Fundamental Analysis Outline

Thank you for taking the time to check out the Fundamental Analysis section of the Learning Page, the purpose of this branch of the website is to provide a quick but detailed overview of important information to research before making an investment.

  • Research – Top to bottom view of an entire company and the surrounding environment. Where to start and how to traverse the wide-array of information available. 
  • Financial Statements – Reading Financial Statements can be confusing, this section breaks down what you need to know when reading the three main financial statements.
    • Financial Statements 101: The Good, The Bad, & The Ugly.
    • Quick-Interpretation of Balance Sheets, Income Statements, and Cash Flow Statements.
    • In-depth analysis of  Balance Sheets, Income Statements, and Cash Flow.
  • Financial Ratios – How to calculate basic ratios and interpret them.
    • Dividend Yield
    • EPS
    • ROE & ROA
    • Net Profit Margin
    • Price/Earnings
    • Price/Sales
    • Price/Cash-Flow
    • Cash Flow Per Share
    • Price/Book
    • Asset Turnover
    • Liquidity Ratios
    • Cash Conversion Cycle
    • Solvency Ratios
    • Z-Score
  • Building a Strategy & Executing – How to use what you have learned and follow through with your decision-making. This will cover diversification as well as managing your portfolio.
  • Reliable Resources – Great resources to use to garner the information that is needed for analysis and interpretation. Use these to leverage yourself as an investor or trader and make and educated decision.


Everyone has their own strategy when investing within the market; whether you plan on holding a stake in a company for a year, or even a lifetime, there are a few key components we think every investor should research before making an investment. There is a plethora of information on Fundamental Analysis dating back to before WWII, with this in mind we have gathered the essential data for you to apply this knowledge to your investment strategies. The concepts and ideas within this section can pertain to any company you would like to research, this applies to researching anything from Penny Stocks to Large-Cap Stocks. Some of the information within the Fundamental Analysis section of the Learning Page you may already know, or this could be completely new to you. We hope to teach you something new no matter what level of experience you have as an investor, or at least simply to serve as a refresher. 

 It is important, in our opinion, to define what an investment really means; in the great words of Warren Buffet one would, “buy the business, not the stock.” In other words, this would involve holding a stock for a period of one year or longer. And what would we be looking for within a business to truly invest your hard-earned cash into? To start, assuming you have already picked a company you would like to research, we believe that analyzing the C-Suite and the Board of Directors is a top priority. When investing in a company, you the shareholder should know what the leaders of the company are all about. Do these people have a high integrity, or have they been involved in some corrupt or mischievous activities in the past? This is important to research because you are essentially trusting these people with your money. Retail investors normally overlook this minor, but crucial detail within an investment; however, this may just be the make or break with the company you are investing in. 

How do I find who’s in the C-Suite or Board of Directors and how can I research them? You can find the company’s leadership and governance on their investor relations page, from there you can dive deeper into researching their management. For most Large to Mid-Cap companies, you can find videos online of their leaders speaking at press conferences, news broadcasts, and podcasts to form your opinion of these individuals. Different Social Media platforms, such as LinkedIn, are a great tool to use as you may find where these people received their education, held previous job titles, and much more. Don’t listen to what your High School English teacher said about Wikipedia either, it can be a great tool for overall research. You may find great sources from different Wikipedia pages on prominent figures, especially within a company you are researching.

We advise you to always check out a company’s investor relations page before making an investment. Companies make them for a reason, you may find important information such as company governance and leadership, financial information and filings, press releases, stock information, and plenty more. Most companies have an option to receive email alerts to stay up to date with company news and information, along with an investor relations email for you to ask questions. DailyBubble has a few watchlists of companies we think you should follow along with a link to their investor relations pages, you can find these watchlists on the Homepage and within the Articles section of our platform.

