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In this paragraph, we focus on fundamental analysis while the next one will be devoted to technical analysis. We introduce the various fundamental indicators that TOP10, our stock screener, is using.
Fundamental anlysis mostly studies the evolution of a company activity within its business environment. It includes a financial study of the company based on reports and interviews of the players. It tries to determine if the company will grow (small and medium business) or return money in terms of dividends.
There are many variables that try to capture the company business evolution. As an investor cannot analyze all the variables, it is common practice to pick up a few and use them for analysis.
We retain some of the concepts defined in the literature for fundamental analysis (partly derived from www.smartmoney.com). From these concepts, we derive five fundamental indicators to measure the solidity of the stock for a buy and the fragilness for a sell. Stock price, earning, return in dividends, debts and incomes are good keys for stock price evaluation. Other criteria such as debt ratio, growth rate, total return on assets are pertinent for forecasting a business developmentThus, our selected indicators are :
Price/Earnings Ratio (P/E Ratio - PER)
The share price divided by earnings per share. Corporations with negative results have an insignificant PER. The PER is one of the most widely used indicator to evaluate an action. As a general rule, the lower is the PER, the less the stock is expensive.
Yield (Dividend Yield - REND)
Payments paid to shareholders of a company from its current earnings or set aside. The rate of return is equal to total dividends paid the last12 months divided by the price of the stock
Business Value versus Sales (Enterprise Sell Ratio - VECA)
This indicator is the result of the value of the business with debt to divided by the sales. It is calculated by dividing the value of the shares more debts by the company income. The lower is this indicator, the less the enterprise with debts is expensive.
Debt Ratio (Debt/Total Capital - REFI)
This ratio is a measure of the financial leverage of a company. It is calculated by dividing total debt by total invested capital.
Growth Rate (Compound Annual Growth Rate - CROI)
The compound growth rate is an average growth rate over a period of several years. It is a geometric average of annual growth rates computed as follows: CROI = (ending value ÷starting value)/(number of years). We integrate earnings and revenue growth rates.