable (suggesting that a company with a given stock price takes in greater profits), U.S. Steel is in the basic materials sector, which as a group doesn't trade with a P/E comparable to the tech sector.

So how should you, the burgeoning analyst, approach metrics? Like this: Use ratios and comparisons only among comparable companies in comparable industries or sectors ("Industries vs. Sectors: What's the Difference?"). For example, while eBay's (EBAY) fundamentals might make it look like a pig (a bloated and overvalued stock) compared to The Bank of New York's (BK) fundamentals, the two aren't in comparable fields, so the intrinsic value intrinsic-value of each stock is no clearer for your comparative effort.

(More suitable comparisons for eBay would be Amazon.com (AMZN) or Yahoo! (YHOO), while JPMorgan Chase (JPM) or Bank of America (BAC) would work for the Bank of New York.)

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