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Fundamental Analysis the Easy Way - Part 1 |
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Friday, 27 February 2009 00:00
Fundamental Analysis
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by John Jagerson
Fundamental analysis is a powerful tool for stock investors, however, it is also easy to over complicate it. Many financial educators and analysts over complicate fundamental analysis to create a mystique around their proprietary methods and to create a "need" for their service. With proper diversification the process of fundamental analysis can be streamlined considerably.
This series of articles on simplified fundamental analysis builds on the concepts discussed in the Understanding Financial Statements article series.
This article will reduce fundamental analysis to a single benchmark ratio*. This ratio is called Return on Equity (ROE) and is used by financial professionals to compare stocks and try to pick those that should be added to a growth portfolio. Return on equity tells you how the company is performing based on its ratio of profits (yes, those are still a good idea) to owners equity (that's you the shareholder). This ratio connects the income statement to the balance sheet.
ROE, summarizes all of a company's critical activities and financial measures into a single ratio. This makes it easy to calculate, search for and understand. However, like all fundamental data, context is necessary to define a "good" or "bad" ratio. In part one of this series we will look at the ratio and learn why it is a quick and valuable tool to easily compare stocks within the same industry group.
*Author's Note: I am fully aware that there are fundamental junkies out there in "Market-land" writhing in pain and mental anguish at the thought that I would preach such heresy. Therefore, I would encourage you to share your thoughts in the discussion forum. But remember, the goal here is to provide education that can reasonably be used effectively by new retail investors. For those of you with questions about this approach to fundamental analysis, please ask your questions there as well.
Next, go to Fundamentals the Easy Way Part 2
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