Fundamental analysis

UNIT OBJECTIVESAt the end of this unit, you will have learnt aboutFundamental analysisEconomic analysisRelationship between economic growth and stock pricesIndustry analysis and stock marketEarnings of a company its importance for the investorFinancial analysis of an organisationAnalysis of financial statementsRelationship between growth in earnings and stock prices

INTRODUCTION

EQUITY RESEARCHEquity research is an act of making an ex-ante evaluation of equity shares from the angle of investment worthiness.

Equity research is mainly dividend into three:Fundamental analysisTechnical analysisEfficient market hypothesis

SOURCES OF INVESTMENT INFORMATIONSources of investment information are mainly the secondary sources.Economic surveyBudget announcementPlanning document issued by the planning commissionReport by international agencies like the World Bank and IMFReport by rating agencies like Moody, Standard & Poor (S & P)Publication by regulatory agencies like SEBI, RBI and others

SOURCES OF INVESTMENT INFORMATIONIndustry report by FICCI and ASSOCHAMPublication by stock exchangeAnnual report of companiesNews reportsIndependent advice of portfolio planners like Sharekhan and othersRating agencies of IndiaAcademic research work by scholars and academiciansOther relevant documents containing price-sensitive information.

FUNDAMENTAL ANALYSISFundamental analysis is the analysis of various fundamental factors economic aggregates, industrial indicators as well as facts related to companies.Fundamental analysis also aims to arrive at the intrinsic value of sharesIntrinsic ValueBuy, if Intrinsic Value > Market PriceSell, if Intrinsic Value < Market PriceIntrinsic value is the value of the share, which is supported by systematic and non- systematic factors.

DIMENSIONS OF FUNDAMENTAL ANALYSISFundamental analysis is carried in three phases; these phases are called three dimension of this analysis:

Analysis of Economy-wide Factors

Analysis of Industry-wide Factors

Analysis of Company-wide Factors

ANALYSIS OF ECONOMY-WIDE FACTORSUnder this phase, national as well as international economic conditions and different economic aggregates are analyzed to answer the question of timing of investment.

StepsStudy of economic aggregatesClassification of indicatorsForecast about the economy

STUDY OF ECONOMIC AGGREGATES Economic aggregates are indicators of the health of the economy. With the help of these, prediction about future outcomes can be made.Industrial productionGross domestic production (GDP)Investment in infrastructure sectorForeign tradeInflation MonsoonBusiness conditionsGovernment policiesInternational environment/events

CLASSIFICATION OF FACTORS INTO INDICATORSAdvance-moving indicators Monsoon, Industrial growth, Infrastructural development

Coinciding indicators rising stock index, increasing consumption

Lagging indicators slow growth areas, regional imbalanceAdvance moving indicators are the front-runner before the actual development in the economy takes place.

ECONOMIC ANALYSIS

ANALYSIS OF INDUSTRY-WIDE FACTORSSecond phase of fundamental analysis; industries selected in the previous phase are scanned individually at length in this phase

Objective of this phase is to provide information about the best industry, in which investments can be made. Steps are:Study of industry life cycleStudy of qualitative and qualitative factor

STUDY OF INDUSTRY LIFE CYCLEBy industry life cycle, we mean the different stages of the development of an industry.

Helps in making investment decision.

Stages:Pioneering stageRapid growth stageMaturity and stabilizationDecline/Diversification

INDUSTRY LIFE CYCLE

STUDY OF QUALITATIVE AND QUANTITATIVE FACTORSLevel of competition and protection by the governmentEntry barriersProduct differentiationSubstitution effectDemand typeSupply of inputsTechnological changesStabilityGovernment supportTrends of turnover/salesTrends of profitabilityTrends of cost structureTrends about marginsQUALITATIVE FACTORSQUANTITAIVE FACTORS

FIVE FORCES DRIVING INDUSTRY COMPETITION PORTER MODEL

ANALYSIS OF COMPANY-WIDE FACTORS Every industry has more than one company; this phase scans the companies of those industries, which have been selected in the second phase.Purpose of this phase is to identify the best company in each of the industry selected.Done with the help of following factors:Financial performance analysisAnalysis of qualitative parametersIt indicates:ProfitabilityFinancial soundness

Financial Analysis TechniquesComparative financial statementCommon size analysisTrend AnalysisFunds flow & cash flow analysisCVP AnalysisRatio analysis

PROMINENT RATIOS TO BE CONSIDEREDOperating profit ratioReturn on investment (ROI)EPSReturn on equity capitalLeverage ratioPrice earning ratio (P/E Multiplier).To identify the best company, financial ratios of companies can be compared either against the overall industry ratio or against the standards. Generally, a company showing financial performance above the industry average is considered the best.

END-RESULT OF FUNDAMENTAL ANALYSISThe right time to invest

The company in which investment is to be made

*