What industries should I invest in? Every investor has a different game plan when picking a stock or industry that they would like to invest in, but some of the best investors focus on a specific industry they know and understand. This is not to say your investments should always consist of following this philosophy, as one should always have a diverse portfolio. This would be more of an idea to keep in mind; as you may have more knowledge in a specific field to make better predictions on where you think a security or industry might be heading in the future. Peter Lynch, a very successful former mutual fund manager at Fidelity and who consistently outperforms the S&P 500, has a very simple strategy: Invest in what you know. This idea is not as simple as it sounds and Peter has come out in recent years that his ideas are being misquoted. “I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock.” Peter further explains to use your exclusive knowledge to target stocks you can analyze and study, and then decide if they’re worth owning. 

Ideas of how you might find these stocks:
Products you buy and where you buy them from:
Think back to what you have purchased over the last couple of months. You might be shopping at Walmart, Costco, or Target, which are all publicly traded companies, for purchasing your basic home necessities; but what about all the manufacturers whose products are on the shelves of the stores you shop at. Below are some ideas of manufacturers and some of their
brands you might know.

Procter & Gamble Brands: Baby Care (Luvs, and Pampers), Fabric Care (Bounce, Gain, Tide, and Downy), Hair Care (Head & Shoulders, Old Spice, Pantene)
Full List of Procter & Gamble Brands

Church & Dwight: Fabric Care (Oxi Clean, and Arm & Hammer), Health & Well-Being (Trojan, and First Response), Home Care (Kaboom, and Orange Glo)
Full List of Church & Dwight Brands

The industry you work in:
The field you work in might be a good resource for your next investment idea. You might be a Graphic Designer and use Adobe products frequently; your professional knowledge with the Adobe products or perhaps customer service might make you want to invest in Adobe or stray away from the Service/Product. As a professional user, you would know the advantages and drawbacks of these platforms better than the average Joe-Schmoe would.

Hobbies and Interests:
If you’re a car enthusiast, maybe look into different automakers and retailers. When searching for a stock in an industry you know, think further such as who makes the seats in my favorite car, the radio, parking sensors, and so on.

Another influential factor to analyze when choosing a stock is, does the company have brand loyalty that people are willing to pay for. Whether you like a company or not, branding plays a major role in consumer purchasing motives. Let’s ask a simple question… If you are looking to buy a copy printer, what brand of printer would you most likely choose? For many, they would say HP (Hewlett-Packard). Why? because HP started making printers in the 70s, you might have seen one of their commercials on TV, and you always see their printers on display at Staples or BestBuy when walking through the office supply section.

In recent years with printer sales drying up because the need for hard copy printouts lessened, HP has made its mark in the printing industry and is now the largest printer manufacturer in the world. Hewlett-Packard dominates the printing industry from the copy printer you use at home, to large format printers used for vehicle wraps and billboard signs; it would be hard to compete with HP when they control their industry. Now, when looking for your next stock to purchase, does that company have the brand loyalty to persuade your purchasing habits on something as simple as a printer? If the answer is yes, you may be on your way to finding your next investment.

Financial Statements

Garnering a detailed context from a Balance Sheet, Income Statement or Cash Flow Statement would allow you, as an investor, to better understand what is financially occurring within the given company. In this section, we will start with a company’s Balance Sheet and work our way through the Income Statement, before finally taking a look into the Cash Flow Statement. Below we have detailed to you Southwest Airlines as the sample company in which we will familiarize ourselves with their End-of-Year (EOY) financial data from 2018 and 2017, respectively. This section may be used as a simple-step guide for what you may want to look at when perusing through a company’s Financial Statements.

