More on Best Suited Fundamental Analysis Tools for Option Trading

More on Best Suited Fundamental Analysis Tools for Option Trading

Submitted by adil on Fri, 11/07/2014 - 00:00

Fundamental analysis gives an idea about the company whose stocks the trader is going to invest his or her money. Traders using short term binary option trading strategies without targeting a specific company or stock portfolio may only rely on technical analysis, but expert traders who plan long term and target specific industry sector or group of companies should perform fundamental analysis from time to time.

Efficient tools (continued):

Price to Book (P/B): Investors use different metrics with PEG to be sure of their profit margins. One of such metrics is the P/B which is the price market has put on the book value of the company. Like P/E, P/B should be low; in such a case the investor will be able to determine a suitable stock with the most promising potential.

Formula: P/B = Share Price / Book Value per Share

Example: A stock with a stock price of $50 and a book value per share of $5 has a P/B of 10.

Dividend Payout Ratio (DPR): DPR is an indication how much a company is distributing its profits among the shareholders. Established companies usually give away more of their profits to their shareholders while growing companies retain their profits to fund their growth and distribute less among the shareholders. But investing in established companies may be hard for small stock traders as the prices involved may not be affordable, and the chances of growth in profit margin are few. Investing in a growing company will not return the investment readily, and there are chances the company progress may dwindle with all of the investment lost, but the prices on investment is usually low which attracts small scale investors.

Formula: DPR = (Dividends per Share / EPS) * 100

Example: If a company paid $1 per share in annual dividends with an EPS of $3, the DPR will be 33%.

Dividend Yield (DY): This is one of the best tools for value or dividend investors. This metric indicates how much return a company is using to pay dividends to the shareholders. Established companies usually have higher DY than newer and growing companies.

Formula: Dividend Yield = (annual dividend per share / stock’s price per share) * 100

Example: If a company offers $1.5 annual dividend per share with a stock price of $25 per share, the DY is 6%.

Book Value (BV): The book value of the company is an indication how the company is progressing with respect to its assets and liabilities. A growing company with a strong investment will always have a current value greater than the book value. It is also a good indicator of when a company is nearing its economic decay.

Formula: Book Value = Assets – Liabilities

Example: A company with $1.5 billion assets and $1 billion liabilities has a book value of $0.5 billion.

Return on equity (ROE): This tool measures how efficiently a company is utilizing its assets to produce its earnings. A healthy company may have a ROE of 13 – 15 percent.

Formula: ROE = (Net Income / Book Value) * 100

Example: A company with a net annual income of $2 million with a book value of $15 million will have a ROE of 13.3 percent.