📊 Fundamental Valuation — P/E, MER, Yield

⏱ ~30 min📚 Theory-heavy🧮 Math-light

Fundamental analysis = "is this business actually worth what people are paying for its stock?" These metrics are the universal vocabulary used by every analyst, every report, every news article. Knowing them turns gibberish into useful information.

STEP 1

P/E Ratio — The Most Famous Metric

Price-to-Earnings ratio = Stock price ÷ Earnings per share (EPS).

Translation: "If the company keeps earning at this rate, how many years before its profits add up to today's stock price?"

Think of it like buying a hot dog cart that earns $10,000/year in profit. Someone offers it for $80,000. P/E = 8. The cart "pays for itself" in 8 years if profits stay flat. Someone else offers a cart at $300,000 — P/E = 30. You're paying for 30 years of future profits today. Worth it only if you believe the cart will grow dramatically.
P/E rangeMeaning
< 10Cheap. Or in trouble. Investigate why.
10–20Reasonable. Most mature companies live here.
20–35Premium. Markets expect growth. Tech often here.
35+Expensive bet on huge growth. High failure rate.
NegativeCompany is losing money. (Common in startups.)
⚠️ P/E gotchas P/E should always be compared within the same sector. Tech companies normally have P/E of 25–40; banks have P/E of 8–14. Comparing Apple's P/E to RBC's tells you nothing useful.
STEP 2

Dividend Yield

Dividend yield = Annual dividend per share ÷ Stock price.

If a stock costs $100 and pays $4/year in dividends, its yield is 4%.

YieldMeans…
0%Pays no dividend (most growth tech)
1–3%Modest, growing dividend (good blend of growth + income)
3–5%Solid dividend stock (Canadian banks live here)
5–7%High yield. Could be stable utility/REIT — or warning sign.
8%+Yield trap. Often means stock has crashed and dividend may be cut soon.
A yield trap is like a "70% off" sale tag at a store going out of business. The stock dropped 50%, so the dividend automatically becomes a bigger % of the price. Looks like a deal — until they cut the dividend next quarter.
STEP 3

MER (for funds) — The Hidden Tax

Already covered in Module 3, but worth its own slot here. Every ETF and mutual fund has an MER. Subtract it from any quoted return.

If a fund advertises 8% historical return and has a 2% MER, your actual return was 6%. The MER is paid quietly every day from the fund's value.

Rule of thumb: Anything above 0.5% MER for a passive index fund is too high. Active funds at 1.5%+ should be presumed bad until proven otherwise.

STEP 4

Other Metrics Worth Knowing

MetricWhat it tells youHealthy range
P/B (Price-to-Book)Stock price vs accounting value of assets. Low = "cheap" but verify.1–3 typical; varies by sector
Debt-to-EquityHow leveraged the company is. High = fragile in downturn.< 1 conservative, 1–2 typical, 3+ risky
Payout Ratio% of profits paid as dividends. >100% = unsustainable.< 70% sustainable
EPS GrowthYear-over-year change in earnings per share> 0 ideally; 5–15% strong
BetaHow much stock moves vs market. 1.0 = matches; 1.5 = 50% more volatile0.7–1.3 typical
STEP 5

Where to Find These Numbers (Free)

STEP 6

The 60-Second Stock Sniff Test

Before buying any individual stock, run this checklist:

  1. P/E in line with sector? (e.g., bank P/E = 8–14)
  2. Dividend yield reasonable? Not a yield trap?
  3. EPS growing year-over-year for the last 3+ years?
  4. Debt-to-equity not insane (< 2 for most sectors)?
  5. Do you understand how the company makes money in 1 sentence?

If you can't answer all 5 — don't buy. Put the money into your ETF instead.

🧠 Quick Check

Stock A has P/E 12, dividend yield 4%, debt-to-equity 0.8, EPS growing 5%/yr. Stock B has P/E 75, no dividend, debt-to-equity 2.5, EPS shrinking. What's true?
B is a better buy — high P/E means more growth coming
A passes the sniff test cleanly; B has multiple red flags. B might still pay off if it executes a turnaround, but the bar is much higher.
They're equivalent
P/E doesn't matter, only price

📝 Your Notes

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