Balance Sheet Analysis:

As we start with the Balance Sheet, remember that these statements are easier to read than most beginners may presume to believe. They may come across as more intimidating to look at and overall may be a headache for someone who does not casually peruse Financial Statements on a regular basis. To negate from this overwhelming effect, we have inserted the financial data into spreadsheets to give you a better perspective of what we are really looking at. Now, let’s take a look at the Balance Sheet for Southwest Airlines within 2017 and 2018, with 2018 being the ‘current’ time:

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You may notice some highlighted areas, which will be detailed further as we dig into this. To start, we should know what it is we are looking for, as you may know the Balance Sheet is made up of a company’s Assets, Liabilities and Stockholders’ Equity. Within these three separate areas you will want to find: the 3 largest Assets, the 3 largest Liabilities, and the proportion of Total Assets financed by the Owners (Equity) and Non-Owners (Debt).

From the yellow-highlighted areas, starting with the top, Southwest Airlines PPE, net (Property, Plant & Equipment) is its largest asset, second once we account for Depreciation & Amortization. This amount sits at $19.5 Billion, which is represented from the BS (Balance Sheet) as $19,525 Million, which takes up 74.4% of Southwest’s Total Assets. This is indeed its largest asset and shows that this company is highly invested within its Property and Equipment. 

If we dig further into what its PPE is made up of, you will see that the Flight Equipment sits at $21.8 Billion ($21,753 Million), before depreciation and amortization, and is just shy of 83% of Southwest’s Total Assets; keep in mind the Total Assets area is accounting for the depreciation and amortization. It’s next largest Asset within this would be its Ground Property and Equipment, showing us as being just shy of $5 Billion ($4,960 Million), before depreciation and amortization, and is making up 18.9% of its Total Assets. One may make the assumption that the Flight Equipment and its Ground Property and Equipment are the Assets with which revenue is being generated from, big surprise I know. This is important in any case, as you now know that these assets are considered to be important to the particular business and may now draw a multitude of hypothetical conclusions to better your investment analysis.

Next you will want to take a look at what the largest Liabilities are for Southwest. Air Traffic Liability makes up $4,134 Million, about 15.8% of its Total Assets. Its Long-Term Debt is its second largest at $2,771 Million, about 10.6% of its Total Assets. Finally, the Deferred Income Taxes are sitting at $2,427 Million, about 9.3% of its Total Assets. Each of these Liabilities hold further information to make hypothetical assumptions or educated assumptions. Air Traffic Liability represents tickets sold for future travels and estimated refunds or exchanges of tickets sold for past travel dates. Long-Term Debt relates to debt that would be due past one year, in this case it would be after 2018. Deferred Income Taxes arise when a company’s accounting methods result in a difference from its income recognition within different tax laws. A company’s payable income tax may not equate to the total tax expense reported within the specified time period. This difference is usually caused by differences in methods used by the IRS and GAAP Accounting reporting for income, which causes this deferred income tax. These three Liabilities show what would be considered important to the business itself or a normal causation as a result of running the business, in this case an airline.

We will now take a look at the proportion of Total Assets which are financed by the Owners and Non-Owners. Owners would be considered the Equity section of the Balance Sheet and Non-Owners would be considered the Total Liabilities from the BS. In 2018 & 2017, the amount of Total Assets financed by the Owners would be 37.5% and 38.4%, respectively. The proportion of Total Assets financed by Non-Owners in 2018 & 2017, respectively would be 62.5% and 61.6%. You may ask what this would tell you, as an investor. Well, you now know that Southwest has a high-debt ratio to function as it does. Over 60% of the business is funded through its Liability section, it is important to note that this is in-line with the industry average. As of 2021, the Industry average of Debt-to-Equity Ratio (D/E) is 1.1562, which means that for every $1 of Shareholders’ Equity, the average company in the industry has $115.62 in Total Liabilities. As of 2018, the D/E ratio is 1.6635, which is moderately above the Industry average (for more on D/E Ratio, please see our Ratio Section).

Again, for what to cover within a company’s Balance Sheet, you will want to deduce the 3 Largest Assets, the 3 Largest Liabilities, and the Proportion of Total Assets financed by Owners and Non-Owners. This is a very good way to simplify a Balance Sheet and extract further information you may be looking for within an investment!

