Fundamental Analysis
SECURITY ANALYSIS
• Security Analysis involves a systematic analysis of
the “Risk-Return” profiles of various securities which is
to help a rational investor to estimate a value for a
company from all the price sensitive information/data so
that the investor can decide whether to “Buy”, “Sell” or
“Hold” a security and thereby earn a reasonable rate of
return.
Approaches for Security analysis
Security analysis is broadly classified into:
• Fundamental Analysis
• Technical Analysis
Fundamental Analysis
• Fundamental analysis is a method of evaluating a
security in an attempt to measure its intrinsic value, by
examining related economic, financial, and other
qualitative and quantitative factors.
Components of Fundamental Analysis
• Economic Analysis
• Industry Analysis
• Company Analysis
Advantages
• Fundamental analysis helps identify the company which
is best among its peers.
• It is very much effective for investing purpose as it
determines the actual value of the stock.
• With the help of this analysis, future growth prospects
about the particular sector or industry is determined.
Disadvantages
• This analysis is very time consuming.
• Large amount of documents are needed to be considered
while conducting the analysis.
Qualitative Factors
• Management’s background
• Business ethics
• Corporate governance
• Minority shareholders
• Share transactions
• Related party transactions
• Shareholders
• Political affiliation
• Promoter lifestyle
Quantitative Factors
• Profitability and its growth
• Margins and its growth
• Earnings and its growth
• Matters related to expenses
• Operating efficiency
• Pricing power
Quantitative Factors
• Matters related to taxes
• Dividends payout
• Cash flow from various activities
• Debt – both short term and long term
• Working capital management
• Asset growth
• Investments
• Financial Ratios
Frequently Asked Questions
• What are some best resources to learn the fundamental
analysis for stock?
• What are the types of fundamental analysis?
• How do you calculate fundamental analysis?
• What is the difference between Fundamental Analysis &
Technical analysis?
• What is fundamental analysis used for ?
Fundamental vs Technical
Fundamental Technical
• Examining the basics of entity • Focuses on data pertaining to price and volume
• Investment related function • Trading related function
• Relevant for long term • Relevant for short term
• Focus on previous and present data • Focus on previous data only
• Basis of DM is available information • Basis of DM is price and trend
• Uses the concepts of ROA & ROE • Uses the concept of Price data and Dow theory
How to buy your first share ?
• Company's Track Record
• Management's track Records
• Low Debt Companies
• Sales & Profit Growth
• Return on Capital
Economic Analysis
• Economic Analysis is the study of forces
• Systematic approach to determining the optimum use of scarce
resources
• Takes into account the opportunity costs
• Historical performance of the economy in the past/ present and
expectations in future
• Consumption affects corporate profits, dividends and share prices in
the market.
Brain Teaser
You have nine matchbox sticks and
would like to make ten. How do you
do it?
-IIM -2014- 55 secs
Factors Affecting Economic Analysis
• Growth Rate of Gross Domestic Product (GDP)
• Savings and investment
• Industry Growth Rate
• Price Level and Inflation
• Agriculture and Monsoons
Factors Affecting Economic Analysis
• Interest Rate
• Government Budget and Deficit
• The Tax Structure
• Infrastructural Facilities and Arrangements
• Demographic factors
• Sentiments
Techniques Used in Economic Analysis
• Anticipatory Surveys
1.Construction activities
2.Plant and machinery
3. Inventory levels
Techniques Used in Economic Analysis
• Barometric or Indicator Approach
1. Leading indicators
2. Coincident indicators
3. Lagging indicators
A) Leading Indicators
1. Bank Credit growth
2. Capacity Utilization
3. Yield curve
4. Durable goods consumption
5. Confidence index
B) Coincident Indicators
1. Manufacturing activity
2. Short term interest rates
3. Inflation
C) Lagging Indicators
1. Gross domestic product
2. Unemployment rate
3. Balance of trade
Techniques Used in Economic Analysis
• Econometric Model Building:
Economists frequently use mathematical equations to express the
normal relations between various economic factors.
With a sufficient number of equations, all the important
interactions within the economy can be simulated in a mathematical
model.
Statistical Tools Used in Economic Analysis
• Collection of data (Primary or secondary)
• Editing.
• Classification and tabulation.
