Introduction to Fundamental Analysis

This is a very brief introduction to the very vast subject of fundamental analysis. To understand and make productive use of fundamental analysis, familiarity with accountancy and economics are essential. However, one need not be an accounting or economics expert for this purpose.

From a shorter - term perspective, one could argue that fundamental analysis does not apply to the Kuala Lumpur Stock Exchange (KLSE)/Singapore Stock Exchange/Hong Kong Stock Exchange/Jakarta Stock Exchange/Thai Stock Exchange/Vietnam Stock Exchange. From a longer - term perspective, however, it is very difficult to invest successfully even on the KLSE/SGX/HKex without incorporating fundamental analysis into one's methodology. While the general perception is that the KLSE is still an inefficient market where rumours, tips, poor corporate governance, etc. rule, the smart investor would realize that applying sound fundamental analysis in such a stock market can be rewarding. But just like any other investment methods, fundamental analysis has its strength and weakness.

 

 

A. Earnings Per Share (EPS)

The Formula for calculating net EPS is:

Net Attributable Profit divided by Number of Shares Outstanding

EPS is generally used as an indicator of the performance of a company over a long period of time. For example, while a company's earnings may be rising over a period of time, its EPS may not be. There are various ways in calculating a company's EPS, depending on what the objective of the investor or analyst is. Most use net attributable earnings, that is, earnings after tax and minority interests.

EPS can also be based on historical or prospective earnings. Projected EPS is important because it can significantly influence the company's share price. A company's EPS can also be calculated on a diluted or non-diluted basis. Where a company has warrants outstanding, it is common practice to calculate the EPS assuming that all the warrants are exercised. The number of shares outstanding may also be affected by rights and bonus issues. In such cases, the number of shares outstanding could be an average figure.

 

 

Durable Competitive Business is able to grow 20-25% consistently over 10 years. But, high growth company doesn’t mean it is a good share to own. What if the growth stop and company has huge debt/long term debt?