For more information on Balance Sheets, and understanding how they work, check out this useful page from Investopedia:

Income Statement Analysis:

The Income Statement can speak volumes to what the business really invests their money into and how financially healthy a company is for the investor. Revenue, Expenses & Net Income are the three main components of a business’ Income Statement and can provide a good outlook overall with yearly trend analysis and simply within performance of a singular provided year. Simply put, the Income Statement shows one how Revenue transverses its way to a Profit or Loss. Let’s dive into the Income Statement for Southwest Airlines between the end of 2017 and the end of 2018:

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The highlighted areas above will be broken down below, but overall the Income Statement can be clearly seen to be made up of three overall categories, this would be as follows: Revenue, Expenses, & Net Income (or Loss). To dig into an Income Statement, the easiest way to get an overall view of the business would be to note the Revenue, Compare the Three Largest Expenses for a year and the previous year, note any Unusual Expenses, and finally deduce whether the current year was more or less profitable than the previous and try to answer why this occurred.

From the provided Income Statement with Southwest Airlines, you may find Operating Revenue at the very top, this would of course be all of the money acquired through operating within the past fiscal year of 2018, 2017 & 2016, respectively. Revenue is just one piece of the puzzle within this statement, but is important to note as it shows how much in sales the business actually does. It can be seen from the above graphic that Southwest had an Operating Revenue of ~$22 Billion in EOY 2018 and ~$21.1 Billion in EOY 2017. If you were to break this Income Statement down into percentages, the Revenue piece would be considered 100% and everything below would become a piece of that 100%.

Next, we will dive into the Three Largest Expenses. For both 2018 & 2017, Southwest’s largest expense would be for Salaries, Wages & Benefits. Respectively, this would chalk up to around $7.6 Billion (34.8% of 2018’s Revenue) & $7.3 Billion (34.6% of 2017’s Revenue). The second largest would be Fuel & Oil, which would respectively be $4.6 Billion (21% of 2018’s Revenue) & $4.1 Billion (19.3% of 2017’s Revenue). The third largest would be on ‘Other’ Expenses, respectively this would be $2.9 Billion (13% of 2018’s Revenue) & $2.8 Billion (13.5% of 2017’s Revenue). With these three in mind, you can accurately see what this company prioritizes to accrue their yearly Revenue. 

Most obviously, the employees of the airline would be it’s number one priority (or asset), their wages account for almost 35% of their yearly revenue. Their second highest expense priority would be Fuel & Oil, with which the company needs to operate their vehicles (typically their planes). We can see that this typically garnishes about 20% of Southwest’s yearly Revenue. It is important to note here that already, on average, Southwest’s Revenue is 55% expensed from their Wages & Fuel Expenses. Applied generally to any business, you can see what priorities or obligations this company has within their yearly expense categories. The last expense that we mentioned would be their ‘Other’ Operating Expenses, which can include a multitude of items which may be broken down within the company’s SEC 10-K (Yearly Statement) or 10-Q (Quarterly Statement). In this case, the Other Expenses cost Southwest about $2.9 Billion (13% of 2018’s Revenue) & $2.9 Billion (13.5% of 2017’s Revenue). All together these expenses account for around 68% of the company’s Revenue for each year. Very obviously, this company relies on these expenses to continue their operations and gives a good overall view of what the company requires to operate. 

Next you would want to see if there are any Unusual Expense activities throughout the year, or previous years, looking at at least two years of financial data would be useful for this process as the comparison allows one to deduce whether there is an actual Unusual Expense for the current year. In this example, there are no Unusual Expenses that are immediately seen, but this should be something that stands out when compared to previous years. The last thing to look at within the Income Statement would be to compare the year-over-year profitability from the current year to the previous year, and try to deduce why it was higher or lower for the current year. As can be seen within the example, the 2018 Net Income was lower than 2017 Net Income, these were $2.5 Billion (2018) & $3.4 Billion (2017), respectively. The main reason for this difference, however, can be seen through the Provision (Benefit) For Income Taxes, which in 2017 was a benefit of $92 Million, but in 2018 this was an actual provision of $699 Million. A provision being a payment in taxes for that provided year. If you add in the provision from 2018 to the Net Income from the same year, you end up around $3.2 Billion, which shows that this large difference is really coming through this expense category.

