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The Fundamentals of Fundamentals

Barry Dumas

What is a fundamental analysis:

At we employ the services of fundamental analysts who are at the top of their game. Mark Ingham is our primary go-to analyst and his job is to better equip our trading desk with the knowledge they require to combine with their technical analysis to execute a better trade plan!

A fundamental analysis looks at the wheels and cogs of what makes a company profitable or unprofitable. Whereas a technical analysis is the study of charts and price movement of the stock. 

In this note we breakdown the lingo used by analysts in their fundamental research, we explain in layman's terms what things like EPS, P/E ratio and EBITA (to name a few) mean.


EPS (Earnings Per Share)

Earnings per share serves as an indicator of a company's profitability. This will be the portion of a company's after-tax profit (or loss) allocated to each outstanding share of common stock. EPS is calculated as: EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares.

Earnings Per Share is also a major component used to calculate the price-to-earnings (P/E) valuation ratio, where the 'E' in P/E refers to EPS.

P/E ratio (Price to Earnings ratio)

There are many ways and techniques investors use to select stocks but the Price to Earnings ratio (P/E) is probably one of the most popular stock selection tools used today.

Usually a stock with a high P/E ratio can indicate higher growth prospects, but is not necessarily a better investment than one with a lower P/E ratio. a stock with a high P/E ratio can indicate that the stock is being overvalued and might be sold off by investors.

EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation)

Analysts calculate this metric to measure the underlying operating performance of a company, excluding the effects of financing, asset investment, taxes, and abnormal items. So, in short EBITDA indicates a company’s financial performance and is a close proxy for earnings potential. The only drawback is that EBITDA strips out the cost of debt capital and its tax effect by adding back interest and taxes to earnings.

DCF (Discounted Cash Flow)

Discounted cash flow is a proven valuation technique that takes estimated future cash flows and discounts these cash flows using the cost of capital appropriate to the company in question and thus obtaining a present value. The present value estimate is then used to evaluate the potential for investment.

Blended fair value post equity raise:

A blended fair value would typically take different valuation techniques, such as discounted cash flow or enterprise value or sum-of-the-parts and aggregate them to obtain a value that the analysts believes to be a fair representation of intrinsic value.

The post equity raise caveat would take in to account the higher number of shares in issue if the company is raising new capital and thus a higher denominator.

Post equity raise market cap

This term takes cognisance that a company will be raising new capital and thus issuing new shares with the result that the market capitalisation could be higher, all else equal.


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