• Tools of presentation: Diagrams and Graphs (Of various types)
• Measures of Central Tendency (Mean, Mode, Median, G.M, H.M)
• Measures of dispersion
Economic Variables:
• Dependent Variables
• Independent Variables
• Endogenous Variables
• Exogenous Variables
GDP In Detail
GDP is the measure of the value of goods and services produced within the domestic boundary
of a country.
It is calculated by adding the market prices of all the final goods and services produces in the
domestic territory in a year.
The GDP is one the most important indicators used for the measurement of the strength of a
country's economy.
In this value added by each firm is measured to determine the health of the economy.
GDP has a greater value and meaning for everyone. But in relation to investors, they are
concerned about GDP growth as it determines the growth opportunity for companies to make
more profit.
We can understand it in this way also that increase in GDP means increase in the production of
goods and services which in turn will result increase in sales of a company and thus increase in
profits of the company. This increase in profit will lead to more returns to equity share holders
MONETARY POLICY
Monetary Policy is the instrument which it controls the supply
of money.
Monetary policy is deciding about interest rates at which money can be
borrowed
In view of an investor, monetary policy affects share prices if there is
variance between the investors’ expectation about the movement of interest
rate and actual movement in interest rates.
If RBI raises the interest rate then it will impact the interest rate on
debentures and bonds. With increase in interest rates on debentures and
bonds there will be change in risk perception of investors and thus they will
want higher return on their equity investment.
Thus an increase in interest rate if not accompanied by increase in returned
of equity then investors will get inclines towards debentures and bonds
rather than equity.
This will affect the demand for equity and thus will lower its prices.
Similarly if change in interest rate is as per the expectation of investors then
it will not affect equity prices to a larger extent.
EXCHANGE RATE
Exchange rate is also another factor that affects the
trade or net exports between the countries.
This in turn will also affect the trade and business of the companies
{having global presence} that is related to any foreign market whether for
buying raw material, selling goods or in any other way.
The effect on such companies activities or business will affect that
companies profitability and enhance the prices of shares. Thus exchange
rate affects share prices.
SAVING RATE
Changes in individual saving rate effect the flow of funds into
investments.
Increase in interest rate Decrease in interest rate
This will result in an increase in demand A lower saving rate means lesser disposal
for equity shares. of funds by household into equity market
which will reduce the demand for equity.
Thus, share market will be bullish as it Thus, there will be reduction in share
has an impact of increase in share prices. prices and market will be bearish.
TRADE DEFICIT
Trade deficit also impact on share prices.
There are different views regarding trade deficit. Some believe that it is favorable in
case of strong expansion. Some says that it is to good in times of recession.
Highlights
Trade deficit occurs when countries imports are more than its
export.
In other words we can see it that a country is buying more of
foreign goods than it is selling to them.
Thus this will impact domestic producers. More imports mean
more purchase of foreign goods and less purchase of domestic
goods.
This will result in more profitability to foreign companies than
domestic producers.
The lesser the profit lesser will the amount of profits available to
equity shareholders. Thus it will result in decline in the prices of
shares of the domestic company.
On the other hand there will be an increase in the prices of
foreign company’s shares
CONCLUSION
Economic analysis as we have discussed is an indicator of how changes in economic factors will influence a
company.
It is a true fact that changes in economic policies and environment will affect the environment in which
business is done and companies operate.
Thus a good understanding and eye on economic variables like GDP rate of growth, Monetary policy ,Fiscal
Policy, exchange rate, business cycle, imports, exports etc will give a valuable insight into the future of
business and company’s performance.
An analysis of GDP and how these components are related to the performance of the industry and companies
is also required.
Thus economic analysis helps the investors to get an idea about the direction of change in the capital market
as economic analysis deals with forces operating in the overall economy.
Economic analysis has an important role to play in the investment decisions. In fact in this era of
globalization when businesses are no more operating in domestic arena only it is very important that one
Industry Analysis
• Industry analysis is a market assessment tool used by businesses
and analysts to understand the competitive dynamics of an
industry.
• When an economy grows, it is very unlikely that all industries in
the economy would grow at the same rate. So it is necessary to
examine industry specific factors, in addition to economy-wide
factors.
