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An Introduction to

Fundamental Analysis

Jason OBryan19 September 2006

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What is Fundamental Analysis?

A method of valuing a security by measuring itsintrinsic value. Economic Factors Financial Statements Industry ConditionsQuantitative and Qualitative Factors

QuantitativeAnalyzes key ratios. Provides concrete data for analysis.

QualitativeAnalyzes intangible data. Patents, management, talented workers, etc.

Difficult to measure numerically.

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Why use fundamental analysis?

The goal is to produce a value thatinvestors can compare with the current

price. If it is undervalued you should buy; sell if it

is overvalued.

One of the most famous users offundamental analysis, Warren Buffett, hassuccessfully used this method to turnhimself into a billionaire.

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Ratios

Quick Ratio

Debt to Equity

EPS

Revenues

P/EBeta

Current Ratio

ROE

ROA

PEG

AlphaNet Profit Margin

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Revenues

Money that a company collects fromcustomers for the sale of a product or

service. When you subtract out all costsfrom revenues, you get profits orearnings.

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Market Capitalization

The total dollar value of all outstandingshares, calculated by multiplying the price

of a single share by the total number ofshares outstanding.

1. Mega Cap: Market cap of $200 billion and greater

2. Big/Large Cap: $10-$200 billion

3. Mid Cap: $2 billion to $10 billion

4. Small Cap: $300 million to $2 billion

5. Micro Cap: $50 million to $300 million

6. Nano Cap: Under $50 million

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Net Profit Margin

Net income as a percentage of sales. You getthis by dividing net income by sales. Since it's a

percentage, it tells you how many cents on eachdollar of sales is pure profit.

The higher a companys profit margin compared

to its competitors, the better.

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Earnings Per Share (EPS)

A very important fundamental, calculated:

Basically, this will tell you if and howprofitable the company is.

Whats preferred stock?

A class of ownership in a corporation with astated dividend that must be paid beforedividends to common stock holders.

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Price/Earnings Ratio (P/E) One of the favorite ratios, it is simply:

EPS from the last four quarters is called trailing P/E EPS taken from the estimates of earnings expected in

the next four quarters is called forward P/E P/E is referred to as the "multiple," because it shows

how much investors are willing to pay per dollar ofearnings. High P/E means highprojectedearnings in the future.

It's usually only useful to compare the P/E ratios of companies inthe same industry, or to the market in general, or against thecompany's own historical P/E

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Price-to-Sales

Price to sales is calculated by dividing astock's current price by its revenue per

share.

The price-to-sales ratio can varysubstantially across industries; therefore,

it's useful mainly when comparing similarcompanies. Also, it does not account forDEBT!

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Price-to-Book

Price to book is calculated by dividing thecurrent closing price of the stock by the

latest quarter's book value (book value issimply total assets minus intangibleassets and liabilities).

A low P/B ratio could mean the stock isundervalued, or something is very wrongwith the company.

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Debt-to-Equity

A relative measure of how much debt acompany has:

Essentially: long-term funds provided bycreditors divided by funds provided byshareholders.

A higher debt/equity ratio generally means that acompany has been aggressive in financing itsgrowth with debt. This can result in volatileearnings.

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Current Ratio

A good measure of liquidity of a company, orhow easily it can cough up cash.

AKA - Indicator of company's ability to pay short-term obligations; calculated by dividing currentassets by current liabilities.

The higher the ratio, the more liquid thecompany!

What types of companies might this ratio beVERY important?

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Quick Ratio

Like current ratio, this gives a measure of acompanys financial strength:

It is a measure of how quickly a company'sassets can be turned in cash.

You subtract inventories so you can check andsee if a company has sufficient liquid assets tomeet short-term operating needs. (Note that

current ratio did not subtract inventories.)

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Return on Assets (ROA)Also sometimes called Return on

Investment or ROI, this is a measure whatearnings were generated from capital

investment back into the company.

Always given as a percentage Think of it as How much money (income)

was generated from a companysinvestment into itself (capital investment orcompany assets)?

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Return on Equity (ROE) It is a measure of how much in earnings a

company generates in four quarters comparedto its shareholders' equity and is a good

measure ofprofitability.

It is also measured as a percentage.

For instance, if XYZ Corp. made $1 million in the

past year and has shareholders' equity of $10million, then the ROE is 10%. Some use ROE asa screen to find companies that can generatelarge profits with little shareholder

investment in the company.

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Beta () A measure of a security's or portfolio's volatility,

or systematic risk, in comparison to the marketas a whole. (usually calculated with S&P 500Index)

Think of beta as the tendency of a security'sreturns to respond to swings in the market. Abeta of 1 indicates that the security's price willmove EXACTLY with the market. A beta lessthan 1 means that the security will be LESSvolatile than the market. A beta greater than 1indicates that the security's price will be MOREvolatile than the market.

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Price/Earnings to Growth (PEG)

It is:

Can give you an idea of a stock potential growth,

since it divides by Earnings Per Share (EPS)annual growth rate but is based on analystsESTIMATES!

If a company has a P/E of 20 and analystsexpect its earnings will grow 15% annually overthe next few years, you'd say it has a PEG of1.33. Anything above 1 is suspect since thatmeans the company is trading at a premium toits growth rate.

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Others

There are many other ratios out there tohelp you get an idea of what the financial

health of a company is. What do you do if you dont know what

they mean?

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Example

vs.

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Industry Comparison

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Which is better?

Compare significant ratios and statistics.

Read current news and annual reports to

see what their plans are in the future.

Look for historical growth and continuedopportunity for growth.

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Questions?