Dr. P.V. Viswanath |
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Four Investing Fundamentals Everyone Needs
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The majority of investors—even those who swear they follow fundamental indicators—tend to act on and react to the market chaos seen in the daily action of the DJIA and stock prices. The short-term price movement in the market is always chaotic and, as confusing as this is, it can become your greatest advantage. If you pick stocks based on the identification of four key fundamental indicators, you narrow down your list to the best companies. If you then time your entry on the price dips in the market, you can buy those companies at bargain prices. Two key rules should always be kept in mind. First, pick companies and stocks based on sound fundamental analysis. Second, time your purchase based on value and avoid relying on passing fads. Fads come and go, including fads in which fundamental indicators are in favor at any given moment. The popularity of EBITDA (earnings before interest, taxes, depreciation, and amortization) is a good example. Many years ago this calculation was all the rage because it approximated the company’s core earnings on a cash basis. It was flawed, however, because it did not adjust for situations with large intangibles on the books or for journal entry–based revenue adjustments. EBITDA also provided no “actionable intelligence” about companies or their stocks. The fad distinguished cash-based income only and did not identify long-term trends or growing revenue and earnings. This calculation has fallen out of favor more recently. So if you believe in the fundamentals, but you don’t know how to narrow down the list of what to watch (or more to the point, how to interpret a long list of indicators) what guidelines are best followed? There are dozens of possible indicators, but many do not actually help you eliminate candidates or focus in on others, and that is what you need to make wise investment decisions. Consider the following four suggestions in selecting and applying fundamental indicators:
With these four suggestions in mind, the following sections describe the four key fundamental indicators that provide the most valuable insights to profitability, operations management, and cash flow control with an organization. These are revenue and earnings, the debt ratio, the P/E ratio, and dividend payment and history. |
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