Editing Fundamental analysis (section)

==Procedures==
The analysis of a business's health starts with a financial statement analysis that includes [[financial ratio]]s. It looks at dividends paid, [[operating cash flow]], new equity issues and capital financing. The earnings estimates and growth rate projections published widely by [[Thomson Reuters]] and others can be considered either "fundamental" (they are facts) or "technical" (they are investor sentiment) based on perception of their validity.

Determined growth rates (of income and cash) and risk levels (to determine the [[discounted cash flow|discount rate]]) are used in various valuation models. The foremost is the [[discounted cash flow]] model, which calculates the present value of the future:
*[[dividend]]s received by the investor, along with the eventual sale price; ([[Gordon model]])
*earnings of the company;
*or [[cash flow]]s of the company.

The simple model commonly used is the [[P/E ratio]] (price-to-earnings ratio). Implicit in this model of a perpetual annuity ([[time value of money]]) is that the inverse, or the E/P rate, is the discount rate appropriate to the risk of the business. Usage of the P/E ratio has the disadvantage that it ignores future earnings growth.

Because the future growth of the free cash flow and earnings of a company drive the fair value of the company, the [[PEG ratio]] is more meaningful than the [[P/E ratio]]. The [[PEG ratio]] incorporates the growth estimates for future earnings, e.g. of the [[Earnings before interest and taxes|EBIT]]. Its validity depends on the length of time analysts believe the growth will continue and on the reasonableness of future estimates compared to earnings growth in the past years (oftentimes the last seven years). IGAR models can be used to impute expected changes in growth from current P/E and historical growth rates for the stocks relative to a comparison index.

The amount of debt a company possesses is also a major consideration in determining its financial leverage and its health. This is meaningful because a company can reach higher earnings (and this way a higher [[return on equity]] and higher [[Price–earnings ratio|P/E ratio]]) simply by increasing the amount of net debt. This can be quickly assessed using the [[debt-to-equity ratio]], the [[current ratio]] (current assets/current liabilities) and the [[Return on capital employed|return on capital employed (ROCE)]]. The ROCE is the ratio of EBIT divided by the "capital employed", i.e. all the current and non-current assets less the operating liabilities, which is the real capital of the company no matter if it is financed by equity or debt.