Fundamental Analysis for Beginners | Invest with Confidence | Rob Armbruster | Skillshare

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Fundamental Analysis for Beginners | Invest with Confidence

teacher avatar Rob Armbruster, Investing and Personal Finance

Watch this class and thousands more

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

8 Lessons (26m)
    • 1. Introduction

      1:24
    • 2. Market Capitalization

      3:36
    • 3. Earnings Per Share

      3:16
    • 4. P/E Ratio

      4:58
    • 5. Debt to Equity Ratio

      4:54
    • 6. Risk

      3:24
    • 7. Going With Your Gut

      3:31
    • 8. Next Steps

      1:23
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About This Class

Fundamental Analysis is the method of trading used by some of the most notable analysts such as Benjamin Graham, and Warren Buffet. It focuses on measurable "fundamental" factors when making a buying or selling decision, such as profit, assets, debt, and shareholder equity. Don't worry though it's not too technical :)

This class with show you how to calculate EPS, P/E, and Debt to Equity ratios. But more importantly, I give examples of high and low rankings of each ratio to give you a framework for how to interpret the numbers for any different investment that you make.

Class Resources:

- Finance.yahoo.com

- Morningstar

This lesson is not considered licensed financial advice. It is purely for educational purposes to help you to manage your own investments. Future trades that you make are done at your discretion.

    

Meet Your Teacher

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Rob Armbruster

Investing and Personal Finance

Teacher

When I was 24 years old I was sitting in an office with a financial advisor. After he showed me the fees associated with him investing my money, I left the meeting feeling uncomfortable with his proposition. This is how my investing journey started. I began to research how to successfully manage my own investments and found that it was easier than I thought. Today, I'd like to pass on what I have learned over the past seven years of managing my finances to you. 

I have a passion to help people from every race, ethnicity, and background discover their ability to make great wealth! My classes provide the basic fundamentals of making great long-term financial decisions. Please follow this page so that you won't miss any of the great resources coming out in the future!

