Fundamental Analysis of Stocks
Fundamental Analysis of Stocks – Fundamental analysis is the concept of evaluating a company’s performance in order to find out the fair value of its shares. Benjamin Graham, in collaboration with David Dodd, formulated the basic concepts of fundamental stock analysis in the book “Analysis of Securities”. It is thanks to these people that such a profession as a financial analyst appeared in the world. In this article, we will look at the basic principles that Benjamin Graham talks about in the pages of his books and find out if they are really outdated and have no value for investors these days, as many people think. After getting acquainted with these principles, we will try to apply them and analyze the Gazprom company as an example.
Fundamental Analysis of Stocks: Graham’s Principles
If we briefly formulate the main requirements of Benjamin Graham for companies whose shares the investor considers as a potential investment object, then we get something like the following list:
- Adequate company size;
- Financial stability;
- Stable profits;
- Good dividend history;
- Profit growth;
- Attractive share price.
As you can see, the requirements are quite logical and one can hardly claim that in the modern world they are meaningless and useless. Now let’s take a closer look at each of the points to get to the very essence of Benjamin Graham’s view of company valuation.
Adequate company size
In his books, Graham insists that the prudent investor should look first and foremost on companies whose size alone speaks volumes. As a rule, investing in companies that are leaders in their field, the investor can sleep well. To simplify things greatly, then a reasonable investor should consider the shares of those companies that are at least included in well-known stock indices as objects for investment. For example, it could be the S&P 500 index, the Dow Jones industrial index or one of the industry indexes of the Moscow Exchange .
Financial stability
Graham paid close attention to the balance sheet of the company under study. Here he was primarily interested in how the management of this company conducts an adequate financial policy. For a quick assessment, he suggests using two common financial ratios:
- current ratio (Current Ratio);
- quick ratio or “acid test” (Quick Ratio).
In his opinion, the current liquidity ratio according to the last balance sheet should be at least 2 . This characterizes a fairly stable financial position of the company and suggests that it is able to pay off short-term loans at the expense of current assets. The quick ratio must be at least 1 .
Good dividend history
There are no contradictions here either. If we consider a share of a company as part of a business that we own, we want to get a return on our investment, whether it be dividend payments or the rapid growth of the company’s profits.
Profit growth
Graham insists that the company’s earnings per share (EPS) should increase by at least 1/3 over the past 10 years . Some clarifications are worth making here. In order to reliably assess the rate of profit growth, it will not be superfluous to look at this indicator. Not only per share, but also in general.
Fundamental analysis of the company “Gazprom”
Let’s recall the list for a quick assessment of the company’s performance. Given a little above and go over it to assess Gazprom:
- Adequate company size;
- Financial stability;
- Stable profits;
- Good dividend history;
- Profit growth;
- Attractive share price.
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