Fundamental Analysis Basics: Reading the Numbers on a Stock

There are two broad ways to study a stock. One looks at the price — its chart, its momentum, its patterns. That is technical analysis, and we cover it in reading a stock chart. The other looks at the business — what it earns, what it owns, how well it's run. That is fundamental analysis, and it is what this guide is about.

The question fundamental analysis tries to answer is simple to state and hard to master: is this a good business, and is the price reasonable? You can get a long way toward an answer with just four numbers. Every one of them appears on the stock pages on this site.

EPS — what one share actually earns

Earnings per share is the company's net profit divided by the number of shares outstanding. If a company earns ₱10 billion in a year and has 2 billion shares, its EPS is ₱5. It tells you how much profit belongs to each single share you own.

EPS on its own doesn't tell you if a stock is cheap or expensive — a ₱5 EPS could belong to a stock trading at ₱40 or ₱400. What matters is EPS over time: is it growing, flat, or shrinking? A company whose EPS climbs steadily for years is doing something right. One whose EPS lurches up and down is harder to trust.

P/E — how many pesos you pay for ₱1 of earnings

The price-to-earnings ratio is the share price divided by EPS. If a stock trades at ₱75 and earns ₱5 per share, its P/E is 15. Read it like this: you are paying ₱15 today for every ₱1 the company earns in a year.

A lower P/E can mean a stock is cheaper — but "cheap" and "good value" are not the same thing. A low P/E sometimes means the market expects earnings to fall. A high P/E sometimes means the market expects fast growth and is happy to pay for it. The number only becomes useful in context:

• Compare like with like. A bank's P/E means something next to another bank's P/E. Comparing a bank to a fast-growing tech-style company or a cyclical miner tells you little. Different industries carry different normal ranges.
• Compare to its own history. Is this company trading above or below its typical P/E of the last several years?

P/E is the single most-quoted valuation number in the market, and the single most misused. Treat it as the start of a question, never the end of one.

P/B — price against what the company owns

Book value is, roughly, what would be left for shareholders if the company sold everything it owns and paid off everything it owes — its accounting net worth. Book value per share divides that by the share count, and the price-to-book ratio compares the share price to it.

A P/B below 1 means the stock trades for less than its accounting net worth. That can flag a bargain — or a business the market believes is worth less than its books claim. P/B is most meaningful for asset-heavy businesses like banks and property firms, where the balance sheet is the business. It tells you much less about a company whose value lives in brands or people rather than buildings and loans.

ROE — how well management uses your money

Return on equity is net income divided by shareholders' equity. It answers the question that should matter most to an owner: for every peso of my money the company is working with, how much profit does it produce? An ROE of 15% means the business generated ₱15 of profit for every ₱100 of shareholder equity that year.

Consistently high ROE — say, mid-teens or better, sustained over years — is one of the strongest signs of a quality business. It usually means the company has a durable advantage: a trusted brand, a cost edge, a captive market. Be a little skeptical of an ROE that is high only because the company has loaded up on debt; borrowing can flatter the number while adding risk underneath it.

Putting the four together

No single ratio decides anything. The numbers earn their value when you read them as a set:

• High and rising EPS says the business is genuinely profitable and growing.
• A reasonable P/E says you aren't overpaying for that profit.
• P/B sanity-checks the price against what the company actually owns.
• Strong, steady ROE says management turns owner capital into profit well.

A company that scores well on all four, in line with or better than its industry peers, is the kind of business worth understanding further. One that looks cheap on P/E but has collapsing EPS and weak ROE is usually cheap for a reason.

Three traps that fool beginners

1. One number in isolation. A low P/E with falling earnings is a value trap. Always read the ratios together and against peers.
2. Trusting a single year. Profits swing. Look at several years so a one-off gain or loss doesn't mislead you.
3. Assuming the data is complete. For some Philippine names, certain fundamentals may not be available — on this site they'll show a dash rather than a fabricated figure. A missing number is not a zero; it's an unknown, and honest analysis treats it that way.

Where to go from here

Open any company on the stock pages and read its EPS, P/E, P/B, and ROE together — try a name you already know so the numbers have a face. To weigh the income side, read understanding dividends. And if you'd rather not pick individual stocks at all, what the PSEi is and how to invest in the whole market is the next step.

This article is educational and is not investment advice.