Stock Fundamentals: Key Metrics to Analyze Any Stock

Stock fundamentals are the quantifiable metrics that reveal a company's financial health, profitability, and valuation. This guide covers the key metrics investors use to analyze stocks and make informed investment decisions.

Valuation Metrics

P/E Ratio (Price-to-Earnings)

The P/E ratio divides a stock's price by its annual earnings per share.

Example: A P/E of 20 means you pay $20 for every $1 of annual earnings.

Higher P/E ratios indicate growth expectations; lower ratios suggest value opportunities or skepticism. Software companies often trade above 30, banks below 15. Compare within industries, not across them.

Limitation: Misleading for cyclical companies where earnings swing with economic cycles.

Best for: Comparing profitable companies in the same sector.

Learn more: P/E Ratio: Complete Guide

PEG Ratio (Price/Earnings to Growth)

The PEG ratio divides P/E by earnings growth rate.

Example: A company with a P/E of 30 and 20% growth has a PEG of 1.5.

Interpretation:

• Below 1.0 = Undervalued
• 1.0-2.0 = Fair value
• Above 2.0 = Expensive

Limitations: Growth rates rarely sustain. Use historical data, not projections. Cyclical companies show misleading growth during recoveries.

Best for: Evaluating growth stocks and determining if premium valuations are justified.

Learn more: PEG Ratio: Complete Guide

P/S Ratio (Price-to-Sales)

The P/S ratio divides market cap by annual revenue.

P/S works for unprofitable companies reinvesting in growth.

Interpretation:

• Below 1.0 = Value opportunity
• 1.0-3.0 = Fair value
• Above 10 = Optimistic pricing

Limitations: Revenue without profitability creates traps. Check profit margins to verify the path to profits exists.

Best for: Evaluating unprofitable companies with strong revenue growth.

Learn more: P/S Ratio: Complete Guide

Profitability Metrics

EPS (Earnings Per Share)

EPS divides net income by outstanding shares.

Two companies with $100M profit: one with 50M shares delivers $2 per share, another with 100M shares delivers $1 per share. EPS reveals whether profit growth benefits shareholders or gets diluted by new share issuance. Cyclical companies show misleading earnings during boom-bust cycles.

Best for: Tracking financial progress over time and comparing companies in the same sector.

Learn more: EPS: Complete Guide

Profit Margin

Profit margin shows what percentage of revenue becomes profit.

Example: A 20% margin means $20 profit from every $100 revenue.

Industry benchmarks: Software often exceeds 20%, groceries stay below 3%. Compare within industries only.

Limitations: Seasonal businesses and one-time events can distort margins temporarily.

Best for: Identifying efficient operators and spotting declining efficiency early.

Learn more: Profit Margin: Complete Guide

Context Metrics

Market Cap (Market Capitalization)

Market cap multiplies share price by outstanding shares.

Examples:

• $5 stock with 100M shares = $500M market cap (small-cap)
• $50 stock with 20M shares = $1B market cap (mid-cap)

Share count matters more than stock price.

Size categories:

• Small-caps ($300M-$2B): Growth potential but higher risk
• Large-caps ($10B+): Stability but rarely double

Never judge company size by stock price alone.

Best for: Assessing risk and setting realistic growth expectations.

Learn more: Market Cap: Complete Guide

Cyclical Stocks

Cyclical companies experience dramatic earnings swings with economic cycles.

Traditional metrics work backwards for cyclicals: low P/E at peaks (before collapse), high P/E at troughs (before recovery). Cyclical industries include automobiles, construction, hotels, metals, and semiconductors. For cyclicals, cycle timing matters more than current metrics. Always check if a company is cyclical before trusting P/E, PEG, or EPS.

Best for: Understanding when standard metrics become misleading.

→ Cyclical Stocks: Complete Guide

Using Metrics Together

No single metric tells the complete story. Combine multiple metrics:

Screening process: Start with valuation metrics (P/E, PEG, P/S) to find attractive prices. Verify quality with profitability metrics (EPS, profit margin). Add context (market cap, cyclical analysis) to set expectations.

Stable companies: P/E for valuation + profit margin for quality.

Growth companies: PEG for growth justification + profit margin trends for improving efficiency.

All companies: Check if cyclical (metrics become unreliable). Check market cap (sets growth expectations).

Never rely on one metric. Cheap P/E might hide poor margins. Strong revenue might burn cash. Quality shows across multiple dimensions.

The Bottom Line

Stock fundamentals transform subjective opinions into quantifiable analysis. These key metrics help you analyze stocks systematically rather than reactively.

Master these fundamentals to evaluate companies effectively. Value investors emphasize P/E and profit margin. Growth investors prioritize PEG. Quality investors focus on profitability and margins.

Remember: metrics are tools for understanding businesses, not automatic decisions. The best investments combine favorable fundamentals with strong competitive positions and clear growth trajectories.