... See full profile

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Transcripts

1. Introduction: Hello and welcome to fundamental analysis for beginners. Going to make this super simple and easy to understand for you today. My name is Rob are Brewster in this class, I'm going to teach you the most important financial ratios to help you distinguish between a good investment and a not-so-good investment. Though in this class, I go over company capitalisation in the first lesson. Then in the second lesson, I'm going to teach you about earnings per share. The third lesson, you'll learn about possibly the most important ratio, which is price to earnings and how it affects investments. Then I'm going to talk about the debt to equity ratio, the advantage of working with companies with less debt. After that, I'll talk about risks and then I'm going to talk about going with your gut after you've done all the numbers and the research, There's a couple other things that you need to look at in terms of what people are leading the company and what they're doing in the future. I have complete confidence that this class is going to take your investment knowledge and joy of investing to another level. And I'm so excited for you to take this class. I'll see you in there. 2. Market Capitalization: In this lesson, I'm going to teach you what market capitalisation is and why it's important to factor in when making an investment, a total company capitalisation is the market value of every share of their stock added into one big number. So what you do is you take the share price in the stock exchange and you multiply that by the number of shares outstanding. And you have what's called the total market cap. This is one of the measurements for the total size of a company. So there are three different types of companies out there. The first one is small cap, the second is mid-cap, and the third is large cap. These are all classified by the capitalization of the company itself. A small cap company is a company with a market capitalization of under $2 billion. And a mid-cap company is a company with capitalisation between 2 $10 billion. And then a large-cap company is a company with over $10 billion of total market capitalization. And there's also mega cap companies to like Google. Their capitalisation is just huge. I don't know if there's an official measurement for the difference between a large cap and mega cap company. Yeah, It example of a large cap company would be IBM. Example of a mid-cap company would be American Eagle. It's not as big as IBM. It doesn't have quite the capitalisation of them. And so they're, they're a smaller company, but still a pretty big company. An example of a small cap company would be Papa John's. Better ingredients, better Pizza, Papa John's, they're actually publicly traded so you can buy their stock. When you think about IBM or Google or Facebook, comparatively, they're a lot smaller of a company. Market cap is important to take into account because it's a measurement of volatility. It's a fact larger companies are more stable and they're less risky than smaller companies. However, smaller companies may be more risky in some ways. There also is a larger potential for growth and reward for investing in them. Well, they're small. It's kind of like thinking like, yeah, I like that band before they were cool. And then when you're small cap company grows into a large-cap company, then it's been a very good investment. There's people who will only invest in large-cap companies, and then people who are much more attracted to the risk and the potential reward of small cap companies. And it's just up to you which one you would like to go with in your portfolio? I have some small-cap companies, some large-cap companies. I mostly tend to invest in large-cap companies because they're a lower risk. And in the next lesson, I'll be showing you an example of earnings per share and teaching you what that is. 3. Earnings Per Share: Let's talk about earnings per share. You may have seen this as you've been researching different investments. It's oftentime presented as the acronym EPS. Now I'm going to show you what this is and then give you an example of how to calculate earnings per share for an investment that you're looking at. So earnings per share is defined as this. How much money a company makes for each share of stock that they've issued and as widely used as a metric to estimate corporate value. So the formula for earnings per share is this. You take the company's earnings or net income and then subtract it by the amount of preferred dividends for that time. Then you divide this number by the end of period common shares outstanding. What this means is, at the end of the time that you're calculating earnings per share, how much shares do they have outstanding? Oftentimes, earnings per share is calculated for the trailing 12 months. And this will be presented to you in the acronym TTM. That's the most common thing that we look at when we look at earnings per share, a higher earnings per share indicates a greater value because investors will pay more for a company's shares if they think the company is going to have higher profits in the future, a lower earnings per share means exactly the opposite. Here's an example of earnings per share and how you would calculate it. So say you have a company named ABC and they earned a net income of a $100 thousand in a year. They paid a total of 25 thousand dollars in preferred dividends to their shareholders. They have 10000 shares outstanding. What you're gonna do is you're gonna take a $100 thousand and subtract 25 thousand dollars out of that and then divide it by the total shares outstanding, which in this case is 10 thousand, and you get an earnings per share of $7.50. It basically measures a company's ability to make profit per the shares that they've issued to us. Something to be aware of. If a company has a negative earnings per share, That's not really good because that means that they are in the negative when it comes to income. In general, earnings per share is used comparatively for companies in the same industry. So earnings per share is a very vital statistic to look at when you're researching stocks. And it is the statistic that goes into possibly the most important financial ratio when looking at a company, which is the price to earnings ratio, which is what I'm going to teach you in the next lesson. 