Four Fundamental Tests Every Stock Investor Should Use
by Michael C. Thomsett
Fundamental analysis is a sensible, valuable and sound system for comparing companies and for narrowing down the list of strong candidates.
But the problem for every investor remains: Out of the range of possible indicators, which fundamental tests should you use? More to the point, how do you know you are getting an accurate picture based on the indicators you rely on to pick value investments?
In this article
- Revenue and Earnings
- Price-Earnings Ratio (P/E)
- Dividends per Share
- Debt Ratio Trend
- Putting It All Together
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Everyone has a short list of their favorite indicators. However, there are four that virtually everyone needs; for some, a list of favorite indicators does not provide the full story of a company’s financial strength or working capital trends. These four essential indicators not only make comparisons between companies easier and more revealing, they also help you study the company’s recent history of results and judge operations and working capital to ensure that the company you put on your short list belongs there.
The four tests work together to avoid a common problem: focusing on one or two important tests while deeper and perhaps growing problems go unnoticed.
To read more, please become an AAII Registered User or CLICK HERE.
Discussion
Great article, AAII. Extremely valuable and very educational.
I love you, AAII. :)
Aloha,
Rick
posted about 1 year ago by Richard from Hawaii
I am new to this. What is a good place to find all the information mentioned in this article - historical debt ratio, current ratio. The AAII stock charts did not show those.
posted about 1 year ago by New Investor from California
very revealing! Iwould like to make it one of my investment tools. Where is an easily accessible data base where I can find the historical data needefor the analyses?
posted about 1 year ago by Istvan from Massachusetts
@Amlan and Istvan: I don't know if there is any publicly accessible data. AAII has a "Stock Investor Pro" for $198/year that will give you 10 years worth of all kinds of data. Otherwise, you will have to do your own calculations company by company. I'd be interested to know if there are other alternatives.
posted about 1 year ago by Kirk from Pennsylvania
Hi Alman,
Much of the data can be found by calling up a stock quote and then clicking on financials on AAII.com. For example, information on DuPont is avaialble at:
http://www.aaii.com/quote?qm_page=53007
More detailed information is available on our Stock Investor Pro program:
http://www.aaii.com/stock-investor-pro/
posted about 1 year ago by Charles Rotblut from Illinois
Very interesting! I joined AAII hoping it would help me make wise investment choices. The information appears to be here but the data I need to make a decision isn't. That is unless I purchase your investor-pro for $198.00. Typical con job. I can't believe I was this stupid. Bet this email doesn't stay or your website. Thank You,
Richard from Kentucky
posted about 1 year ago by Richard from Kentucky
This article:
http://www.aaii.com/computerized-investing/article/the-top-web-based-stock-screening-services
points to other data sources. I don't know if you need to subscribe to CI to get to the article.
Easy on the conspiracy theories. I've been with AAII 20 years and no one's out to screw anyone--just the financial industry, investment banks & the billionaire lobbies ;-)
posted about 1 year ago by Britni from California
Richard: Sorry, but you are incorrect. I never puchased a stock in my 51 years until 2 1/2 months ago. I purchased SI pro, studied it, started research and started buying. I'm up over $1000. It would be a lot more if I had paid better attention to some of the information available. I really don't want to sound flippant, but if you want to be cheap, you can do things the hard way if you wish... Good luck!
posted about 1 year ago by Darryl from Louisiana
A lot of free info can be found on Morningstar website, including ten year stock information. To obtain analyst reports and some other info requires subscribing.
posted about 1 year ago by Sandra from California
Financial info is available from a variety of pay sources e.g Morningstar, WSJ, etc. But there are free reference sources available at your local public lib
posted about 1 year ago by Ken from Alabama
This article was very informative. I'm in the process of taking control of my portfolio from a broker. Thanks for helping me get "up to speed". Doug
posted about 1 year ago by Barb & doug from Washington
fantastic article. i had the same question - where to get this data that is neatly summarized here. Thanks for all those tips. i am starting to reapportion part of my IRA to probably use the Shadow portfolio. I want to better understand the philosophy - this article really helps. thanks.
p.s. i am new member who wishes I had paid more attention when I first investigated aaii 10 years ago.
posted about 1 year ago by Joseph from Massachusetts
"A price-earnings ratio that is too high means the stock is probably overpriced."
Other than "too high" is subjective, a P/E over the stated 25 high may well mean that the stock is performing well in the eyes (pocketbooks?) of investors. P/E is almost a meaningless criterion for investing. A P/E over 25 may be an indicator of a volatile (momentum) stock, but it also can lead to great profits from capital appreciation (there are many, many examples); they just need to be monitored closely.
posted about 1 year ago by Roger from Florida
I asked aaii a few weeks ago about the Mac and this is what they replied:
Stock Investor Pro is a Windows-based program. You can run on the Mactel-based systems running Windows on utilities such as Bootcamp and Parallels.
I have considered getting one of these emulators to allow me to get Pro but just want to be sure the $199/year is worth it. Based on the above comments, my position is strengthening.
posted about 1 year ago by Daniel from Illinois
For the next investor conference how about sectionals on using various selections from the AAII web site? Also to the fellow who was disappointed with his membership, I have always thought of AAII membership as a source of information, not to be told what vehicle to invest. I do however, wonder why Mac users are not "allowed into the secret inner sanctum of Computer Investing". Thanks AAII for providing great information to me since 1989. I can't remember but CI might have been available back then on a CD......out
posted about 1 year ago by Mark from Alaska
Your article was great. The problem I have as a new AAII member is where exactly do you find some of the data to evaluate a stock?? For example, if I were looking at XOM as a possible buy, where would I find Price/Book and Price/Sales ratios??
posted about 1 year ago by Charles from New York
Charles-If you go to the home page of AAII.com, you will see a box to call up stock quote right below the "Today's Market" chart. Type in the ticker, hit go and you will be directed to the quote page. On that page, click on "company" and then "key ratios". -Charles Rotblut, AAII
posted about 1 year ago by Charles from Illinois
This is a very good article. 15 years ago when I was just getting started I bought Dell Computer because I once knew a girl named Della. And Southwest Airlines as their ticker is 'LUV'. My returns were so great that my broker highlighted my profits with parenthesis. I am a micro-micro investor, too poor now to pay for the premium services. But with the help of being a basic AAII member and reading all the free articles on the internet - many of the sites pointed out by AAII - I am getting better. Now I know what P/E is. Some one may promote a stock and I can analyze their argument. Perhaps see through their smoke cloud. Sometimes. It takes lots and lots of work and a long long time.
posted about 1 year ago by Steven from Iowa
Stock Investor Pro and the Macintosh.
As a long time Mac user I have evaluated several Windows emulators over the years. My pick is Oracle's VM VirtualBox. The price is right,it's a free download from https://www.virtualbox.org/
My iMac with OSX 10.6.8 running Windows 7 on VirtualBox is giving me a completely satisfactory user experience.
Since Stock Investor Pro comes with a 3-month money back guarantee it download it to VirtualBox and give it a try.
posted 9 months ago by Thomas from Minnesota
