Fundamental   analysis   includes   the   study   of:
Definition
Fundamental   analysis   – the   study   of    a   company’s   capital   value
(on   the   balance   sheet)   and   profit   or   loss   (on   the   income   statement)   to   determine   its   overall   viability   as   an   investment;   to   identify   financial   trends;   and   to   decide   whether   the   current   price   is   reasonable   based   on   trends   in   revenue   and   profit.
‐ the   balance   sheet,   the   value   of   assets,   liabilities   and   net   worth   as   of   the   end   of   the   quarter   or   year.
‐ the   income   statement,   a   summary   of   revenues,   costs,   expenses   and   profits   during   a   quarter   or   full   year.
‐ other   financial   attributes   including   the   earnings   per   share,   competitive   position   within   the   industry,   and   dividend   history.

An   investor   may   use   any   number   of   fundamental   indicators,   but   six   are   essential   for   everyone.
These   are:
1.
growth   in   revenues
2.
growth   in   earnings
3.
price/earnings   ratio   (P/E)
4.
dividend   yield
5.
dividend   growth
6.
debt   ratio

1.
growth   in   revenues

What   should   you   expect   to   see?
The   trend   and   how   it   changes
The   tendency   for   trends   to   level   out
Revenues   are   tied   to   earnings
Revenue   dollar   values   should   grow
Earnings   percentage   should   be   consistent

Revenues   trend   erratically
Revenues   grow   while   earnings   do   not
Revenues   remain   level   or   begin   to   slide

2.
growth   in   earnings

Net   return   should   remain   consistent   or   rise
The   net   dollar   value   should   grow   as   well
Seek   consistent   earnings   trends

The   net   return   declines   even   if   dollar   amount   grows
Revenues   outpace   the   net   return
Revenues   grow   while   earnings   move   to   negative

You   can   only   tell   how   a   trend   is   evolving   by   studying   a   long ‐ term   trend
A   10 ‐ year   trend   is   excellent   because   it   reveals   how   trends   move   through   time
Track   revenues   and   earnings   together   to   get   the   full   picture

(In   millions)              .
Revenue Earnings
2003 $10,506 $     917
2004 11,070
2005 11,244
2006 11,640
2007 12,442
2008 13,652
1,055
1,240
1,090
1,144
1,295
2009 14,691
2010 14,797
2011 14,880
2012 16,658
1,304
1,531
1,804
1,567

(In   millions)              .
Revenue Earnings
2002 $20,152 $     798
2003 22,763
2004 30,251
2005 36,339
2006 41,517
2007 44,958
1,099
2,035
2,854
3,537
3,541
2008 51,324
2009 32,396
2010 42,588
2011 60,138
3,557
895
2,700
4,928

‐
(In   millions)              .
Revenue Earnings
2002 $244,524 $     8,039
2003 256,329
2004 285,222
2005 312,427
2006 348,650
2007 378,799
8,861
10,267
11,231
12,178
12,884
2008 405,607
2009 408,214
2010 421,849
2011 446,950
13,254
14,414
15,355
15,766

(In   millions)              .
Revenue Earnings
2003 $30,762 $ ‐ 3,262
2004 17,072
2005 19,701
2006 49,124
2007 53,012
2008 50,703
248
1,106
948
1,490
826
2009 46,770
2010 44,043
2011 43,326
2012 41,567
53
235
150
‐ 3,113

3.
price/earnings   ratio   (P/E)

The   price/earnings   ratio   (P/E)   is   a   summary   of   the   relationship   between   the   current   price   per   share,   and   latest   reported   earnings   per   share
(EPS)
To   compute,   divide   price   per   share   by   earnings   per   share.

The   P/E   compares   a   current   technical   indicator
(price)   to   an   outdated   fundamental   indicator
(earnings).
The   P/E   multiplier   is   a   reflection   of   how   many   years'   earnings   are   in   the   current   price.
The   higher   the   P/E,   the   more   expensive   the   stock

The    P/E   cannot   be   reliably   used   as   a   singular   value   at   the   moment.
However,   volatility   of   the   stock   can   be   judged   by   a   review   of   the   range   of   annual   P/E   and   its   trend.
A   consistent   level   of   P/E   in   a   narrow   range   is   a   positive   indicator.
For   example,   General   Mills   has   reported   a   narrow   P/E   over   many   years.

Generally,   a   P/E   between   10   and   25   is   a   positive   signal.
However,   the   trend   is   as   important   as   where   P/E   is   today.
Irregular   and   volatile   P/E   is   a   sign   of   volatility   in   the   stock   and   in   the   fundamentals.
For   example,   Caterpillar   has   reported   very   erratic   P/E   range   over   recent   years.

