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Academy · Stage 3
Fundamental analysis for stocks
How to read a company’s numbers: earnings, revenue, margins, valuation ratios and guidance, and how they move the share price.
Technical analysis tells you where a stock is. Fundamental analysis tells you what it is worth. Traders use both: fundamentals to decide which stocks deserve attention, charts to decide when.
The quarterly report
Listed companies report every three months. The report contains:
Revenue — total sales. Growth rate matters more than the level.
Earnings per share (EPS) — profit divided by shares outstanding. The headline number, compared against the analyst consensus.
Margins — gross margin (revenue minus cost of goods), operating margin, net margin. Expanding margins mean pricing power or efficiency; contracting margins are a warning even when revenue grows.
Guidance — management’s forecast for the next quarter or year. Often moves the stock more than the results, because it changes the future.
Cash flow — operating cash flow and free cash flow. Profit can be managed; cash is harder to fake.
Balance sheet — debt, cash, and what the company owns. High debt plus rising interest rates is a specific risk to check.
Valuation ratios
Price to earnings (P/E) — share price divided by annual EPS. A P/E of 20 means investors pay 20 for each unit of annual profit. Compare within a sector, not across sectors; a software company and a utility have different normal ranges.
Forward P/E — uses forecast earnings. Better for growth companies.
Price to sales — used when a company has no profit yet.
EV/EBITDA — enterprise value (market cap plus debt minus cash) to operating profit before depreciation. Preferred by professionals because it accounts for debt.
Dividend yield — annual dividend divided by price. Matters for income investors and for banks, utilities and consumer staples.
PEG ratio — P/E divided by expected growth rate. Roughly, below 1 suggests growth is not yet priced in.
The earnings reaction
The stock moves on the gap between reported numbers and expectations, then on guidance, then on what management says on the call. Common patterns:
Beat on EPS, miss on revenue, stock falls: the market cared about growth, not cost-cutting.
Beat on both, stock falls: expectations were higher than the published consensus, or guidance disappointed.
Miss, stock rises: the miss was smaller than feared, or the shares had already fallen into the report.
Study the last four reactions before trading a stock through earnings. Options markets publish an implied move for each report; if a stock usually moves 8 percent and is implying 12, the market expects something unusual.
Sector context
A company’s numbers are judged against its peers and the cycle:
Cyclicals (industrials, materials, discretionary) — earnings rise and fall with the economy; best bought when things look worst.
Defensives (staples, utilities, healthcare) — steady earnings; outperform in downturns.
Growth (technology, biotech) — valued on future earnings; most sensitive to interest rates.
Financials — earn on the gap between short and long rates; watch the yield curve.
Worked example
A retailer reports quarterly EPS of 1.20 against consensus 1.10, revenue up 6 percent against 5 percent expected. Good quarter. Guidance for the next quarter is 1.05 against the 1.15 analysts expected, citing weaker consumer demand. The stock opens down 9 percent. The beat was history; the guidance was the news. A trader who only read the headline numbers would have been on the wrong side.
RISK DISCLAIMER
Praevis publishes education and market commentary. Nothing here is investment advice. Trading forex, stocks and CFDs carries a high level of risk and may not be suitable for all investors.