WHICH METHODS ARE IMPORTANT IN FUNDAMENTAL ANALYSIS?
Which methods are important in fundamental analysis. P / E ratio and dividend yield are not everything: Buy low, sell high – the profit lies in purchasing. Easy said. But when is a share really cheap? When evaluating companies, professionals never rely on just one key figure. In addition to analyzing the company’s most important products, the market and the competitive environment, they scrutinize a whole bunch of fundamental data. Among the most important for value investors – in addition to the price / earnings ratio, earnings yield and dividend yield – the key figures:
- Ratio of price to book value,
- Course to sales,
- Course to cash flow,
- EBIT and EBITDA margin.
What is the price-to-book value ratio (P/B)?
The price / book value ratio compares the current share price with the book value per share shown in the balance sheet. In simple terms, the book value corresponds to the company value in the event of liquidation: liabilities and intangible assets are subtracted from the sum of the assets. The higher the value, the more expensive the company. A low P /B alone is not enough for a buy recommendation. Because it can have different causes:
- The company is undervalued because it has not yet been discovered by institutional investors. Therelation between quotation and balance value is low.
- The company’s return prospects are miserable. Then the relation between quotation and balance values also low.
A low P / B is therefore particularly convincing in connection with a low price-earnings ratio and a clear corporate strategy. As a rule, a company is valued favorably if the share price is below the book value per share (P / B <1).
What is the Price to Sales Ratio?
The P / E ratio provides information about how high a company is valued on the stock exchange . But not every company shows a profit. While the profit of a company can be embellished or diminished, the turnover can hardly be manipulated. To calculate the price-sales ratio, the price per share is divided by the sales per share. For example, company A has one million shares that are trading at $80.
Conservative value investors make sure that the price-sales ratio is not quoted higher than one. For many traditional brands, for example in trade, chemistry and automotive engineering, for example at Daimler, the price-sales ratio is actually lower.
The shortcoming of the key figure: The costs of the company are completely ignored. However, these costs have a major impact on a company’s profitability (EBIT margin). According to the strict price-sales ratio standard, high-performance companies with high profitability such as Apple or SAP would never end up in the depot. Therefore, the price-sales ratio should never be created solely for an investment decision.
What is the Price to Cash Flow Ratio?
The ratio of price to cash flow is also difficult to manipulate. The price to cash flow can be used in addition to the price-earnings ratio.
The term cash flow describes the inflow of money during a period. It marks the balance of deposits and withdrawals during a financial year. The cash flow is systematically higher than the profit, since taxes, interest and depreciation are not taken into account. The cash flow shows the liquidity of a company. The ratio indicates how high each liquid dollar is valued on the stock exchange. It is calculated according to the formula: price per share divided by cash flow per share.
What do the EBIT margin and EBITDA margin say?
The EBIT (earnings before interests and taxes) is calculated from the annual surplus before taxes and interest. The idea of EBIT: The operating profitability of companies should be made comparable regardless of the capital structure. Because unlike the annual surplus or the net return on sales, debt or equity ratios do not matter. Depreciation is also taken into account in EBITDA. The EBITDA also enables companies that report under different laws to be compared. The profitability of a company is measured with the percentage EBIT margin or the EBITDA margin on sales. An example: With sales of 100 million and an EBITDA of 15 million, the margin is as follows:
Companies willing to invest often measure themselves by the EBITDA margin. This is especially true for companies from the technology or telecommunications industry, because they often incur high depreciation, which reduces earnings.