Fundamental Analysis Metrics Guide
Valuation Metrics
Price-to-Earnings (P/E) Ratio
The P/E ratio measures a company’s stock price relative to its earnings per share. It helps investors understand how much they’re paying for each dollar of company earnings. A high P/E might indicate investors expect high growth, while a low P/E could suggest undervaluation or slower growth prospects.
Price-to-Book (P/B) Ratio
Compares a company’s market value to its book value. The P/B ratio helps investors understand if a stock is overvalued or undervalued relative to its assets minus liabilities. It’s particularly useful for evaluating financial companies.
Enterprise Value-to-EBITDA (EV/EBITDA)
A comprehensive valuation metric that considers a company’s debt and cash position alongside its market value, compared to its operating earnings. Often used for comparing companies with different debt levels.
Profitability Metrics
Profit Margin
Measures the percentage of sales that translate into profits. A higher profit margin indicates better efficiency at converting revenue into profit. This metric helps compare companies within the same industry.
Operating Margin
Shows how much profit a company makes after paying variable production costs but before interest and taxes. It’s a good indicator of operational efficiency and pricing power.
Return on Equity (ROE)
Reveals how efficiently a company uses shareholders’ investments to generate profits. Higher ROE generally indicates better management performance and more efficient use of capital.
Trading Metrics
Beta
Measures a stock’s volatility compared to the overall market. A beta above 1.0 indicates higher volatility than the market, while below 1.0 suggests lower volatility. Useful for understanding potential risk.
Trading Volume
The total number of shares traded during a specific period. High volume often indicates strong interest and can validate price movements. Unusually high volume might signal important news or events.
Float
Represents the number of shares available for public trading, excluding restricted stock and closely-held shares. Understanding float helps gauge how easily a stock can be bought or sold without affecting the price.
Growth & Performance Metrics
Revenue Growth
The rate at which a company’s sales are increasing. Strong, consistent revenue growth often indicates healthy business expansion and market acceptance.
Earnings Growth
Measures how quickly a company’s profits are increasing. Sustainable earnings growth often leads to higher stock prices over time.
Dividend Yield
The percentage return a company pays out in dividends relative to its stock price. Higher yields might indicate better value but should be evaluated alongside payout ratios and growth prospects.
Risk Metrics
Debt-to-Equity Ratio
Shows how much a company’s financing comes from debt versus shareholders. Higher ratios might indicate higher risk but could also mean better use of leverage.
Current Ratio
Measures a company’s ability to pay short-term obligations. A ratio above 1.0 indicates good short-term liquidity, while below 1.0 might signal potential cash flow problems.
Short Interest
The percentage of float that has been sold short. High short interest might indicate many investors expect the stock price to fall, but could also set up a “short squeeze” if the price rises.