Easy Fundamental Analysis Part 1

This video is about making fundamental analysis accessible to anyone interested in stocks or those interested in understanding stocks. Analysts and companies rely on concepts like D/E (debt to equity), PEG (price earnings to growth ratio), P/E (price to earnings ratio), and earnings before interest, taxes, depreciation and amortisation (EBITDA) to study the market, terms that are daunting for the ordinary trader. (If the video above isn't playing it is also available here.

The speaker talks about one company that requires you to study 13 different measures/ratios for a stock before this stock even qualifies to be analysed in the company's financial statement. In other words, some companies make it very complicated for the common investor to makes sense of all the data.

The speaker stresses that fundamental analysis does have value, but the ordinary investor does not need an accounting degree to understand the basic concepts. Fundamental analysis IS valuable, but FA can lose its meaning in the complications and thus become inaccessible to ordinary traders.

Return on Equity or ROE then becomes the main focus of fundamental analysis. He says that ROE is the one measure that simplifies fundamental analysis. ROE can be taken as a "parent ratio", as it explains not only how the trader's assets become revenue, but ROE paints a picture of the company's activities. Company information such as sales, leverage, margins, and debt can be seen from the following formula:
Return on Equity = (Net Income) /(Owner's Equity or Net Assets)

In short, these are your assets minus you liabilities. The DuPont analysis calculation that traders learn in business school can be called the "expanded" view of the ROE formula. The DuPont formula states that:

ROE = Net Income/Sales x Sales/Assets x Assets/Equity

This shows that ROE in a nutshell is what the company is doing, and how your money is turned (or not) into revenue. The viewer is then cautioned to take ROE as a "relative" measure. ROE needs to be taken into context for the interpretation to be effective. You cannot take an ROE value from one company and say that it is better than another without taking into account the company story.

To illustrate this point, the speaker compares two company stocks, Harley Davidson and Polaris, and their corresponding ROE. Given relatively similar conditions (high volatility, time period starts during the bull market), Polaris has an ROE of 66.17 percent with actual return of +14.51 per share, while Harley-Davidson has an ROE of 36 percent and is at -$5.90 per share.

In this example, we can go on to say that from a similar industry group, Polaris is reasonably performing better than Harley.

Fundamental Analysis the Easy Way Part 1 Quotes

"I know of a company that actually requires you to weed through 13 different ratios and measures before the stock even qualifies to be taken for further analysis into the financial statement."
"You don't have to have [an accounting degree] to understand fundamental analysis. It is actually quite accessible."
“[The DuPont calculation] looks at ROE and it is a way to prove why ROE is so effective. You're getting an encapsulated view of the company's activities.”
"ROE, just like any other financial measure, is a relative measure. It means that it has to have context."

Submitted by YouTube Trader on Thu, 07/21/2011 - 23:48

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