What is the fundamental stock market

Fundamental analysis - the most important metrics

Fundamental equity analysis is more in demand than ever. It is the only way to be successful on the stock market over the long term. The fundamental stock analysis is divided into three main blocks:

1. Quality and profitability indicators

2. Valuation indicators

3. Timing, price potential, cyclicality and security

In plain language this means: We are looking for shares in very solid companies that are valued cheaply and for which the entry point is exactly the right time to buy. In addition, these companies should also pay a decent dividend.

1. Quality and profitability indicators

The return on sales (net profit margin) indicates how much of every euro (or every dollar) of sales remains with the company as profit. It is defined as profit after tax as a percentage of sales. The higher it is, the stronger the company's market position and the easier it is to cope with cost increases or price reductions.

We can use this key figure for a direct comparison within the industry, but also for a comparison with the company's historical data. Returns on sales over 10% are very good. Another profitability indicator is the return on equity. Here, the net profit is measured as a percentage of equity. The return on equity is the return on the invested equity of a company.

Here we divide the annual profit by the equity. So we check how the company's equity pays off. A return on equity greater than 20% is very good. The equity ratio is the percentage of equity in the balance sheet total. Figuratively speaking: If a company has assets and other assets valued at 10 million euros.

With a debt of 5 million euros, it has an equity ratio of 50%. We select stocks for you from companies with a high equity ratio (> 30%) and low debt. The cash flow margin offers another comparison option. Here the cash flow is measured in terms of sales. Since the reported profit is often artificially suppressed by the formation of hidden reserves, the cash flow margin offers a better comparison option.

As a result, many institutional investors focus on cash flow rather than profit. A good order of magnitude is a cash flow margin of more than 20%. The cash flow describes the access to liquid funds of a company from the sales process and other sources within a certain period of time. The complex cash flow analysis provides information about the financial strength of a company.

It is better suited to this than profit, which hides rather than reveals certain financial flows. It is not very easy to calculate. But don't worry: our experienced team of analysts will also do this for you. Companies with high investments have to pay a large part of their profits e.g. B. investing in machines just to keep business going (e.g. car manufacturers).

There may be phases in which the cash flow is exceeded by the sum of the investments. In such cases, companies need capital from other, external sources. So that we can check for you in which years this was the case and, above all, whether this occurs in several periods, the key figure investments is calculated as a percentage of the cash flow.

This makes it easy for us to see whether the group was able to finance the investments from its own resources or whether it had to raise additional capital externally. If a company is unable to cover its investments with its own funds in most of the years, we must expect increasing debt (credit rating declines) or capital increases (dilution of the substance). A low investment rate from the cash flow is desirable.

2. Valuation indicators

Fundamental analysis is the only way to answer the question of whether a stock is cheap or expensive. For this purpose, the current market value (market value) of a company is set in relation to current company figures. The dividend yield is an important valuation criterion, but there are also others that we consider for you.

Dividend yield

The dividend is the annual distribution of the company to its shareholders, more or less as a profit-sharing scheme. The dividend yield indicates a kind of “return” on your capital, namely your return if the price of the share stagnates. The dividend yield describes the ratio of the dividend to the current share price.

The dividend yield in percent is calculated by dividing the dividend to the share price times 100. The dividend yield tells you how much capital you get on your shares. It is also a key figure for evaluating a share. The dividend yields on the values ​​of the major stock indices are usually 2 to 3%.

The background to this key figure is that a dividend that is high in absolute terms can bring less income than a dividend that is low in terms of amount. Dividend yields of 1 to 3% are considered normal; but there are many companies that pay their shareholders significantly more. A high and safe dividend yield usually acts as a price support for the stock.

Price-earnings ratio (P / E)

A key figure that is often used is certainly the price / earnings ratio, or P / E ratio for short. It has the advantage that it is very easy to calculate. Simply divide the current share price by the annual profit per share (alternatively the market value of the company by the annual profit). The following applies: the lower the calculated value, the cheaper the share is.

Which value is cheap and which is expensive at the P / E ratio is not that easy to say in general. It depends on a variety of factors, such as the company's growth prospects (with good growth prospects, we can grant the company a higher P / E ratio), the industry or the region.

