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Judging stock fundamentalsRocky markets call for close scrutinyBy Bina Brown  When markets are moving up and down, it's a good time to scrutinize a stock's fundamentals. YOUR E-MAIL ALERTS(CNN) -- Having ridden domestic or international share markets through the recent boom, now is not the time to shy away from some possible bargains. The longer global markets go down or sideways the better the chance of finding a good opportunity. Market watchers recommend that now is the time to look more closely at what you are buying. With international accounting standards now widely in place, the same tests can apply to companies around the world -- all that is needed is the initial public offer document if it is a newly listed company, or the annual, half yearly or in some cases quarterly reports of an established company. While the temptation is always there to take the recommendation of a friend or broker, or look at just one or two classic indicators, it might pay to scrutinize more closely the broader fundamentals of a stock. Rodney Weston, the general manager of independent investor services provider Bourse Data, urges investors to look beyond the price earnings (PE) and dividend yield figures -- which are basically the most readily available data. The PE ratio is published daily in most major newspapers and is often a first point of call for investors looking to buy. But the PE ratio actually has little to do with how profitable a company is. Rather, it is what the market is feeling at the time, says Weston. 'Measure of popularity'"The PE is a measure of popularity rather than something fundamental about the stock. It goes up when the stock is more popular and goes down when the stock is less popular," says Weston. "The thing in the PE that matters is the E. The return on equity (ROE) is a measure of how well the earnings are going to grow. Don't ignore the PE but taken in isolation it is a dangerous thing to focus on," he says. The ROE is the true judge of a company's profitability. Calculated by dividing net profit before abnormals by total equity, if the ROE is good, it shows a profitable stock that is worth further investigation. A ROE of at least 15 percent is one benchmark used to distinguish relatively profitable companies from unprofitable ones. A ROE of 8 percent or less means the company is struggling to deliver a sufficient return to shareholders. It is also possible to determine a company's risk profile by looking at its cash flow after capital spending, its debt to equity ratio and its ability to pay its interest costs -- which will be particularly important with the expectation of higher interest rates in many countries. A business can report a healthy looking profit, and yet still be in real financial distress. One cause is when a company is spending much of its cash on buying or improving assets, reducing drastically the profit available to be distributed to shareholders. A rule of thumb is to look for a debt to equity ratio (total debt less cash divided by equity) of less than 75 per cent. An exception to this rule is the banking industry; banks have much higher ratios because their business is to "trade" debt. A high debt to equity ratio leaves the shareholders at risk if assets are revalued downwards. Interest cover ratioAnother rule of thumb is that it is desirable to have an interest cover ratio (earnings before interest and tax divided by interest) of greater than four. Interest cover highlights a business's ability to pay its interest costs. A ratio of less than two leaves a business exposed to interest rate movements, and is therefore considered higher risk. Company history is the best indicator of performance patterns. Five years is generally considered enough to establish a pattern of performance, unless it is a newly listed company. Some criteria that investors should consider include: • Consistency of ROE. If it is consistently strong and increasing every year then net profits should also increase at a faster rate. Inconsistent, patchy performance is a warning sign. • Directors' shareholding reports: Often quite illuminating. If directors are selling, there is often a good reason to stay away. • Risk criteria: Ensure that interest cover has been consistently high and that debt to equity has been consistently low. Private trader Jim Berg, author of The Share Trader's Handbook, believes fundamental analysis can be a valuable tool, but that it should be approached with caution. "Research written by an analyst who is selling advice is stating an opinion and often has some sort of bias. As investors, we are putting our faith in company accountants and auditors to present accurate figures reflecting the true state of a company's financial position. "Corporate statements and press releases offer valuable information, but are often part fact and part spin. Like every other analysis tool, investors need to take the good aspects of fundamental analysis and combine it with the good aspects of other forms of analysis to make common sense investment decisions," he says. 
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