Many factors play a role in the fundamental valuation of the stock market. The overall economic development is just as important as developments that only affect certain sectors or individual companies.
Fundamental analysis uses various indicators to estimate the relationship between prices and actual values. The aim of this approach is to track down undervalued stocks and buy them in order to benefit from an increase in the price towards the fundamentally justified value. Conversely, valuation metrics can identify overvalued stocks and markets in which short positions are taken.
The dividend yield results from the dividend distribution announced by a company and the share price. The latter is divided by the dividend. If a share costs EUR 100 and the next distribution is EUR 5, the dividend yield is 5 percent.
The greatest advantage of high dividend yield is the secure inflow of funds that shareholders receive. The dividend is not fully passed on to CFD owners at all CFD brokers. If the CFD broker retains part of it, investors must expect losses on the day of the distribution. Ceteris Paribus applies that shares lose value on the day of distribution by the amount that flows to the shareholders. In contrast to bonds, the full distribution always flows to those who hold a share on the reporting date.
There is no proportionate distribution to former owners similar to the accrued interest on interest-bearing securities. The dividend yield of individual stocks must always be viewed in relation to that of companies in the same industry. High dividend yields and also a lot of security with regard to future distributions can be found in defensive stocks with a utility character. These include, for example, energy suppliers and large telecommunications companies. The overall market dividend yield is also useful. It is often viewed in a historical context: a very high dividend yield may indicate that the market is in an exaggeration phase.
Price-earnings ratio (P / E ratio)
The price-earnings ratio is one of the most important indicators in the analysis of the stock market. It is the ratio of the share price to the expected earnings per share. The higher the P / E ratio, the more expensive the market is valued. A historically very high P / E ratio can, therefore, be an indication of an exaggeration of the market. Conversely, markets with a low P / E ratio often offer entry opportunities.
The price-earnings ratio of individual shares must be compared in relation to the P / E ratio of other companies in the same industry. Small and medium-sized companies from growth sectors, in particular, are often rated very highly based on the P / E ratio. P / E ratios from 50 to 100 are not uncommon. With most blue chips, on the other hand, a P / E ratio of more than 20 is an indication of an overvaluation.
The P / E ratio of the overall market is often very helpful for a fundamental view if it is seen in a historical comparison. A very low P / E ratio that can be found after almost every pronounced bear market is often an indication of an impending upward trend. Shares in large, healthy companies, in particular, are repeatedly available as single-digit earnings after downward movements. In the past, getting started at such valuation levels has paid off very often.
One problem with the P / E ratio is its susceptibility to (legal) manipulation by the company or its management. The basis is the profit shown in the balance sheet, which can be embellished by various measures. In the event of very noticeable discrepancies in the P / E ratios of comparable companies, investors should, therefore, seek further information.
Price-cash flow ratio (KCV)
The price-cash flow ratio is the ratio of the share price and cash flow. A company’s cash flow is very important for fundamental valuation for several reasons. It indicates whether more money flows into a company than vice versa. In contrast to the determination of the balance sheet profit, only cash transactions are taken into account. Depreciation, for example, does not reduce cash flow. This also applies to additions to provisions.
The cash flow provides information about the performance of a company with regard to investments, debt repayment and distributions to the shareholders.
Price / book value ratio (KBV)
The price-book value ratio is calculated from the share price and the book value of a company broken down to a single share. The lower the KBV, the cheaper a company is valued. A KBV of less than 1 means that the valuation of a company on the stock exchange is lower than the assets that the company owns.
The price-book value ratio, like the P / E ratio, is particularly valuable when it takes on extreme values. After periods of long-term price losses, healthy industrial companies have repeatedly listed below or only slightly above their book value. The entry into such values has often paid off. Conversely, a very high price-book value ratio can be an indication of an exaggeration of the market.
The KBV is based exclusively on the reported balance sheet value. Values or loads outside the balance sheet are not taken into account. Particular caution is therefore advised in the event of very large discrepancies in the valuation of comparable companies. Real estate and associated companies are particularly susceptible to bias.