For example, if a stock price breaks above a prior resistance level, it may be headed up further. Obviously, there is a relationship between the fundamental and the technical factors. If a stock price has what appears to be upward momentum, this probably reflects favorable fundamental factors, such as a good earnings report from the company or the announcement of a new product. Although an awareness of trading patterns can be helpful in timing investments, technical analysis can be quite specialized, and we suggest that most investors emphasize a fundamental approach to investing. Although the past is not necessarily indicative of future results, it is advisable to examine a company's historical performance.
Financial ratios provide ways to quantify a company's operating success and financial well-being.
Valuation ratios gauge how fairly a stock is priced. The ratios for a given company don't mean much by themselves, but they are very revealing when compared with the company's historical ratios and with the ratios of comparable companies in the same industry. These financial ratios indicate how profitably a company is investing funds from stock offerings, borrowings, and retained earnings. This concept is similar to looking at the size of a homeowner's mortgage relative to the value of the house. For firms such as utility companies, however, a large proportion of debt, or financial leverage, is typically less of a concern than for other types of companies because utility companies have a relatively predictable and adequate stream of income and cash flow to cover interest expense.