Some fundamentals to help you pick stocks

Rather than judging a stock by its price movements alone, a fundamental analysis delves deeper into a company's actual business, economic well-being and future prospects.

It includes a study of quantitative measures like earnings, growth, revenue and finance statement, and qualitative parameters like CEO or key executive's performances and strategy. A fundamental analysis aims at gauging the true intrinsic value of the stock.

Here are a few values that can help investors base their decisions on:

Price to earnings (P/E) ratio :

 











This is a popular formula that looks at the relation between a stock's price and the company's earnings. P/E is a stock's price divided by the earnings per share.

The ratio indicates what the market is ready to pay for the company's earnings. A high P/E suggests that investors are expecting higher earnings' growth in the future compared to companies with a lower P/E.

A low P/E ratio can suggest that a stock may be under-valued , or that investors expect poor future earnings.


 Price to sales (P/S) ratio:

 











Some companies have no history of earnings. But investors cannot afford to over-look these young, budding companies. A price to sales (P/S) ratio looks at the current stock price relative to the total sales per share.

A P/S ratio is the stock's price divided by the sales price per share.

The lower the P/S ratio, the better is the stock valued . However, this ratio must not be viewed in isolation when deciding on a nascent company.


 Price to book ratio:

 










This is calculated by dividing the share price by the book value per share. Price to book (P/B) ratio is of great importance to value investors who are on a constant search for under-valued and ignored stocks.

A P/B ratio is the share price divided by the book value per share. Book value is the sum of all of a company's assets minus its liabilities.

A manufacturing company that requires more assets will generally post a drastically lower P/B ratio in comparison to a consulting firm providing some service. A company trading at a low P/B ratio, in comparison to others in same sector, is perceived as under-valued relative to its share price.


Projected growth in earnings ratio:

 








A projected growth in earnings (PEG) ratio gives an insight into the future earnings growth.

A PEG ratio is the P/E divided by projected growth in earnings .

The lower the PEG ratio, the better the value, as the investor will be paying less for each unit of earnings growth. A lower ratio is considered cheaper and a higher ratio is expensive. Since this relies heavily on projections, the conclusions may not always be accurate.

Dividend payout ratio:

 








This ratio is obtained by dividing the annual dividends per share by the earnings per share.
It is a measure of a company's payouts to investors in the form of dividends versus its earnings per share.
It also an indicator of how sustainable the dividends are, especially for investors looking for passive income.