What are the Main Fundamental Indicators?

The study and analysis of fundamental indicators are essential for investors seeking to understand the real financial health of a company and its potential for appreciation.

These indicators are crucial tools that provide in-depth insight into various financial and operational aspects of a company.

Below, we explore the main fundamental indicators, their definitions, importance and how they influence investment decision-making.

What are fundamentalist indicators?

The fundamental indicators are metrics used to evaluate a company's financial performance and its ability to generate profit in the long term.

They allow for detailed analysis of a company's finances and operations, helping investors determine whether a stock is undervalued or overvalued.

See below what the main indicators are.

1. P/E (Price/Earnings)

The P/E ratio relates the stock price to the company's earnings per share (EPS). This ratio is calculated by dividing the current stock price by the company's net income per share.

A low P/E may suggest that the stock is undervalued, while a high P/E may indicate that it is possibly overvalued.

This indicator is often used to compare companies within the same sector, providing a clear view of the relative value of a stock.

For investors, a low P/E can be a sign of a buying opportunity, while a high P/E can suggest that the company is overvalued.

However, it is crucial to consider other indicators together, as a low P/E may also reflect operational problems or weak growth prospects.

2. ROE (Return on Equity)

ROE measures how efficiently a company generates profit from shareholders' funds. It is calculated by dividing net income by shareholders' equity.

A high ROE indicates that the company is efficiently utilizing shareholders' capital to generate profit, which is generally seen as a positive sign.

Therefore, a strong ROE suggests that the company has good management and an effective business model. However, it is important to compare ROE with that of other companies in the same industry to get a more accurate perspective on the company’s performance.

+ What is Return on Equity (ROE)?

3. EV/EBITDA (Enterprise Value/EBITDA)

The EV/EBITDA indicator assesses the total value of the company in relation to its earnings before interest, taxes, depreciation and amortization (EBITDA).

This multiple is calculated by dividing the enterprise value by EBITDA. EV/EBITDA is a useful tool for comparing companies in the same industry because it is not affected by the company's capital structure and tax policy.

This indicator is widely used to assess the relative value of a company, helping investors determine whether a stock's price is in line with the company's financial performance.

How important is fundamental indicator analysis?

The analysis of the fundamental indicators is vital for the comprehensive assessment of a company as it provides a detailed view of its financial and operational health.

These indicators allow investors to identify companies with good performance and growth potential, while avoiding those that may be overvalued or in financial trouble.

A recent study by Morningstar showed that companies with a low P/E and a high ROE outperform the stock market over the long term.

Furthermore, the analysis of multiple indicators helps to create a more complete view of the company, reducing the risk of decisions based on incomplete or misleading data.

So, comparing these indicators over time and across similar companies is crucial to understanding trends and identifying investment opportunities.

+ Fundamental Analysis: Know What It Is, Its Advantages and How to Use It

How to use fundamental indicators in decision making?

To effectively utilize the fundamental indicators, it is essential to adopt a holistic approach.

Rather than relying on a single indicator, investors should consider a combination of metrics to gain a comprehensive view of the company.

This includes analyzing multiple indicators over time and in comparison with companies in the same sector.

Additionally, trend analysis and comparison with industry benchmarks help contextualize indicators and make more informed decisions.

Data interpretation must consider factors such as the economic cycle, market conditions and the company's future prospects.

By integrating these factors into the analysis, investors can develop a investment strategy more robust and well-informed.

Practical examples of the application of fundamental indicators

Let us consider two practical examples to illustrate the application of the fundamental indicators:

Company A: Suppose Company A has a P/E of 12, a ROE of 18%, and an EV/EBITDA of 8.

This may indicate that the company is well valued in terms of profit and offers a good return on shareholders' capital.

When compared to other companies in the industry, these indicators may suggest that Company A is a good investment opportunity.

Company B: On the other hand, Company B might have a P/E of 25, a ROE of 10%, and an EV/EBITDA of 15.

These numbers may signal that the company is overvalued relative to its profit and that the return on shareholders' capital is lower compared to the market.

This may indicate that Company B's stock may not be the best choice at this time.

The following table summarizes the main fundamental indicators and their uses:

“Fundamental analysis provides a solid basis for informed, strategic investment decisions.” — Benjamin Graham

Understand and correctly apply the fundamental indicators, is essential for effective investment analysis.

By considering these indicators together and contextualizing their information, investors can identify valuable opportunities and avoid financial risks, contributing to a successful investment strategy.