For more information on Income Statements, and understanding how they work, check out this useful page from Investopedia:

Statement of Cash Flows Analysis:

The Statement of Cash Flows isn’t the most popular statement to read or analyze, but is very useful to see how Balance Sheet accounts and Income affect cash & cash equivalents. The Cash Flow Statement is broken down into three categories: Operating, Investing, & Financing Activities. The Cash Flow Statement differs from the Income Statement in that it does not account for (i.e. isn’t manipulated) by non-cash transactions, such as Depreciation. Without further ado, let’s dig into a real Cash Flows Statement and go over an easy way to analyze one!

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We discussed previously that there are three separate activities to pay attention to, this would entail: Operating, Investing & Financing Activities. The best way to compare each one is to use previous years, as we had with the Balance Sheet & Income Statement. Looking at each from an overall perspective, and then, if so inclined, digging into the little pieces to make connections. The above example is being pulled from Southwest Airlines and we will be focusing on 2018 & 2017, respectively for each category.

For Cash Flows from Operating Activities, one can see the Net Income and each of the adjustments underneath to reconcile Operating Expenses. Without digging too deep the strategy of breaking this down would be to compare the total. As can be seen from the highlighted area, one can easily tell that the total Net Cash Provided by Operating Activities, in both 2018 & 2017 were greater than Net Income. However, 2018 is exponentially higher than the Net Income for the year. This can be caused by a multitude of items listed, but the easiest to see would be from the Deferred Income Taxes for 2018 versus 2017.

Within Cash Flows from Investing Activities, for both 2018 & 2017, we can see that Southwest used cash rather than generate income from their investment activities. This is important to note as investing activities could potentially be devastating for a company, especially within Short Term assets, but this would of course be circumstantial. Generally, companies would pick safe short terms and can cover a wide variety of financial instruments. Nonetheless, cash was spent rather than made within Southwest’s case on a seemingly regular basis.

Finally we have the Cash Flows from Financing Activities, and again within this section it is important to note whether the company generated or used cash from their Financing Activities. For both 2018 & 2017, respectively, Southwest used cash rather than generating income. However, Financing Activity is a tad different as this would be cash being used to fund the company. It can be important to note in any case when looking into a company.

This of course is a very broad look into the Cash Flow Statements, but we believe this is a truly easy way to break down the Cash Flow Statement and try to deduce something from it, whether that be a negative or a positive. We chose not to bring up the data directly within this section as an overall view will suffice, however digging into each category can of course reveal more to a potential investor of a company!

For more information on Cash Flow Statements, and understanding how they work, check out this useful page from Investopedia:

Financial Ratios

Financial ratios, also known as Accounting ratios, allow for the comparison of two financial related values taken from a company’s financial statements to attain a relative average. These may be used to compare averages throughout its operational years, or quarters, to discover strengths or weaknesses that a company may have. Other than time periods, these may be used to compare similar firms, the business sector or across industries. Some of the Ratios listed below may be calculated in a multitude of ways, below are, what we believe, to be the simplest way to make these calculations.

Profitability Ratios:

A Profitability Ratio allows you to evaluate a company’s ability to generate earnings in relation to its revenue, operating costs, balance sheet assets, or shareholders’ equity over time, from data within a specific point in time. These calculations may sum up the effects of liquidity management, asset management, & debt management within the business. The three most important ratios are:

Net Profit Margin: Net Income/Total Revenue. These figures may be found within the Income Statement. This calculation will show how much the profit, or net income, is generated as a percentage of revenue. A growing net profit margin over a period of time is what you would want to see within a company.

