HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

Fundamental Analysis


Company fundamentals, such as the amount of money the companies earns and how efficiently they utilise their resources, drive the share and CFD markets. Traders buy companies they believe will grow and sell companies they believe will stop growing. Learning a few basic fundamental concepts, as well as how to evaluate the data that professional traders act on, will help you to accurately anticipate market trends.

As a company fundamentally strengthens it lifts the value of that company’s share price. Conversely whenever company fundamentals weaken the share price is negatively affected.

Traders focus much of their attention on a handful of fundamental indicators when they evaluate a company. Learning about a company fundamentals can assist you to anticipate the direction a company’s share price should move to seize trading opportunities.

We will now address the following categories of Fundamental Analysis.

Company Earnings


Traders initiate their fundamental evaluations by examining how much profit the company is making for its shareholders. The fundamental data that illustrates how much money the company earned for each owner is called earnings-per-share, or EPS. To calculate EPS, traders take the company’s overall earnings and divide them by the number of shares the company has issued. If a company earns $1 billion and has 1 billion shares issued, the company’s EPS is $1.

Once traders identify a company’s EPS, they then examine share costs in relation to the earnings per share. The fundamental ratio that illustrates this information is the price-to-earnings ratio, or P/E ratio.

The P/E ratio helps to determine if a share is relatively overpriced or underpriced, which is crucial. For example, if a share has an EPS of $1 and the share is trading for $20 then it has a P/E ratio of 20. By looking at historic P/E ratios, traders can assess whether the current P/E ratio of 20 is comparatively high or low.

Traders also want to know if companies are likely to increase earnings in the future. Good earnings today are helpful, but traders want to know if the company has a prosperous future. When you are looking to buy a share, ensure the underlying businesses have real growth potential. When you are looking to sell, ensure the underlying businesses

Operating Efficiency


Once traders have evaluated the profit a company earns its owners, they tend to examine how efficiently the company utilizes its resources. Shares in efficient companies usually outperform shares in inefficient companies, since efficiency generally leads to greater profit and more earnings flow into owners’ pockets.

One resource that traders prefer to see used efficiently is shareholder equity. Shareholder equity is company cash, hard assets and retained earnings (i.e. those which the company keeps to invest instead of distributing them to shareholders). Traders are interested in equity because if a company can’t efficiently use such assets, they would be better invested elsewhere.

To monitor the efficiency of asset utilization, shareholders make a comparison similar to that which they make with price compared to the earnings in the P/E ratio. But this comparison is called the price-to-book ratio.

To find a company’s price-to-book ratio, you need the book value of the company, which equates to the shareholders’ equity divided by the number of shares the company has issued. If a company has $5 billion in assets and issued a total of 1 billion shares, the company book value is $5 per share. Next divide the current share price by the book value to get the price-to-book ratio. If the share trades at $20 its price-to-book ratio is therefore 4.

Like the P/E ratio, price-to-book ratios illustrate whether current share prices are under or overpriced.

Cash Flow


Cash is a company’s life-blood. Regardless of how a company performs, if it runs out of money, it will fold up. A company must pay its employees, vendors and shareholders. Shareholders want a dividend unless the company retains cash to grow itself and increase share value.

Some believe a company’s bottom line, its net income, represents the cash the company generated but net income is what remains after expenses are subtracted from revenues.

Net income is the government valuation when deciding tax liabilities. But governments need entrepreneurial growth to boost the economy and provide jobs, so incentives like depreciation and interest deductibility are allowed and can distort net income figures.

Traders are more interested in cash creation than earnings after adjustments, so they look at a company’s free-cash-flow, its ‘true’ cash flow, and what it has had available to invest in new initiatives or to pay investors via dividends. A company’s free-cash-flow is its net income plus both depreciation and amortization expenses, but then minus the company’s changes in working capital and capital expenditures. See below.