4. P/E Ratio: I'm so excited to teach you about the PE ratio. I consider it a great honor to be able to just reveal this ratio to you, which is probably the most important thing to look at numbers wise for a stock or an investment, the price to earnings ratio, or PE ratio, is for valuing a company by measuring its current share price relative to its per-share earnings. Okay, What does that mean? Well, basically you take the earnings per share that I talked about in the last lesson, you divide it by the market value of the shares. Price to earnings ratio is one of the most widely use stock analysis tools. It's considered to be a tool for analyzing its stock valuation in the marketplace and give you a clue towards whether a stock is being overvalued by people or undervalued by people. And that's important to keep in mind. You can also use it as a stock valuation to compare companies in the same industry. Let's look at a comparative example here. In the healthcare industry, I pulled up three different companies and let's look at their current PE ratio. The first company is CVS. You may have heard of them. They're a pharmacy, they're awesome. They're PE ratio is 13.23. The second company is Humana, which is in health care also, but it's more a health care insurance company. Their PE ratio is 15.27. Then the third one is sigma health when their PE ratio is 10.35. Okay, what does this mean? And why does Humana have a higher PE ratio than the other two companies? Basically, with the election, now we have a Democratic president. And that has put a lot more investor interests into the health care, health insurance industry. People are more interested in Humana. And what the higher PE ratio says, people are willing to pay more for the stock relative to its earnings to be able to own that stock. You might be asking yourself, what is a high PE ratio and what is a low PE ratio? The average PE ratio in the S and P 500, which are the 500 biggest companies in America, is 25. That can kind of give you a little bit of a peg like, okay, if it's pretty far above 25, then it's overvalued. If it's a lot lower than 25, then it has the potential to be undervalued. But I also want to say the best thing to do is to compare it to other companies in its industries, find out what is going on with the company. Here is the question you should ask yourself before investing in a company with a low P E ratio, ask yourself the question, why investors are willing to pay less even though the company is profitable? Are they looking into the future and saying, Hey, this company is profitable? But I don't know how big of a player they will be in the future. And the other question to ask yourself, if a company has high PE ratio is why our investors willing to pay more for the profit that this company is earning right now. A great example of this is Tesla. Tesla doesn't have very large earnings numbers right now, but they have a very high PE ratio because people are looking into the future. They've already changed the game, but they have the potential to change the game in the auto industry even more. Those are questions to ask yourself. I will tell you, my tendency is to look for companies with lower PE ratios in my eyes. That means that there's less hype with the company. There's a lot of hype with Tesla right now. But there's not a lot of hype with a company like General Electric. People don't get that excited about electricity, but it's still is a good investment. So those are some things to take into mind. And just a little bit of my perspective on the PE ratio. In the next lesson, it's going to be awesome. I'm going to show you what the debt to equity ratio is and why it's important. 5. Debt to Equity Ratio: In this lesson, I'm going to teach you what the debt to equity ratio is and how it factors into the importance of your investments. Debt equity ratio when looking at a company is actually the total liabilities divided by the total shareholders equity. You can find these numbers on the balance sheet of a company's financial statements. For the first example, company 1 has a $120 thousand in assets, but they have a $100 thousand in liabilities, which gives them $20 thousand in shareholder equity because assets minus liabilities equal shareholder equity. An example of how you would calculate the debt equity ratio in this situation, you would take that $100 thousand in liabilities and divide it by the $20 thousand in equity that the company has, which gives them a debt to equity ratio of five. Which effectively means that for every $1 of equity, The company has $5 of debt. That would be an example of a high debt to equity ratio for a company. So let's go over company number two. And what a low debt to equity ratio looks like, which really means a healthier financial company. Company number two has 250 thousand in assets, a $100 thousand in liabilities, which gives them a $150 thousand in shareholders equity. What you would do is you would take that a $100 thousand in liability and divide it by the $150 thousand of shareholder equity, you'd get a debt to equity ratio of 0.66, so it's even below 1-to-1. That would be an example of a low debt to equity ratio. A question to ask yourself for buying a stock that has a high debt to equity ratio is why did they go into that in the first place? Maybe they bought a new technology. Maybe they've just slowly been acquiring more debt as they've not been making money. You know, those two things are really different. The company of the Lowe's has a very high debt to equity ratio. But it's because they have just purchased a tech company to help them with their operations. So that purchase might end up leveraging the company to make more profit in the future. And it's all just kind of if it works out or not. As a rule of thumb, companies with lower debt to equity ratios have lower leverage and they're less risky to invest in. I really see less debt as an advantage for companies. And that is one of the things that I look for when I'm investing in different companies. Here are a few examples of companies with low debt to equity ratios. The first one is Humana, the health care company. It actually has a debt to equity ratio of 0.52 for every dollar of equity the company has. It has basically $0.50 of debt, which is very good. The other one is Southwest Airlines, with the ticker symbol of LUV. It has a one-point one debt to equity ratio. So their debt is a little bit bigger than their equity. But for an airline, this is actually very low and a very favorable debt to equity ratio. And then the last example is Facebook. Facebook is amazing in this area because they operate with hardly any debt. Their debt to equity ratio is 0.08 for every dollar of equity the company has, they only have a sense of debt. I hope you can take this and apply this when you're searching for different investments. Debt to equity isn't the full picture of whether or not a company is going to be successful. But it is a crucial ratio for you to consider. In the next lesson, I'll be talking about weighing different risks when investing. 