Return on Equity (ROE): Net Income/Shareholder’s Equity. Net Income may be found within the Income Statement and Shareholder’s Equity may be found within the Balance Sheet. ROE allows you to gain insight into how efficiently a company is handling its shareholders contributions. The higher the ROE, the more efficient the company’s management is at generating growth and income from its equity financing activities. 

Return on Total Assets (ROA): Net Income/Total Assets. Net Income may be found within the Income Statement and Total Assets may be found within the Balance Sheet. When you make this calculation you may see how efficiently a company’s total assets are generating profit. If a company earns a new dollar for every dollar invested within it, the ROA would be 1, or 100%. So you will want to find a company with a higher ROA, as it would be earning more capital back with its investments. 


Market Value Ratios:

Market Value Ratios are used to gain insight into the valuation of a company’s current share price. In other words, one may derive a valuation of a stock’s valuation in terms of over or under-pricing. There are five ratios that may be considered important to an investor:

Earnings per Share (EPS): (Net Income – Preferred Dividends)/Average Outstanding Common Shares. It may be preferred to not include the Preferred Dividends within this equation, and that is completely alright. Net Income may be found within the Income Statement. Preferred Dividends, if any, may be found within the Balance Sheet as well as the Outstanding Common shares. EPS shows you how much capital a company makes for each share of its stock. The higher the EPS is, the better it would be for you as an investor as it indicates greater earnings per share relative to its price. 

Price/Earnings (P/E) Ratio: Share Price/Earnings per Share. Once would find the share price through any means of lookup, i.e. Google, Brokerage or otherwise. EPS is calculated with the above information. A P/E Ratio compares a business’ share price to its EPS. This may be used as a forward (projected) or trailing (historical) looking perspective. A P/E Ratio that is higher may mean that the stock is overvalued; however, other investors may believe that there is a high growth potential within the coming future which may inflate this figure just as well. 

Dividend Yield: Annual Dividends per Share/Current Share Price. Dividends are typically paid on a quarterly basis, but may be an annualized amount, in any case they can be quickly added to find the annual dividend per share. A higher dividend yield does not always indicate a great investment opportunity, for example, a declining stock price may show a higher dividend yield for the given stock.

Book Value per Share (BVPS): (Total Equity – Preferred Equity) / Total Shares Outstanding. All figures within this calculation may be found within the Balance Sheet. When a stock is undervalued, the BVPS will be higher in relation to the current stock market price within the market. Generally, a stock’s price is higher than the provided BVPS.

Market Value per Share: This is one calculation that does not need to be calculated as it is the current price with which a share of a business’ stock is trading at. This price will vary based on the level of demand with which the stock has at any particular time throughout an active trading day. The market value of a stock is usually higher and more volatile than book value as the market value is based on demand and includes values such as unrecorded intangible assets and future growth prospects for a business.


Liquidity Ratios:

Liquidity Ratios allow someone to tell if a business is able to meet their current debt obligations with their current assets. In other words, it shows the ability of a business to pay back their debt with raising any additional/external capital to do so. There are 3 main ratios to consider for this:

Working Capital (or Current) Ratio: Current Assets – Current Liabilities. One may find these figures from the company’s Balance Sheet. The measurement will tell you if the business can pay its current, short-term debt with its current assets. A Current Ratio should align with the industry average or may be slightly higher to be considered good. If it is lower than the industry average, this may indicate a higher risk of default. If it is too high, this may be an indication that the company is not using its assets as efficiently as they could.

Quick (or Acid Test) Ratio: Current Assets – Inventory/Current Liabilities. One may find these figures from the company’s Balance Sheet. This measurement will tell you if the business can pay its current, short-term debt without selling any inventory. The higher this ratio is within a company, the better its liquidity and financial health is. If the ratio is lower it is more likely that the company will or is struggling to pay its debt obligations.

