Fundamental analysis

UNIT OBJECTIVES

At the end of this unit, you will have learnt

about
o Fundamental analysis
o Economic analysis
o Relationship between economic growth and
stock prices
o Industry analysis and stock market
o Earnings of a company its importance for the
investor
o Financial analysis of an organisation
o Analysis of financial statements
o Relationship between growth in earnings and
stock prices

INTRODUCTION
Research and
analysis

Technical
analysis

Market data
On Prices,
Volume ,
Moving
Averages,

Fundamental
analysis

Economic
analysis

Industry
analysis

Company
analysis

Indicators like
GDP,
Growth rate,
Inflation,
Money supply,

Capacity
Market
position
Govt. policy
Raw material
availability

EPS
Book value
P/E ratio
Dividends
paid

EQUITY RESEARCH

Equity 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:
o Fundamental analysis
o Technical analysis
o Efficient market hypothesis

SOURCES OF INVESTMENT
INFORMATION

Sources of investment information are mainly

the secondary sources.
Economic survey
Budget announcement
Planning document issued by the planning
commission
Report by international agencies like the World
Bank and IMF
Report by rating agencies like Moody, Standard
& Poor (S & P)
Publication by regulatory agencies like SEBI, RBI
and others

SOURCES OF INVESTMENT
INFORMATION
Industry report by FICCI and ASSOCHAM
Publication by stock exchange
Annual report of companies
News reports
Independent advice of portfolio planners like
Sharekhan and others
Rating agencies of India
Academic research work by scholars and
academicians
Other relevant documents containing pricesensitive information.

FUNDAMENTAL ANALYSIS
Fundamental 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 shares
Intrinsic Value
Buy, if Intrinsic Value > Market Price
Sell, if Intrinsic Value < Market Price
Intrinsic value is the value of the share, which is supported by
systematic and non- systematic factors.

DIMENSIONS OF FUNDAMENTAL ANALYSIS

Fundamental 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
FACTORS

Under this phase, national as well as

international economic conditions and
different economic aggregates are
analyzed to answer the question of
timing of investment.
Steps
Study of economic aggregates
Classification of indicators
Forecast 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.
o
o
o
o
o
o
o
o
o

Industrial production
Gross domestic production (GDP)
Investment in infrastructure sector
Foreign trade
Inflation
Monsoon
Business conditions
Government policies
International environment/events

CLASSIFICATION OF FACTORS INTO

INDICATORS

Advance-moving indicators Monsoon,

Industrial growth, Infrastructural
development
Coinciding indicators rising stock index,
increasing consumption
Lagging indicators slow growth areas,
regional imbalance
Advance moving indicators are the front-runner before the actual development in the
economy takes place.

ECONOMIC ANALYSIS

ANALYSIS OF INDUSTRY-WIDE
FACTORS
Second 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:
o Study of industry life cycle
o Study of qualitative and qualitative factor

STUDY OF INDUSTRY LIFE CYCLE

By industry life cycle, we mean the different
stages of the development of an industry.
Helps in making investment decision.
Stages:
o Pioneering stage
o Rapid growth stage
o Maturity and stabilization
o Decline/Diversification

INDUSTRY LIFE CYCLE

Gr
ow
ing

Stagnant

Blue chip
companies

Fas
gro test
win
g

Growth
industries

Sun rise
industries

Declining

STUDY OF QUALITATIVE AND

QUANTITATIVE FACTORS
QUALITATIVE FACTORS

QUANTITAIVE FACTORS

Level of competition
and protection by the
government
Entry barriers
Product differentiation
Substitution effect
Demand type
Supply of inputs
Technological changes
Stability
Government support

Trends of
turnover/sales
Trends of profitability
Trends of cost
structure
Trends about
margins

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:
o Financial performance analysis
o Analysis of qualitative parameters

It indicates:
o Profitability
o Financial soundness

Financial Analysis Techniques

Comparative financial statement
Common size analysis
Trend Analysis
Funds flow & cash flow analysis
CVP Analysis
Ratio analysis

PROMINENT RATIOS TO BE
CONSIDERED
Operating profit ratio
Return on investment (ROI)
EPS
Return on equity capital
Leverage ratio
Price 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
ANALYSIS
The right time to invest

The company in which investment is to be

made