4.
dividend   yield

The   meaning   of   dividend   yield
Definition
Dividend   yield   – the   percentage   yield   based   on   dividend   declared   and   paid   per   share.
To   determine,   divide   dividend   per   share,   by   the   current   price   per   share.
Example: a   company   currently   pays   $0.44
(forty ‐ four   cents)   per   share.
The   price   per   share   is   $20.00.
Dividend   yield   is:
0.44
÷ 20.00
=    2.2%
Price   is   changing   constantly,   but   the   dividend   declared   per   share   does   not   change.
As   a   result,   dividend   yield   changes   every   day.
The   lower   the   price,   the   higher   the   yield.
Examples:
0.44
0.44
0.44
÷ 20.00
÷ 18.00
÷ 16.00
=
=
=
2.2%
2.4%
2.8%

To   evaluate   dividend   yield,   remember:
‐ Your dividend   yield   is   always   based   on   the   price   you   paid   per   share.
‐ To   judge   a   company’s   value,   review   dividend   yield   over   many   years,   and   not   just   what   is   paid   today.

Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Compare   two   companies   to   see   how   dividend   yield   works.
Both   yielded
3.43%   as   of   December   11,   2012:
0.96
1.16
1.28
0.80
0.54
0.80
dividend   per   share
Johnson
Pfizer   &   Johnson
0.52
0.80
0.60
0.68
0.76
0.93
1.10
1.28
1.46
1.62
1.80
1.93
2.11
2.25

In   this   comparison,   Pfizer’s   dividend   over   10   years   was   lower   than   Johnson   &   Johnson’s.
More   significantly,   Pfizer   reduced   its   dividend   per   share   over   several   year,   while   JNJ   increased   its   payment   every   year.

5.
dividend   growth

The   meaning   of   dividend   growth
Definition
Dividend   growth   – the   percentage   of   increase   each   year   in   dividends   per   share,   over   payments   in   the   previous   year.
Dividend   growth   may   be   more   revealing   than   dividend   yield.
The   rate   of   growth   is   a   significant   factor    as   a   long ‐ term   trend.
The   change   from   year   to   year   in   the    dividend   per   share   is   a   significant   factor.
Although   a   company   may   increase   its   annual   dividend   per   share,   if   growth   is   declining,   that   has   to   be   taken   into   account   as   well.
Evaluating   dividends   should   be   a   combination   of   dividend   yield   and   dividend   growth.

Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Compare   two   companies   to   see   how   dividend   yield   works.
Both   yielded   3.43%   as   of   December
11,   2012: dividend   per   share
Johnson
Pfizer   &   Johnson
0.52
0.80
0.60
0.93
0.68
0.76
0.96
1.16
1.28
0.80
0.54
0.80
dividend
Pfizer
1.10
1.28
1.46
1.62
15%
13
12
1.80
1.93
2.11
‐ 68
2.25
48
26
21
10
‐ 38
growth
Johnson
&   Johnson
16%
18
16
14
11
11
7
9
7

These   results   tell   the   story   of   dividend   growth.
Although   Pfizer’s   yield   was   erratic,   the   growth   during   positive   years   was   impressive
In   comparison,   Johnson   &   Johnson   increased   its   dividend   yield   each   year,   but   growth   diminished.

6.
debt   ratio

The   debt   ratio   is   a   test   of   how   well   management   plans   and   controls   its   cash   flow.
The   debt   ratio   is   the   percentage   of   total   capitalization   represented   by   long ‐ term   debt.
“Total   capitalization”   is   the   combination   of   long ‐ term   debt   and   stockholders’   equity.

The   meaning   of   debt   ratio
Definition
Debt   ratio– the   percentage   of   total   capitalization   represented   by   long ‐ term   debt.
Total   Capitalization   – the   combination   of    long ‐ term   debt   and   stockholders’   equity.
Example: long ‐ term   debt   =   $62.7
billion stockholders’   equity   =   82.1
billion total   capitalization   =
$62.7
+   $82.1
=   $144.8
billion debt   ratio   =
$62.7
÷ $144.8
=    43.3
Debt   ratio   is   the   percentage   of   total   capitalization   represented   by   long ‐ term   debt.
It   is   always   expressed   as   a   number   without   percentage   signs.
A   debt   ratio   of   43.3
means   that   long ‐ term   debt   is   43.3%   of   total   capitalization.
When   debt   ratio   is   steady   or   falling,   it   is   positive.
When   debt   ratio   is   rising,   it   is   negative.

The   meaning   of   debt   ratio
For   example,   Eastman   Kodak   was   for   many   years   considered   one   of   the   strongest   and   best   capitalized   blue   chip   companies   in   the   market.
However,   EK   did   not   keep   up   with   changing   markets   and   when   the   digital   camera   boom   arrived,   they   lost   market   share.
In   2007,   EK’s   debt   ratio   was   about   30   – but   by   the   end   of
2010,   it   was   above   160.
When   debt   ratio   is   over   100,   it   means   debt   has   entirely   absorbed   equity.
The   company’s   stock   is   worthless.

Fundamental   analysis   is   nothing   more   than   the   study   of   financial   conditions   and   trends.
It   is   imperative   to   analyze   trend   direction   and   strength   over   time.
The   fundamentals   identify   the   value   of   companies   and   levels   of   competitive   strength.