Cash Ratio: Cash + Cash Equivalents/Current Liabilities. One may find these figures from the company’s Balance Sheet. This measurement will tell you if the business can pay off all of its current liabilities without liquidating any assets, aside from its Cash Equivalents (i.e. Short-Term Marketable Securities). This ratio is expressed as a numeral, greater or less than one. If the result is equal to one the company has exactly the same amount of cash and cash equivalents to pay off its current liabilities. If this calculation is less than one for a company, this means that there is insufficient cash on hand to pay its near-term debt. If this calculation is more than one, then the company has the ability to cover all of its short-term debt and will still have cash left-over.


Efficiency Ratios:

Efficiency Ratios allow someone to tell how efficient the company is using its assets to generate revenue and maximize shareholder return or profit. These ratios may help show how efficient a company’s operations are for a given period of time. There are 3 common ratios that may be considered for this:

Inventory Turnover Ratio: Sales/Inventory. One may find these figures within both the Income Statement (Sales) and the Balance Sheet (Inventory). This ratio will tell you the amount of times inventory is sold or used within a specific time period, usually quarterly or yearly. This will allow one to recognize if the company has an excessive inventory in comparison to its sales level. A slow turnover may imply weak sales or possibly excessive inventory on-hand. A faster ratio implies stronger sales or possibly insufficient inventory.

Days Sales Outstanding (Average Collection Period): Accounts Receivable/Net Revenue in Accounting Period x (Number of Days in Accounting Period). One may find these figures within the Balance Sheet (Accounts Receivable) and the Income Statement (Net Revenue). This calculation will measure the efficiency of which a company is collecting on payments for outstanding sales. It is generally considered to be of a company’s best interest to collect on its outstanding receivables as soon as possible. 

Total Assets Turnover Ratio: Sales/Total Assets. One may find these figures within the Balance Sheet (Total Assets) and the Income Statement (Sales). This ratio allows one to assess how effectively a company is using their assets to generate revenue. This ratio can vary widely from one industry to another, it is best to compare this calculation with different companies within the same sector. Generally, the higher the asset turnover ratio, the better the company would be performing as opposed to a competitor.


Solvency Ratios:

Solvency, or debt management, ratios allow you to see a company’s position in regard to their financial leverage, or debt financing, which would be used to finance their operations. These ratios may help show how much financial leverage a company uses compared to using their retained earnings or equity financing to fund the business. There are two main ratios for this:

Total Debt Ratio: Total Liabilities/Total Assets. One may find these figures within the Balance Sheet. This ratio shows the percentage of a company’s assets which are financed by its debt. A debt ratio that is above 1, may inform you that a company has more debt than assets. Conversely, a debt ratio that is less than 1, tells you that a company has more assets than their relative debt.

Debt-to-Equity (D/E) Ratio: Total Liabilities/Total Shareholders’ Equity. One may find these figures within the Balance Sheet. This calculation shows a company’s leveraging of its assets, either through debt or equity financing. The D/E ratio is best compared within the same industry for different companies, as ideal amounts of debt vary depending on the industry. A higher ratio for D/E may indicate a company with higher risk to shareholders.


Coverage Ratios:

A Coverage Ratio may be used to measure a company’s ability to cover its debt obligations and any associated costs. These obligations may include interest expenses, lease payments and even dividend payments. Coverage Ratios go hand-in-hand with Solvency Ratios to paint the picture of a company’s debt position. There are two main ratios for this:

Times Interest Earned Ratio: Earnings Before Interest & Taxes (EBIT)/Interest Expense. EBIT = Revenue – Cost of Goods Sold (COGS) – Operating Expenses. COGS may be read as Cost of Sales or Cost of Goods Sold. Figures for EBIT may be found within the Income Statement, Interest Expense may also be found within the Income Statement, but may be categorized within Other Income/Expenses. This calculation will show you how well the company can cover its interest payments on debt and debt service payments. The higher this ratio is, the more financial freedom the company will have against the withhold of debt. 

