Rookie Corner: The Foundation of Fundamentals Part Deux | Tackle Trading: The #1 rated trading education platform

Rookie Corner: The Foundation of Fundamentals Part Deux

Rookie Corner : The Foundation of Fundamentals Part Deux

Good Evening Budding Traders!

We are back to set the foundation for successful trading. During our last meeting, we started to break down the concept of fundamental analysis. This concept being, that we are able to use numbers to discern the value of company A versus company B. Also, we use these same numbers to try and peek into the future of any particular company to figure out if they are worth buying and what might be a fair price. The knowledge of fundamentals is part of our transformation into a well-versed trader. As we pointed out last week, we will sometimes need to dive very deep into fundamental analysis and other times we will just need to have a tertiary knowledge depending on trading style and timeframe.

Four Pillars Picture II

We looked at three popular metrics last week that traders and investors alike use to determine value. Those three metrics are the P/E ratios, the PEG ratios and the Debt to Equity ratios. Did you have a chance to review your holdings to see how those metrics compared to other companies in that particular industry? Were you able to discern whether your portfolio is fundamentally sound? We discussed these metrics in some detail last week and I mentioned that I have a few other fundamentals that I watch very closely and that myself and my peers use to determine whether a company is a good long-term value or whether the company simply doesn’t warrant holding onto for the future. The next three metrics we are going to examine are free cash flow, price to book ratio, and payout ratio. Let’s look into each one of these and see how they measure value for our companies.

Free Cash Flow

First up, is free cash flow. Free cash flow for a company is the cash available after all the capital expenditures are accounted for. A better way to say this is this is the money left over after all the expenses for running or building the business has been dealt with. This is a big deal and it is easy to understand why this is a big deal by relating it to your own household. Think about a typical family household, there are paychecks that come in and then the bills are paid and typically what’s leftover is the households free cash flow. Sometimes this is a lot of cash for those who live within their means and for those who live outside their means it can sometimes be a negative number. Anyone who has a negative free cash flow number is on borrowed time and is usually in trouble going forward as that household is borrowing to meet its needs and that can only work for so long before assets need to be liquidated or worse yet, bankruptcy sets in. This is no different for a company if they are making enough money to cover the costs of running the business and they have cash left over then it is a sign of financial strength. The more cash the better the company looks and the more issues they can deal with without adverse effects. To give you an example of good free cash flow versus not so good cash flow, look at IBM versus QCOM. IBM sits on approximately 9 billion in free cash flow and QCOM is about half of that. These two companies are in the same sector but are not exactly the same business but I think you can understand, he who has the most cash wins and this usually holds true for businesses.

P/B Ratio (Price-to-Book Ratio)

Next up is the P/B ratio, or price to book ratio. The price to book value measures the current stock price versus the book value. The book value relates to the companies total asset value. This essentially tells an investor how much they are paying for the assets of the company. This ratio can be valuable to a point. Obviously, a company with a lot of assets can be a good thing. Having many assets means you have spent some capital acquiring assets and this is a positive to the business and the investor in the realm that if the company got into trouble it could liquidate some assets and take care of debt obligations. The trouble with just looking at this ratio is we are not counting in the current levels of debt so this is also we need to watch and take into consideration when determining value.

Payout Ratio

Thirdly, we look at the payout ratio. The payout ratio is the percentage of earnings that are paid out as dividends. This metric can be useful in determining whether the company is doing well enough to sustain its current dividend output and possibly increase it in the future. Why would we care about the dividend? The dividend can tell us all we really need to know about a company to determine its value and we will discuss more on the dividend and its role in the fundamental analysis in next week’s chapter.

In addition to the dividend discussion next week, we are going to go over the intangibles that can make a company worth owning, things like goodwill and brand recognition just to name a few. We will also wrap up our fundamental discussion by bringing all of these things together into an actionable series of steps to determine the overall health of a company we may be looking at. In our wrap up we are going to discuss the pitfalls of fundamental analysis as well, that way we will be knowledgeable just like professional traders and investors and we will be on our way to transforming into the person we want to be.

Until next time, stay fundamentally sound my friends!


Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

The Rookie Corner series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Sign up now for a 15-DAY FREE TRIAL #


Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses, and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisors, to determine whether such trading or investment is appropriate for that user.

3 Replies to “Rookie Corner: The Foundation of Fundamentals Part Deux”

  1. JacobAgbor says:

    Bien fais!!

  2. DATNGUYEN says:

    Great information. thank you.

  3. DATNGUYEN says:

    This article is very helpful, get to know new terms and understand more about fundamental of the company. Thank you!

Comments are closed.

Share this

X
Facebook
LinkedIn
Reddit
Pinterest
Telegram
WhatsApp

More Insights

Join the #1 Rated Trading Education Platform

Learn to generate monthly cash flow from the financial markets and how to grow long-term lasting wealth. Tackle Trading is an amazing online community for active traders that is led by seasoned market professionals. Tap into the power of Tackle Trading’s proven trading system and learn how easy it is to make money with the proper coaching and education.

8,800+

Members

100+

Reviews

Ready to take your trading to the next level?

Get in touch today and receive a FREE complimentary consultation.

Let us help you start trading!

Our Pro Membership gives you the tools to tackle all your trading obstacles.

Register for the Master Trader Live Workshop and get the First 15 Days on Us

Book a FREE Consultation

Sign up for a free consultation to build your Educational Plan.