Fundamental analysis is an approach used in accounting and finance that consists of analyzing a business’s financial statements. This type of analysis not only considers the company’s assets and earnings, but also its competitors and markets. It also considers the overall condition of the economy at the time and other economic factors, such as the GDP, interest rates, and employment rates of the city and country where the business operates. There are many tools used in fundamental investment analysis in order to extract this information, which will be touched on below. Kevwe Yerifor is a finance expert who currently serves as the Chief Investment Officer of Capital Intell in Calgary, Alberta. Yerifor is a member of the Investment and Wealth Institute USA, has an MBA from the University of Bradford, UK and gained his Investment Management Education from the Yale School of Management. After completing his bachelor’s in accounting, he began working in the financial Industry in 1999. He gained nearly a decade of Investment Banking experience while working for Citigroup, before proceeding to work with other UK Financial and Consulting institutions. In total, Yerifor has over 20 years of experience in the Financial Services industry. His illustrious career makes him well poised to provide his insight into the top tools of fundamental investment analysis.
The Goals of Fundamental Investment Analysis
First off, Kevwe Yerifor asserts that there are multiple goals or objectives when it comes to fundamental investment analysis. The primary goal is typically to conduct a business stock valuation, establishing a value for the company’s stock. However, other goals of this type of analysis can range from making a projection on the company’s business performance to evaluating its internal management and business decisions in order to calculate its credit risk. Although fundamental investment analysis relies on historical and present data (unlike technical investment analysis, which relies on trends and short-term price levels), it still ultimately offers a financial forecast for the company. It does this by assessing basic economic factors, like revenue, expenses, income, market competition, growth prospects, and predicted return on equity. Overall, Kevwe Yerifor claims that fundamental investment analysis is suitable for companies looking for a long-term investment approach.
The Tools of Fundamental Investment Analysis
The most important factor in fundamental investment analysis is earnings. According to Kevwe Yerifor, investors just want to know how much money the business is currently making and how much it is projected to earn in future. While a company’s profits are vital to fundamental investment analysis, this number cannot be examined in isolation. How much a company earns can’t tell you anything on its own. Therefore, it’s necessary to use a set of tools that will allow you to evaluate and consider the sum of the company’s earnings, growth, and market value. Kevwe Yerifor shares that there are many popular fundamental investment analysis tools, such as the following:
- Price to Earnings Ratio: The Price to Earnings Ratio, or P/E, compares the price of the company’s stock with the company’s earnings per share. This helps investors discover whether a business’s stock is overvalued or undervalued.
- Projected Earnings Growth: The Projected Earnings Growth predicts the one-year growth rate earnings of the stock. This tool provides an understanding of a company’s growth prospects. The possibility of higher growth rates is always more favourable than lower growth rates, asserts Kevwe Yerifor.
- Debt to Equity Ratio: As the amount of debt a company has is a major consideration for investors, it is necessary to evaluate the company’s debt to equity ratio. This ratio identifies the proportion of debt versus the proportion of shareholders’ equity that is used to finance the company.
- Price to Book Ratio: Sometimes called the Price to Equity Ratio, this analysis tool compares the market value of a stock with the book value of a stock. To clarify, book value refers to the value of a company asset as it appears in their own books.
- Dividend Payout Ratio: Dividend Payout Ratio is a tool used to assess how much income a company pays to its stockholders by comparing the dividends paid to stockholders with the total net income of the company. Kevwe Yerifor claims that investors typically seek businesses with a high dividend payout ratio.
- Return on Equity: Return on Equity, also referred to as ROE or Return on Net Worth, gauges how successfully a business uses investments to generate profit. In order to find this number, the net income of the company should be divided by the shareholders’ equity.