Fundamental Analysis

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Below are concise yet comprehensive explanations aimed at enhancing your understanding of Fundamental Analysis.

Fundamental Analysis:

  • Focusing on: A company’s financial health, future prospects, and industry trends to assess its intrinsic value.
  • Factors: Revenue, earnings, debt, management team, competitive landscape.
  • When to Use: Long-term investing, selecting undervalued companies with solid growth potential.
  • Example: You research a company with a P/E ratio of 15 compared to its industry average of 20, suggesting potential undervaluation. You calculate its EPS to be $2 and its annual dividend to be $1, resulting in a 6.67% dividend yield (attractive for income investors).


  • Dividend Yield: Imagine a stock priced at $50 with an annual dividend of $2. Dividend Yield = $2 / $50 x 100% = 4%.
  • P/E Ratio: If the same stock has an EPS of $10, its P/E Ratio = $50 / $10 = 5.
  • Price-to-Earnings-to-Growth Ratio (PEG Ratio): Considers both valuation and growth potential. PEG Ratio = P/E Ratio / Expected Growth Rate. A PEG ratio below 1 suggests potential undervaluation.


Indicator Term Benefit When to Use Example Calculation
Valuation P/E Ratio Price-to-Earnings Ratio Measures relative valuation based on earnings Long-term investment, identify potentially undervalued stocks Company A: P/E 15 is better if industry Avg is 20 Stock Price / EPS
Valuation & Growth PEG Ratio Price-to-Earnings-to-Growth Ratio Considers valuation and growth potential Long-term investment, identify undervalued growth stocks Company A: PEG 0.75 (below 1 suggests potential undervaluation) P/E Ratio / Expected Growth Rate
Income Dividend Yield Annual dividend divided by stock price Income generation, identify high-yielding stocks Income investors seeking regular income Company A: Dividend Yield 5% Annual Dividend / Stock Price x 100%
Financial Health Debt-to-Equity Ratio Total debt divided by shareholder equity Measures financial health and risk Long-term investment, assess financial stability Company A: Debt/Equity 0.5 (lower is better) Total Debt / Total Equity
Valuation Price-to-Sales Ratio (P/S Ratio) Stock price divided by sales per share Valuation relative to revenue Long-term investment, compare across industries Company A: P/S 2 (industry avg: 1.5) Stock Price / Sales per Share
Profitability Return on Equity (ROE) Net income divided by shareholder equity Measures profitability and efficiency Long-term investment, assess company’s ability to generate profit Company A: ROE 15% (industry avg: 10%) Net Income / Total Equity

Key Terms:

  • Stock: A share of ownership in a company, representing a slice of its value.
  • Investor: An individual or entity that buys and holds stocks, seeking profit through capital appreciation or dividends.
  • Broker: Your financial intermediary, facilitating trades and providing investment advice (optional).
  • Stock Exchange: A marketplace where investors buy and sell stocks (e.g., NYSE, NASDAQ).
  • Market Capitalization: The total value of a company’s outstanding shares (stock price x number of shares).
  • Dividend: A portion of a company’s profit distributed to shareholders.
  • Dividend Yield: The annual dividend divided by the stock price, expressed as a percentage (Dividend / Stock Price x 100%).
  • Earnings per Share (EPS): A company’s profit divided by the number of outstanding shares.
  • Price-to-Earnings Ratio (P/E Ratio): The stock price divided by the EPS, indicating how much investors are willing to pay per dollar of earnings.
  • Bull Market: A period of sustained price increases across the market.
  • Bear Market: A period of prolonged price declines.
  • Portfolio: A collection of different investments held by an individual.


  • Start small: Begin with a manageable amount of money and gradually increase your investment as you gain confidence.
  • Diversify your portfolio: Spread your investments across different companies and sectors to minimize risk.
  • Do your research: Never invest in a company you don’t understand.
  • Be patient: The stock market fluctuates, so don’t expect overnight riches.
  • Seek professional advice: Consult a financial advisor for personalized guidance.

Best wishes,
The Learn and Permits Support Staff

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