The current, average price-earnings-ratio (P / E ratio) of all stocks shows you how expensive or inexpensive the totality of all stocks is now. Compare the current P / E ratio with the average values ​​of the last 10 and 5 years as well as the last year. A current value below the historical values ​​indicates an “undervalued” overall market - and vice versa.

Price-Earning-to-Growth (PEG)

Shares that are growing strongly often have a high price-earnings ratio (P / E). However, the P / E ratio alone is only of limited significance for the valuation, especially in the case of growth stocks. Price-Earning-to-Growth (PEG) has proven to be a useful auxiliary variable for evaluating the share.

To get the PEG (so-called dynamic P / E), the P / E is divided by the average profit growth rate over the next three years. If the value is less than 1, the stock is considered undervalued. We always keep an eye on whether the growth rates are in proportion to the valuation.

Price to Cash Flow Ratio (KCV)

In this evaluation, we check for you how favorably the individual companies are valued in relation to cash flow. The price / cash flow ratio is often used by our professional analysts when looking for cheap stocks, as the profits reported by companies are often pushed down by the formation of hidden reserves or revised upwards by their release.

The real operational earning power is often falsified by these cosmetic measures. There is a long-term statistical relationship between cash flow and the development of the share price.

Price-to-sales ratio (KUV)

The price-to-sales ratio sets the share price in relation to sales per share (alternatively the entire market value of the company to company sales). So it is independent of the company's profit, which can be an advantage if a company is not yet making a profit or a profit forecast is too uncertain.

However, it makes little sense to compare companies with different profitability with each other using KUV. A highly profitable company usually has a significantly higher KUV than a company that is in the red. Therefore, we will never use the KUV as the only evaluation criterion.

Price-to-book value ratio (KBV)

The price / book value ratio sets the market value of a company in relation to the book value. The book value is the sum of all assets of a company (real estate, production facilities, machines, vehicles, patents, company investments, cash on hand, etc.) minus debts.

Regardless of what profit or revenue a company makes, you can use this to determine the intrinsic value of a company. From an investor's point of view, companies with a price-to-book value ratio of less than 1 are particularly interesting.

Because that means: The substance of the company in question is higher than the price that is paid for it on the stock exchange. It is not uncommon for investment companies and financial investors to become aware of such companies and take over the majority of the shares.

3. Price potential, security and cyclicality Long-term price potential and price range

You not only want to generate a regular flow of cash with our dividend shares, but also benefit from the share's price increase potential. To estimate the long-term price potential, the earnings per share to be expected in the long term are first estimated based on concrete growth expectations and then multiplied by the P / E ratio to be expected in the long term.

The investment period assumed for this key figure is 3 to 5 years:

To get the long-term price range, the estimated earnings per share is multiplied by the highest and lowest P / E, both estimated based on company and industry considerations:

Security and cyclicality

The level of security, what a stock offers relative to others is an important criterion for the investment decision. The fundamental safety of every stock is usually assessed using the ratios A, B and C.

A - high security and low risk

Highest security. This stock enables one of the safest, most stable and lowest risk exposures on the stock market. Here, for example, you can find multinational companies that cover the basic needs for consumer goods, such as the food multinational Nestlé.

B - medium security and medium risk

Average. With average certainty and with the same risk, as risky or promising as the overall market.

C - low security and high risk

Highest risk. Risky companies can be found here. Companies that are experiencing serious financial and structural problems are often rated C. In addition to security, the stability of a company's business development in the event of economic fluctuations is of great importance.

The stability of the sales and profit development over time has an impact on the development of the share price. The cycle is usually determined using the parameters low - medium - high.

"Deep" cycle

Low business cycle. Companies with a steady sales and profit development are given a “low” rating. Such companies can often be found in the consumer goods sector and show good and predictable business development despite adverse economic conditions. Here we often find companies with a very stable dividend.

"Medium" cycle

Medium business cycle. These companies are not immune to economic fluctuations. However, your sales and profits do not show any disproportionately strong fluctuations during an economic crisis.

"High" cycle

High business cycle. Companies are highly cyclical in their sales or profit development. These are mostly companies from the capital goods, steel, automotive and financial sectors. If the economy recovers, there are interesting entry opportunities for stocks with a low P / E ratio. Here we always find “unique” opportunities for a very high dividend

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