Fundamental Analysis

You know you are wading into stock market deep waters when you wish to know what fundamental analysis means. Perhaps your goal in life is to become a hotshot stock analyst, or maybe you just want a basic understanding of securities. In the simplest terms, fundamental analysis is the study of factors that affect a company's earnings.

In addition to company financials as contained within the annual report, an additional resource for the investor is the share appraisal form. This form serves as indicator of the company's health and provides a method to help you in decision making.

Points in Summary

• When buying shares, you invest capital and you become part owner of a company. Evaluating the company beforehand thus becomes necessary. Fundamental analysis is the study of factors that affect a company's profits.

Earnings Per Share

Earnings per share (EPS) is a part of the company profit allocated to each outstanding share and indicates a company's profitability. The EPS value is used to calculate price to earnings ratio. The formula for EPS is net profit after tax (NPAT) divided by number of shares on issue, with the results expressed as cents per share.

EPS (cents per share) = Net profit after tax ÷ Number of shares on issue.

Analyst reports are created by professionals who interpret annual reports. Analysts use annual report data to create forecast and calculate financial ratios. Financial ratios are used to compare a company's performance for a specific period to its previous results, competitor results and market averages.

Although there are disadvantages to using ratio analysis (imperfect data or too much data), reviewing analyst reports will add objectivity to your interpretation. An objective approach avoids knee jerk reactions and takes out the emotion from the equation.

Per Share Data

So where do you get all the data to analyse a company? You look at financial statements. Financial statements are documents containing an incredible amount of information about a company's activities. The sheer volume of data in these reports can be confusing at first, but like all things, practice makes reading them easier.

Calculations can put off the beginner trader or stock market student. It's good to remember that calculations are a way to distill raw market data into a manageable value. Think of numbers as a way to simplify rather than complicate things. In case you get scared off by balance sheet analysis, you can always employ the services of a stockbroker or a professional analyst. Before crunching numbers, list the facts you are trying to learn.

• Growth. Is growth from mergers and acquisitions or is it organic?

Trading on news is a dangerous prospect. Especially if you don't have a Bloomberg box or Dow Jones newsfeed sitting on your desk. But that's another issue I’ll definitely delve into at my TradingCritic blog another day. Sometimes there is a need to get the latest news: perhaps for your own research purposes to justify your trade. Or for investors to find a fundamental base onto which they will invest their money. Whatever the reason for your search for Australian stock news, here are a few places where you may be able to find the information you seek.