How to Analyze Stock Performance (Fundamental Analysis)

September 19, 2013

stock analysisMany investors are interested in identifying individual stocks that can add value to their portfolios. Adding individual stocks to your portfolio is a bit more hazardous than simply investing in a mutual fund or an ETF. With mutual funds and ETFs, you are investing in a group of stocks, and so the end result is influenced by a larger group of assets. When you pick an individual stock, your success relies on the performance of that one asset.

While you can limit some of your risk by adding various stocks to your portfolio and diversifying your investments, when you pick stocks, each one needs to be properly evaluated so that you stand a greater chance of coming out ahead in the long run.

Using Numbers to Analyze Stock Performance

Value investors like to look at some of the numbers associated with an asset in order to gauge how well it’s doing. Some of these numbers are designed to help you get a feel for the fundamentals of stock. The fundamentals are all about how strong a stock is underneath everything. It’s not about price action per se, but about the overall strength of an investment.

Some of the numbers to consider when analyzing a stock include:

  • P/E ratio: The price to earnings ratio represents the amount of money an investor is willing to pay for each dollar a company earns. A stock with a low P/E ratio is one that costs less per dollar of earnings – it’s a better deal than a stock with a higher P/E ratio. However, you need to compare P/E ratios within sectors or industries, since what’s reasonable for one industry might be too high for another.
  • P/B ratio: Rather than looking at price as compared to earnings, the price to book measure looks at how much investors are willing to pay as compared to the companies’ assets. It’s important to consider intangibles – such as good will – and balance that against tangible assets. A company with a lot of intangibles likely has a P/B ratio that seems too high.
  • Cash: Earnings aren’t the same as cash. You can get an idea of how much cash a company has, and balance that against its liabilities, with the help of statements. Take a look at cash flow to get an idea of how well a company is doing, and whether the company is well run.

There are other considerations, such as how much debt a company has as compared to its equity, and the PEG ratio (a modified P/E ratio that also considers earnings growth). You can look at profit margin and other numbers as well to get an idea of where a company stands, and the kind of value it might offer. You can even look at dividend yield to see if a stock offers a reasonable opportunity for ongoing income. But don’t just look at the numbers. There are other considerations as well.

Big Picture Fundamentals

As you analyze stocks, don’t forget some of the big picture fundamentals of a company. Think about the other factors that might affect a company. Does the company use outmoded technology that could lead to obsolescence in the coming years? Just because a company has performed well in the past doesn’t mean it will continue to do so in the future.

Look at the management as well. Do you trust the management to do the right thing and make the right choices? Is there a culture of innovation? Does the company match up with your ethical values? What kind of political issues might impact the company? Does the company rely on seasonal performance, or are there vulnerable supply lines?

Choosing individual stocks is a lot of work, if you want to do it right. Make sure you are careful about your analysis, and choose the right stocks for you.

What are some other aspects investors should consider before buying a stock? Leave a comment!


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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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One Response to How to Analyze Stock Performance (Fundamental Analysis)

  • S. B.

    You definitely list many of the key numbers to look at. I have found personally found P/E, margins, and debt/cash levels to be the most important numbers. However, I agree that the intangible factors are usually even more important.