Fundamental analysis | Alphabet- A company with a superb fundamental

It has been awhile for me to post fundamental related topic. Here we go!

Hello everyone, in this video, I will be sharing on the basic methods to analyse a fundamental of stock, to combine with stage analysis so we can optimize our gain in stock market.

I will be using Google as example here, as this is one of my favourite stocks and I am confident that Google is the stock that can consistently generate nice return for the coming 5-10 years.

Similarly, you may access the full video here for a better illustration. Please subscribe my channel to motivate me if you find this insightful!

To make the fundamental part as simple as we can, I have selected five most important criteria here.

1. To generate consistent and increasing revenue and net profit over pass 3-5 years.

We need a company that can keep making profit. Then, it will reward us with either rising stock price or pay us dividend.

Click on it, search Googl. Then, select financial, we will be able to select the financial data that we want to plot. I will be focusing on the annual value.

Look at the revenue of Google. It is clearly an up-trend! It generates more and more revenue over years.

Google also generates consistent and increasing profit over years. There was a dip in year 2017, but overall, Google is a company that makes money!

Another important criteria to look for is share buy-back. When a company manages to make consistent profit, they will be able to buy back the share, reduce the numbers of shares in the market. Here’s how it works: Whenever there’s demand for a company’s shares, the price of the stock rises. When a company buys its own shares, it’s helping to decrease supply, price increases, more buyers are willing to buy it, further increase the demand, thereby creating value for all shareholders.

We can simply use Google to search “Stock + Share buy back” to check if the company did buy back the share. Using Alphabet as an example, it announces $70 billion buyback in April 2022.

2. Moat: Gross income margin.

A company with strong moat is important to ensure the company has competitive advantages that protect it from rivals and enable its large profits. It does not need to worry about the price war and they can just increase the price to cope with the inflation. Google has a huge user database and that is enough for it to maintain its strong moat for digital marketing.

One of the ways to measure moat is gross income margin, or gross profit ratio.

In general, a gross profit ratio of >25% is considered healthy.

For Alphabet, the gross profit ratio is as high as 60%! From this chart, the Alphabet manages to maintain its gross profit ratio for a least 20 years!

3. To generate consistent and increasing cash flow of operation.

Cash flow of operation is very important. It indicates the amount of money a company brings in from its ongoing, regular core business activities, such as advertisement business for Alphabet.When a company shows a reduced or negative cash flow of operation, even the revenue and net profit are increasing,it is not sustainable as the company is not generating the money through its core business.

This is the chart of the Alphabet on cash provided by operating activities. It is a clear up-trend, means Alphabet manages to generate consistent and increasing cash flow through its core business!

4. Health debt profile. Current ratio and debt to equity ratio.

Next, a company with a strong fundamental must have a healthy debt profile, to ensure the company can sustain during the winter time. A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.

The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company’s total liabilities by its shareholder equity. Although the debt to equity ratio varies from industry to industry, I prefer a company with a ratio of lower than 0.75.

We can obtain both current ratio and debt to equity ratio from Finviz. For Alphabet, the current ratio is 2.80 and debt to equity ratio is 0.06. Alphabet has a very healthy debt profile!

5. ROE

Return on equity provides us with an insight into the business's profitability for owners and investors. In short, it helps investors understand whether they're getting a good return on their money. To me, a good company should have a ROE of at least 15%. We can also obtain ROE value from the finviz. Alphabet has ROE of 28.60%.

Summary:

Alphabet:

- Increasing of revenue and net income in the past 5-10 years

- Strong moat with gross profit margin of 60%

- Increasing of cash flow from operating activity in the past 5-10 years

- Healthy debt profile

- High ROE

Thus, once the Google is showing a positive signal in stage analysis, I will not hesitate to add more in my portfolio. Before you go, please give me a like to motivate me. Thank you and see you in the next video.