Fundamentals Indicators
Fundamentals vs Technicals for Trading
Fundamental indicators decide what to trade (quality, value, growth, risk). Technical indicators decide when to enter/exit. Traders screen for fundamentally strong stocks, then use technicals for timing.
How fundamentals feed trading signals
Fundamental metrics group into valuation, profitability, leverage, growth, and shareholder returns. Traders look for "good clusters" aligned with strategy, then use charts to time entries.
Key uses:
- Filter universe: Exclude weak earnings, high debt, poor returns before technical scans
- Define regime: Expensive stocks = short/mean-reversion. Cheap, high-ROE = long/buy-dips
- Adjust sizing: Strong fundamentals = hold through volatility. Weak = smaller size, tighter risk
Valuation ratios
Tell if stock is expensive or cheap vs fundamentals.
| Metric | Good buy bias | Bad/caution bias | Why it matters |
|---|---|---|---|
| P/E (trailing) | Near/below sector average (~15–20) with solid growth. Very low (<10) can be value if not trap | Very high vs peers (>30–40) without growth. Extreme P/E (>80–100) = overvalued | Low = undervalued. High = paying many years upfront |
| Forward P/E | Below peers while growth outlook equal/better | Far above peers with modest/declining growth | Shows if growth is priced in |
| PEG (P/E ÷ growth) | Below 1.0 = undervalued growth vs peers | Above 1.5–2.0 = paying too much | Normalizes P/E by growth rate |
| Price-to-Sales | Below sector norms. Many like P/S under ~2 | Very high (>10) without path to profit = bubble | Useful when earnings thin/negative |
| Price-to-Book | Below ~2.0 = value. Below 1.0 = deep value (rare) | Very high vs sector (4–6+) = overvalued | Compares market value to net assets |
Always compare vs same industry. Good P/E for utilities ≠ good for software.
Trading use:
- Value longs: P/E and P/B at/below sector median, PEG < 1, technical pullback above rising 200-day MA
- Short/avoid: High P/E/PEG + slowing growth = short on breakdowns
Profitability and quality
Show how efficiently company converts revenue to profit.
| Metric | Good buy/hold | Bad avoid/short | Why it matters |
|---|---|---|---|
| EPS level & growth | Consistently positive with steady growth. Upside surprises | Negative or frequent misses. Erratic | Earnings drive long-term value |
| Net profit margin | Higher than industry, stable/rising | Below peers or compressing | Shows revenue → profit conversion |
| Operating margin | Strong and improving | Shrinking despite revenue growth | Core business strength |
| ROE | >15% above peers, sustained | Very low/volatile, below cost of equity | Measures equity capital efficiency |
| ROA | Above industry norm | Weak vs peers | Good for asset-heavy sectors |
Trading use:
- Quality longs: High rising ROE/ROA + solid margins. Buy dips on temporary news when technicals stabilize
- Low-quality shorts: Deteriorating ROE/margins + high leverage. Short when price below falling MAs
Leverage and balance sheet
Debt amplifies returns and risk. Watch for crash/dilution risk.
| Metric | Good/safer | Bad/high-risk | Why it matters |
|---|---|---|---|
| Debt-to-Equity | ~0.5–1.0 in many sectors. Below sector = conservative | Very high vs peers (>2–3) = bankruptcy risk | High leverage wipes equity in downturns |
| Interest coverage | EBIT/EBITDA covers interest >3–5× | Coverage <1.5–2× = stress | Shows debt service ability |
| Current/quick ratio | Above ~1.5 = healthy liquidity | <1.0 = liquidity crunch risk | Short-term solvency |
Trading use: Rising rates or recession fears: short high D/E, overweight low-debt names. Use technical breakdowns for timing.
Shareholder returns
Dividend metrics influence income strategies.
| Metric | Good income buy | Bad/trap risk | Why it matters |
|---|---|---|---|
| Dividend yield | Attractive but sustainable vs sector | Extremely high (2× sector) = cut expected | Yield too high = red flag |
| Payout ratio | Moderate (30–60%) leaves growth room | >80–100% unsustainable | High payout caps growth |
| Dividend growth | Steady raises over years | Irregular cuts/freezes | Stability prized |
Trading use: Buy near support before ex-div for stable growers. Avoid high-yield, stretched-payout stocks with technical weakness.
Market cap, beta, technical overlay
- Market cap: Different thresholds for P/E, volatility, debt by size
- Beta: High-beta + strong fundamentals = aggressive longs. Weak + high-beta = short candidates
- MAs & 52-week: Only buy strong names above 200-day MA, not at extreme highs. Add on pullbacks with RSI/MACD confirm
Buy/sell bias examples
Bullish (buy on good technicals):
- P/E and P/B at/below sector, PEG ≤ 1.2
- Positive EPS with growth, ROE > 15%
- D/E around/below 1, interest coverage > 3–5×
- Margin above sector, no liquidity flags
- Dividends: reasonable yield, 30–60% payout, stable
Entry: Price above rising 200-day. Pullback to support/50-day with improving RSI/MACD. Breakout with volume.
Bearish (avoid or short on weak technicals):
- P/E, P/S, P/B far above peers, PEG > 2, slowing/negative growth
- Deteriorating ROE and margins
- High D/E (>2–3), low coverage, tight liquidity
- Very high yield, payout near/above earnings
Entry: Price below falling 200-day. Failed rallies, breakdowns, negative divergences.
Context data (CIK, officers, insiders, float)
Not direct buy/sell triggers. Used for context and edge:
- Insiders/Form 4: Cluster buying + good fundamentals = long bias. Persistent selling = avoid/short
- Institutional/float: High stable ownership in quality = supports longs. Low float + speculation = squeeze risk