Fundamental analysis has two aspects.
One is qualitative and the other is quantitative.
Quantitative analysis, include ratio analysis.
Ratios are calculated based on different numbers from the balance sheet, income
statement, cash flow statement, stock quotes...
There are many ratios available, the most know are probably PER (Price earning ratio) , PEG , Price to book, Price to cash flow.
How we analyse ratios ?
Let me take a ratio as example, i am considering PEG ratio now.
PEG must be :
- compared against previous quarters and years PEG value.
- compared against average industry PEG value.
- compared against other company PEG value
....
Success of building a winning trading system is to choose the best combinations of Ratios in addition to others methods of analysis like technical analysis for example.
I started in previous posts, some back-tests of ratios over last four years.
I back-tested PER and Price to Book ratios and both showed good results.
I used back-test using only fixed numbers and didn't use comparison.
In near future i will do that comparison back-test against industry and previous ratios data to see how these ratios performed in the past.
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