(Net income Amortization Depreciation) – (Changes in working capital) – (Capital expenditures) = Free cash flow

Traders also use a company’s free-cash-flow data in a discounted-cash-flow analysis to see if its share price is expensive compared to the cash the company is able to generate.

#source


RELATED

The Effective Use of Technical Indicators

Technical traders often compute and plot mathematical quantities based on market observables like price and volume in order to indicate the past or present state of the market...

NFP trading: understanding the effects of the Nonfarm Payroll

Professional traders often consider economic announcements as a reliable indicator of coming price action, and one of the biggest reports that capture traders' attention is the NFP...

What Factors Affect the Price of Cryptocurrencies?

Do you want to trade cryptocurrencies but need to know when it is better to sell or buy them? What happens to the prices in the crypto market, and what should you consider?

Dogecoin: Has the Hype Faded?

Dogecoin (DOGE) has been enjoying the newfound attention this year. So far, it has accumulated a market capitalization of more than $40 billion and ranks #6 largest digital currency...

Wrapped Bitcoin and relationship with Ethereum explained

The cryptocurrency industry and both the Bitcoin and Ethereum ecosystems are rapidly evolving, and have come to the point of converging together as Wrapped Bitcoin (WBTC)...

What are binary options in the global financial market

In the global financial market, as in many other areas of commercial activity, there are often categories that seem to the uninitiated person very difficult to understand and use...

Netflix Stock: Should You Invest in Netflix in 2022?

We can argue about whether investing in Netflix (NFLX) stock is a good or bad option, but there is no denying that the American entertainment company has changed the rules of the game...

What should you do during a crash?

The world of markets can, in some cases, become very difficult, while uncertainty and often a lack of essential knowledge can lead to confusion amongst traders. And a market crash could be one of those situations...

Is MetaTrader 4 good for Crypto?

MetaTrader 4 is used to trade a variety of financial instruments including some of the world’s most popular cryptocurrencies. In this blog, we’ll look at the benefits of using MT4 for crypto trading...

The Benefits Of Cryptocurrency Explained: Should I Trade Cryptocurrencies?

Gold has been in use for ages, and the stock market dates back hundreds of years. Cryptocurrencies have been around for more than a decade now...

Pair Trading: Effective Strategies

Pair trading is used by experienced traders as a reliable tool for risk diversification. For the successful implementation of a long-term trading...

What Factors Influence Electroneum Price?

With the cryptocurrency market being on the rise for the past three years, more and more investors are considering going for digital assets instead of traditional ones...

The Nine Biggest Risks Of Trading Cryptocurrencies

While the cryptocurrency space has become an increasingly exciting one, and more and more mainstream, it is still a new space that comes with certain risks...

Advantages Of Using VPS for FX Trading

VPS is short for a virtual private server and it’s widely used for trading in the financial market. The VPS hosting service will be especially useful for traders who prefer...

How to Make the Most of the Crypto Drop with Shorting?

The crypto market undergoes a clear negative trend that is expected to last for a while. Bitcoin has plummeted by 33% this week and reached the 18-month low...

What is the Bitcoin Fear and Greed Index?

As a cryptocurrency trader, you will eventually encounter the “Crypto Fear and Greed Index.” This article explores this valuable tool, provides insights on how to utilize it, and outlines its significance...

What Is Equity: A Complete Guide

Equity, also referred to as shareholder equity, is one of the most common terms in the financial markets that almost every investor or trader has come across at least once...

How to Trade CFD effectively like the Pro

Hardly can anyone talk about investment without mentioning contract for Difference (CFD) because of its popularity on most forex trading platforms. CFD is a contract...

What Is Spoofing in Crypto Trading?

Spoofing is a way to attempt to manipulate the market in your favor. If you spend any time trading, you will eventually hear the term “spoofing.” Spoofing is illegal...

How to Trade Bitcoin and Crypto CFDs in 2020?

Bitcoin is a popular cryptocurrency that is accepted as digital money, traded as financial security and used for online transactions around the globe...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.