6. Risk: All right, so in this lesson, I'm going to teach you how to weigh the risks of making certain investments. So the first thing to think about when you're thinking about risks is actually evaluating the industry that the investment is in. Is it in the IT industry? Is it in the tobacco industry? Is it in the healthcare industry? A great question to ask is, where is this industry headed in the future? And can this add to the risks that I'm taking with this investment? A great way to see where an industry has been in the past is to actually look at the ETF price of an industry specific ETF. Basically what these do is they take a collection of stocks in a certain industry and measure them altogether. And that can really give you a sense of how fast it's growing if it's declining, and where it's going to go next. For example, if you look at the tobacco industry, that's actually an industry that is declining right now and it's expected to keep declining. Having companies associated with that industry is a higher risk investment in the information technology industry. It's in a growing industry that offers the advantage to you of that grow the company being in the informational technology space, it doesn't guarantee It's going to increase. What it says is it's an, in an industry that is growing, that more people are putting money towards. The other thing to look at is, what are the company specific risks? You can look at market share. What percentage of the market does this company own? So for example, Target, Walmart, and all the other retailers all own a share of the whole piece of the pie of what's called consumer retail. What percentage is owned by Walmart or Target? A decrease in market share Can be telling you, oh, what, what is going on here like that could increase the risk when choosing an investment. The other thing to ask is, what are your competitors doing in the real estate industry? There's this really interesting dynamic going on right now where a lot of people are selling their houses online and figuring out how to do that really well. There's people also committed to using an in-person realtor. And the value that goes with that looking at and knowing what company is using, which of those strategies affects the risk of the investment going forward? A resource that I'd like to recommend to you that has great risk and analysis. Probably the best that I've seen is Morningstar. So that is just a resource for you to look up, being able to look at a company and see all their risks, and see a variety of opinions of what different analysts think of where the company's going to go in the future. In the next lesson, I'm going to teach you how to go with your gut and really think about the people in the company would that you're investing in. 7. Going With Your Gut: In this lesson, it's titled going with your gut. I'm going to go over the things to look at to just give your gut that good feeling about making a certain investment. There's things that numbers can't measure with companies. One of those things, and the most important thing is people. I just discovered this. It's a whole realm of study in the area of investments. I just discovered it and it's called qualitative analysis. I love it so much. So I'm going to talk about this for a couple minutes here. It answers the question, how to explore the intangibles of a certain company? Qualitative analysis assesses the integrity, the trustworthiness, and the business skills of the management. And it looks to that first and foremost, when looking to invest in something, a great thing for you to look at is okay, what are these people that are leading this company like? What are they like? What's their personality? What's their background, what skills they have? I think CEOs sometimes get a bad rap because they earn so much money. And there have been CEOs in the past that they kind of look to take and they just take their money. They're not really interested in the betterment of everybody in the company that has happened in the past. But then on the other side of the coin, I've seen so many company leaders who are incredible men and women of character and integrity. They take on a large burden of leading an entire company and try to do it to the best of their ability while knowing that they themselves are just one person. The other thing to look at when looking at qualitative analysis is what is the employee's enthusiasm if you're looking at the company Dairy Queen, a great way to do this is to go to Dairy Queen, order something and just talk to the people and be like, Hey, how's your day going? And you can start to get a feel for what is their culture like, what is it like for them to work there? And if it's not a good culture and if your order is wrong, then that might not be the best investment. If you show up to the place and your orders gray and the people are sparkling and smiling. I mean, that's a pretty good indicator of a good, healthy company culture. The other thing that is an intangible that you can consider is, what is the public's view of the company? A great thing to do would be just to Google the company, Google reviews of the company's products and see what people think of them. Again, this piece of the pie doesn't give the full picture, but it gives an important picture of where a company might be headed. And I also want to say that these lessons that I'm making are not licensed financial advice. This is just what I've found through my experience of investing myself. Your decisions that you make are yours to make and your risks to take. And the truth of the matter is, is that nobody knows, not even me, not even the most gifted stock analyzer knows what is going to go up and what is gonna go down. It's up to us to be able to find this and find the conviction to go with what we would like to go with. 8. Next Steps: Okay, so here's what I'd like you to do with what you just learned in this lesson. The first thing I'd like you to do is the class project. For your project, I've created an assignment for you to do. You choose a company and you do the analysis on the company that I've just taught you how to do. So you find the market cap, the EPS, the PE, the debt to equity ratio. You measure the risks after you've completed that, makes sure to post that on to Skillshare. We would love to share and what you found with the different companies that you're looking at. Second thing that I would like you to do is leave a review for this class. So tell me, what did you love about it? What did you learn? And possibly anything that could be improved in the future also that be greatly appreciated. The last thing I'd like you to do is check out the class that I created. It's called investing for beginners part to edit really answers the question of why and how to invest in a more broad sense than in this class and know that you'll get value out of it. Thank you so much for tuning into this class, and I'll see you in the next one.