Chapter 6. Fundamental Analysis

In the general menu, select the Fundamental Analysis tab.

The purpose of fundamental analysis is to analyze a company's accounts over several years in order to assess the relevance of its strategy through the resulting performance, as well as its positioning relative to its competitors. Fundamental analysis is a complement to technical analysis for medium to long-term investment purposes.

Financial data are either downloaded or entered directly by the user into the software from information available on the Internet.

Functions performed by Axial Finance:

Company accounts are memorized for at least 7 fiscal years: the last four years, the current year, and the next two years.

The current fiscal year is defined either:

The closing month of the accounts (a number from 1 to 12) is present and modifiable in the company-by-company account display screen.

Axial Finance has adopted the convention that any accounting year closing on or before June 30 is assigned to the previous fiscal year. Thus, a company's accounting year ending on June 30, 2002, will be assigned to fiscal year 2001. Conversely, accounts closing on July 31, 2002, will be assigned to fiscal year 2002.

The user can decide at any time the value of the fiscal year that should correspond to the current year using one of the two buttons below:

For each company, Axial Finance provides a notepad (2000 character maximum) to allow the user to record any information deemed useful.

The user can enter information obtained from the Internet using the copy/paste function.

The selection of a company is made from the software's stock list. The Financial Data screen detailing a company's accounts, shown below, comprises three main parts:

For each year, the table presents basic data (which can potentially be modified by the user) and data calculated from the former:

For fundamental analysis, Axial Finance performs a specific classification of companies into approximately fifty sectors. These sectors have been refined compared to classic classifications so that comparisons of instruments within the same sector are as consistent as possible.

The horizon for this target is 12 to 18 months. The calculation of this target is based on the Whitbeck and Kisor model, which has been adapted for the fundamental analysis module. This target is followed by the percentage of achievable progression relative to the stock price at the date of the recommendation.

Several criteria are taken into account to determine the recommendation decision.

In particular:

Three types of recommendations are issued for the instruments actually selected:

The Average Sector P/E includes most companies in the sector (all segments combined), and not only the SRD stocks of that sector.

The beta determines the sensitivity of a stock's price relative to the benchmark index. The beta is characterized by the ratio between the covariance of the stock's profitability with that of the benchmark index (CAC 40), and the variance of the benchmark index's profitability.

The beta is a risk indicator:

When the ratio Price/Net asset per share is less than 1, the stock is considered discounted. In this case, for the current fiscal year, this ratio is displayed in bold white characters on a red background.

The net debt is equal to the difference between financial debts (short-term and long-term) and cash plus financial investments.

The Net asset per share is equal to equity divided by the number of shares.

The enterprise value (EV) is the sum of market capitalization and net debt. The ratio EV/Revenue (like the P/E) is an indicator of the stock's cheapness.

From the financial data recorded in the software, Axial Finance establishes several types of charts for companies in a list of stocks, allowing for the assessment of the main ratios used in fundamental analysis.

Nine ratios are thus represented:

The screen shown below comprises:

Three types of ratio chart are available:

The choice of chart type as well as the choice of ratios on the axes are made using the drop-down lists located at the top and center of the screen:

Each ratio is calculated as follows:

Axial Finance automatically determines the scales on the axes based on the magnitude of the ratios. However, the user can also fix the scales according to their own needs via the following procedure:

Position the mouse over the horizontal or vertical axis. The cursor arrow changes into a hand. Double-click with the left mouse button to open the dialog window shown here. Select the tab for the axis scale you wish to modify. Uncheck the Automatic Scale box. Define the maximum graduation of the axis. Define the minimum graduation of the axis. Choose the number of graduations between the two extreme values using the drop-down list. Click the OK button to return to the chart, or click the Apply button to modify another axis scale afterwards.

To return to an automatic scale, check the corresponding box for the axis again.

The Financial Ratios table presents the situation of a list of companies according to the seven financial ratios defined above.

This table indicates for each company:

When the numerator and denominator of the ratio to be calculated are zero, the field for the ratio in the table remains empty. When only the denominator of the ratio is zero, the field for the ratio in the table indicates the infinity symbol.

Initially, companies are ranked in the table in alphabetical order.

To rank the companies in the table based on the relative importance of one of the seven ratios :