Debt Service Coverage Ratio (DSCR): Net Operating Income/Total Debt Service Charges. Net Operating Income may be found within the Income Statement. Total Debt Service Charges may be found within the Balance Sheet, you will want to include short and long-term debt for Total Debt Service Charges. This calculation measures a company’s ability to use its operating income to repay all of its debt obligations, which would include repayment of principal and interest on short & long-term debt. The higher the ratio is, the better off a company is compared to its industry. If the DSCR is less than one, this would imply a negative cash flow, which means a company would not be able to cover its debt obligations from its operating activities. If it is too close to one, the company is vulnerable to being unable to cover its debt obligations. 

Strategies & Execution

It’s human nature to create a plan for almost everything, from picking what route to take on a road trip, to writing a shopping list for groceries, your investment strategy should not be a shot in the dark. This is a financial game plan unique to every individual for many different reasons; a 20 year old is going to have a very different strategy than a 65 year old getting ready to retire. Creating an investment strategy and writing it down to refresh every so often is essential because our bird brains like to forget and think they are not important over time. Having this financial blueprint will help you reject many potential investments that might perform poorly over time and keep you in check with meeting your wealth goals. There are many different strategies an investor could implement in their portfolio, below are a few of the most common and easiest to apply to your investments.  

Value Investing:

This is a strategy made popular by Warren Buffet, the theory is simple: buy securities that appear underpriced by some form of fundamental analysis. The quest value investors search for are stocks that look cheap compared to the underlying revenue and earnings.

Characteristics of a good value stock?

• Established business with a long history of success.
• A company with consistent profit.
• Pays a dividend (Not a qualification, but is nice.) When investing in undervalued companies, it may require waiting long and tedious periods before the stock goes from undervalued to overvalued. In the meantime, you can lay back and collect dividends.
• Positive Earnings per Share Growth: Finding a company with positive earnings per share growth without any earnings deficits over the last 5 years will help you avoid high-risk companies.
Ratios for good value stocks:
Price to Earning (P/E) Ratio: Invest in companies with a low P/E ratio. Companies with a P/E ratio of 9.0 or less usually eliminates high growth companies.
Total Debt Ratio: When value investing, it is important to invest in companies with low amounts of debt. Ratios less than 1.10.


Income Investing:

Growth Investing:

Small-Cap Investing:

This is an investment strategy for those wanting to take on a little more risk. Small-cap stocks are companies with a market cap typically between $300 million and $2 billion. While small cap stocks have a bad reputation and lack many qualities investors should demand in a company, they do have their benifits. Most successful large-cap companies once started out as small businesses making it enticing for investors to get in on the ground floor.

What should an investor look for in a good small-cap stock and how can you find them?

• Revenue Growth: When searching for a good small-cap stock, revenue growth is one of the most important ingredients needed to find a potential big winner. Investors should look for companies with at least 20% revenue growth or more as this adds to the disruptive potential, and the ability to sustain growth. If a company’s revenue growth is decelerating, that may be a sign that its business is maturing or the industry was a fad.

• Past Price Appreciation: While the underlying performance of the business is ultimately more important than the movement of the stock price, previous price appreciation is a good quality to recognize. Investors will generally respond to a strong business by sending the stock price up, previous stock price appreciation may indicate the company has what it takes to outperform in the near future. On the other hand, stocks that have deteriorated for several years or mirrored the market are less likely to deliver exponential growth.

Profit Potential: Most small-cap stocks aren’t profitable, often because they are young companies still growing and investing into their future. Even if a company is still not profitable, it’s important to consider the ability if or when they could turn a profit. This takes research into its business model, competitive advantages, or things such as valuable assets.

Reliable Resources

If you made it this far to learn about Fundamental Investing, the Team of DailyBubble congratulates you on taking the first step towards your enrichment within the Financial world. Please see below for a list of useful links and what these links can provide to you to expand on the knowledge provided above. We would also like to mention that this is not the end all be all to Fundamentals, there is plenty more that we just did not get into, never stop learning!

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