Quantitative factors are measurable indicators of a business. The main source of quantitative data is financial statements, which contain information about income and expenses, assets, liabilities, cash flows, etc.
When conducting fundamental analysis, the key quantitative indicators are:
What do these indicators show? Let's take a look at examples.
Earnings per share (EPS). There are two types of earnings per share: basic earnings per share and diluted earnings per share. What is the difference between them? Basic earnings per share is the total amount of earnings per share that is calculated based on the number of shares issued. Diluted earnings per share is the earnings per share that a business would earn if all warrants, options, convertible and other securities were accounted for. The formula for calculating basic earnings per share is as follows:
EPS = (Net Income - Preferred Dividends) / Number of Shares.
Imagine the company's profit is $ 4 million. The number of issued stocks is 400,000. The EPS is $ 10. Typically, companies with larger or growing EPS are more attractive. If two analyzed companies generate the same EPS, this does not mean that they have the same financial condition and the same financial indicators, therefore EPS is not the only indicator that is used for analysis.
Price-to-earnings ratio (P / E). The price-to-earnings ratio allows you to compare the price of a stock with its EPS. It is calculated using the formula:
P / E = Share Price / Earnings per Share
Let's continue with the company from the previous example. Imagine a stock of a company is trading at $ 20, so the price-to-earnings ratio is 2. What does this mean? This ratio could be used to determine if a stock is overvalued or undervalued, which can be compared to the P / E of other companies in the industry. But let's see what the other metrics show us.
Price-to-book ratio (P / B). It is a financial ratio that shows the ratio of the share price to book value and is calculated using the following formula:
P / B = Price per Share / Book Value per Share
Suppose the book value of the company, as determined in the financial statements, is $ 1 million. The book value per share is 2.5 (as we know from our example, the number of stocks issued is 400,000). Using the P / B formula, it will be 8. The resulting P / B value shows that the company's stocks are now trading at a higher price than the company is actually worth, perhaps the market is overestimating the company, expecting growth.
Price / Earnings-to-Growth Ratio (PEG), which is calculated using the following formula:
PEG = Price-to-Earnings Ratio / Earnings Growth Rate
Imagine that the expected average profit growth for the company over the next five years is 12%. Using the formula the PEG would be 0.17. What does it mean? Perhaps the company is a good investment considering future growth. The PEG score takes into account an important variable - future growth.
The Beta (ß) coefficient or market beta shows how the stock price on average correlates with the market by comparing stocks with a benchmark index such as the S&P 500. There are three formulas for calculating beta: variance / covariance method, slope method, and regression analysis, which can be done in Excel.
How to interpret the received data? If the beta coefficient is higher than 0, it means that the stock (security) price is positively correlated with the benchmark index. A higher beta value also means that the volatility of these stocks is higher, so the risks are higher too. Beta values below 0 show an inverse correlation with the market.
So, we considered the key quantitative indicators of the business when conducting fundamental analysis, which help to make the optimal investment decision. Of course, this list is not exhaustive, there are also other quantitative indicators that allow you to form a more accurate assessment of the business.