Yeah, it is true that in Fundamental Analysis: Company Financial Condition part I article, we have discussed about what and how to analyze the Company Financial Condition. However, it is only in general way so you may still not understand how to analyze Company Financial Condition in practical way. Therefore this time, let’s be more detail about how to do Company Financial Condition analysis so you can practically do the Stocks Analysis and find the best value of the stocks to be bought.
We will discuss more detail about Company financial aspects such as Net Profit Margin, Earning Per Share (EPS), Price Earning Ration (PER), Book Value, Price To Book Value (PBV), Current Ratio, Debt Ratio, and Inventory Turnover. With these, we should be able to extract the most important information from the company financial report and utilize it to choose the best value of stocks/shares to be bought.
Fundamental Analysis #1: Net Profit Margin
Net Profit Margin is the profitability ratio which calculates by dividing Net Profit with Total Sales. Here the formula:
Net Profit Margin = Net Profit/Total Sales
As we can see, indeed, Net Profit Margin shows us the net profit level from each sale or in other words, tell us what the gain level from each sale from the company. As example, if the net profit margin is 50%, the company will make USD 500 from each USD 1000 sale.
Fundamental Analysis #2: Earning Per Shares (EPS)
Earning Per Shares (EPS) is the “per share” profitability ration which calculates by dividing the Net Profit with total stocks/shares. Here the formula:
EPS = Net Profit/Total Stocks
Earning Per Shares shows us how profitable the stocks/shares is. In other words, it tells us the profit level of each stocks/shares for the investor. By knowing EPS ratio, we should be able to calculate the investment return from each stocks/shares that we have. Higher the EPS means more profitable the stocks/shares.
Fundamental Analysis #3: Price Earning Ratio (PER)
Price Earning Ration (PER) is the price ration which calculates by dividing the current stocks price with Earning Per Share (EPS). Here the formula:
PER= Stocks Price/EPS
As we can see, Price Earning Ratio (PER) tells us how good the market appreciate the stocks/shares based on how the company offers the profit. In here, the lower the PER value is better since it means the stocks/shares valuation is still cheap so there is a high investment return possibility. In short, the PER can tell us whether the stocks price is under value, normal, or over value.
Fundamental Analysis #4: Book Value
Book Value is the price value ratio which calculates by dividing the total equity (net asset) with total stocks. Here the formula:
Book Value = Total Equity/Total Stocks
Please be noted that Total Equity is the Net Asset which calculates by subtracting the debt from total asset. Book Value is usually utilized to determine whether the stocks/shares is under-price or over price.
Fundamental Analysis #5: Price To Book Value (PBV)
Price To Book Value (PBV) is the Book Value ratio which calculates by dividing the Stocks/Shares price with its Book Value. Here the formula:
PBV = Stocks Price/Book Value
As we can see, Price To Book Value (PBV) ratio tells us how good the market appreciate the certain company’s Book Value. Higher the PBV ratio is better since means the market have high trust to the company performance. It also means that the stocks/shares’ price has high possibility to growth in future.
Fundamental Analysis #6: Current Ratio
Current Ratio is the liquidity ratio which calculates by dividing the current asset with the current debt. Here the formula:
Current Ratio = Current Asset/Current Debt
As we can see, this Current Ratio tells us how good the company’s financial level to pay its debt. In other words, the Current Ratio tells us how the current capability of company according its debt obligation. The higher Current Ratio is better since more liquid the company’s financial is. As example, the 4.0 Current Ratio means the company’s asset can pay 4 times bigger of the current debt.
Fundamental Analysis #7: Debt Ratio
Debt Ratio is the leverage ratio which calculates by dividing total debt with total asset. Here the formula:
Debt Ratio = Total Debt/Total Asset
Debt Ratio tells us how much the asset is financed by the debt. As example, the 50% Debt Ratio means the 50% of Total Asset is financed by company’s debt. Indeed, Debt is neutral which can be good or bad for company. However, in crisis, the debt will become a high burden since the debt interest will be very high. So, it is always wise to avoid to buy the company’s stocks if there is a high Debt Ratio level.
Fundamental Analysis #8: Inventory Turnover
Inventory Turnover is the efficiency ratio which calculates by dividing cost of the sold goods with inventory. Here the formula:
Inventory Turnover = Cost of the Sold Goods/Inventory
Inventory Ratio tells us how efficient the company is in relation to its inventory management. This Inventory Ration is about how good the turn over level from the company’s inventory in one year duration. This ratio will be highly dependent of the industry sector. As example, the consumer goods industry will have higher Inventory Turnover if compare with the car industry.
Have a profitable stocks trading by using fundamental analysis everyone!