Fundamental Analysis – Valuing Stocks Based on Economic Facts

What Is Fundamental Analysis?

Fundamental analysis is a method used to determine the intrinsic or fair value of a stock. Unlike chart analysis, which only looks at price data, fundamental analysis examines the economic substance of a company: balance sheet, income statement, and cashflow.

Goal of Fundamental Analysis

The goal is to determine the intrinsic value of a stock. If the current market price is below the calculated intrinsic value, the stock is considered undervalued – a potential buy signal for value investors.

Approach

1. Macro analysis: Economy, interest rates, currencies, industry trends
2. Company analysis: Business model, competitive position, management
3. Ratio analysis: Evaluation of balance sheet ratios (P/E, P/B, ROA, equity ratio, ...)
4. Valuation: Calculate intrinsic value and compare to market price

Key Ratios of Fundamental Analysis

Below is an overview of all key ratios relevant to fundamental analysis, which also flow into the Finanzoo F-Score.

Price-to-Cashflow Ratio (P/CF)

A company's cashflow shows the real financial flows within a fixed period. The P/CF relates the price to liquidity and enables the assessment of earnings power. Values between 15 and 18 are considered "fair" – the lower, the better.

To calculate the F-Score, Finanzoo uses free cash flow per share relative to the current market price. Point deductions occur for extended, negative free cashflow.

Return on Assets (ROA)

Return on assets (ROA), also known as ROI, indicates how a company uses available capital to generate profits. Values above 12% are considered good – the company uses its capital efficiently. Below this value, efficiency tends to be rated as poor.

For the F-Score, Finanzoo relates net income to total capital – without sector smoothing, so all industries are measured equally.

Equity Ratio (EKQ)

The equity ratio relates equity to total capital, showing the financial stability and debt dependency of a company. The higher the equity ratio, the more independent and creditworthy the company. An equity ratio above 30% is considered good.

Price-Earnings Ratio (P/E)

The P/E ratio (also Price-Earnings-Ratio, PER) is one of the best-known ratios of fundamental analysis. When calculating it, it's important to specify precisely which stock price is used. Finanzoo's calculation is based exclusively on the actually achieved profits of a company.

A common objection: During a loss phase, the P/E no longer provides a reliable statement – here Finanzoo falls back on the P/S ratio instead.

Price-Sales Ratio (P/S)

The P/S ratio is an alternative to the P/E ratio, especially for start-ups and companies without profit. Since the P/S ratio is easier to manipulate, Finanzoo prefers the P/E ratio when possible and uses the P/S ratio only as a supplement. Both values should always be considered in context with other ratios.

Price-Book Ratio (P/B)

Book value shows a company's equity and takes into account values such as inventory, machinery, and real estate. If the P/B ratio is below 1.0, the stock is worth less on the stock market than all company assets combined. Values below 1.5 are optimal – however, the P/B ratio can be misleading for young companies or franchise models.

To calculate the F-Score, Finanzoo multiplies the P/B ratio by the P/E ratio and compares the result to a factor derived from empirical studies (Graham factor).

Dividends

Dividends are paid out when the company decides to do so. The goal of most investors is to find stocks with rising dividend payments. Companies that continuously pay and increase dividends are called dividend aristocrats. As part of fundamental analysis, both the dividend yield and the dividend history and industry comparison are relevant. Note: Most dividend payments are subject to tax.

Raw Data Used at Finanzoo

Finanzoo obtains the data for fundamental analysis from company balance sheets and annual reports, sourced from financial regulatory authorities. After an automatic quality check, they are additionally reviewed manually and are always up to date.

• Net revenue
• Earnings per share
• Operating cashflow
• Investments in fixed assets (from the cashflow statement)
• Free cashflow
• Equity
• Total capital
• Shares outstanding
• Net income
• Dividend per share

Fundamental Analysis and Data

The quality of fundamental analysis strongly depends on the quality of the underlying data. Finanzoo imports fundamental data from professional sources and processes it according to consistent standards (IFRS, US-GAAP).

Limitations of Fundamental Analysis

• Balance sheet data is historically oriented – future developments are uncertain.
• Accounting rules leave room for structuring (e.g. depreciation).
• Qualitative factors (management, brand) are hard to quantify.
• Short-term market movements often follow psychology, not fundamentals.

The Advantages of the Finanzoo F-Score Tool

With the Finanzoo F-Score you can effortlessly compare over 2,500 securities. All important ratios are evaluated using a proprietary algorithm and summarized into a single metric.

Finanzoo is 100% independent of banks, brokers, and other financial institutions.

• Determine the fair value of a stock: With the F-Score, stocks can be assessed at a glance.
• Company ratios: Balance sheet figures can be interpreted much more easily – even over time.
• Price forecast: Future price developments can be recognized early in combination with analyst forecasts.
• Selecting the best stocks: A search query helps filter stocks by certain ratios or valuation levels.

Short-term price fluctuations, which often bring distorted valuations, are significantly reduced through the systematic fundamental analysis of the F-Score.