Factors Affecting Industry Analysis
• Product Life-Cycle
• Demand Supply Gap
• Barriers to Entry
• Government Attitude
• State of Competition in the Industry
• Cost Conditions and Profitability
• Technology and Research
Types of Industry Analysis
• There are three commonly used and important methods of
performing industry analysis. The three methods are:
• Porter’s 5 Forces
• PESTLE Analysis
• SWOT Analysis
Porter’s 5 Forces
1.Ease of Entry
2. Power of Suppliers
3. Power of Buyers
4. Availability of Substitutes
5. Competitors
PESTLE analysis
• Political: It accounts for all the influences that a government may
have upon the business environment, including business cycles,
the economy at large and individual business industries. Tax
reforms, fiscal policies and trade tariffs form part of this analysis.
• Economic: This analyzes the economy as a whole and its
performance owing to global trends and long term effects that
may be evident. Inflation rates, interest rates, economic growth,
demand and supply trends are all analyzed under this head.
CONT.
• Social: This charts the analysis of cultural trends, demographical
determinants, age distribution etc.
• Technological: This analyses the technological trends of the
business environment. It accounts for the rate at which the
innovations are occurring and how directly and indirectly they’re
influencing the business you’re in.
• Legal: There are many laws and policies that directly impact the
way your business is run and the decisions that fuel its propulsion.
These laws can be social laws, regulatory laws, certain standards
that need to be met and other such laws.
CONT.
• Environmental: Your business has effects in the environment it
operates in, therefore you need to analyze in depth what
implications your business might be having on it. On the other
hand, the environment also influences your business directly or
indirectly especially the tourism, farming or agriculture business.
Therefore these factors account for the geographical location,
weather, climate etc. but are not just limited to the study of these
only.
SWOT
• Strengths: The S in the acronym stands for Strengths. Much to do with the name, it
analyses the company’s strengths in line with the product/service and counts the USP
(unique selling propositions) that it has. Strengths of a company or a product make it
stand out when in comparison with their competitors.
• Weaknesses: The W stands for Weaknesses. It accounts for all the current weaknesses
that the company may have or may be facing and how the product features them. It
gives the company the view from an external standpoint where they can understand
what their areas of lacking and then work upon them to remove them from their
internal environment.
• Opportunities: O spells out Opportunities. These opportunities are for the company to
gain, master and then derive benefits from. Usually, weaknesses are reflected here with
a strategy to encounter them as opportunities where the company can work upon itself
or the product/service.
• Threats: Threats, denoted by T take into account the threats that able and potential
How to do a PESTLE Analysis?
• Identify the scope of the research.
• Form a good team and assign responsibilities
• Identify appropriate sources of information
• Gather and assemble the information.
• Analyzing the collected information is a significant step.
• Create an order of the issues to be addressed.
• Identify the business-specific options to address the issues.
• Create a well-informing document for all the stakeholders
• Disseminate and discuss the findings with stakeholders and decision-makers
Advantages
• It is a simple framework- easy to understand and conduct
• It facilitates a better and broader understanding of the business
environment.
• It encourages organizations to develop external and strategic
thinking
• The most talked advantage- it enables an organization to anticipate
future business threats and allows it to minimize or nullify the
impact
• It also allows organizations to spot an opportunity and to capitalize
on them
Disadvantages
• Some PESTLE analysis users oversimplify the amount of data used for decisions –
it’s easy to use insufficient data.
• It’s easy to get lost in the enormous amount of data. So, there always remains a
risk of capturing too much data and undertaking too much data analytics that may
lead to ‘paralysis by analysis’
• As a PESTLE analysis works on assumptions, there remains a risk of being wrong
• Once in a while an attitude doesn’t work with PESTLE analysis. So, it must be a
regular practice.
• The pace of change makes it difficult to anticipate the developments and this may
affect the organization in future
POLITICAL FACTORS IMPACTING INDIA
• LARGEST DEMOCRACY
• POLITICAL CORRUPTION
• MEMBERSHIP & ALLIANCE
• CONFLICT WITH NEIGHBORS
ECONOMIC FACTORS AFFECTING INDIA
• HIGHEST GDP
• CORPORATE TAX RATE
• IMPORTS & EXPORTS
SOCIAL FACTORS AFFECTING INDIA
• LARGE CONSUMER MARKET
• DEMOGRAPHY
• LIFESTYLE
OTHER FACTORS
TECHNOLOGY
• STRONG TECH INDUSTRY
LEGAL FACTORS AFFECTING INDIA
LAWS & REGULATIONS
Life cycle analysis -Strategy
• Avoid stocks during early phase
• Get it during growth stage
Industry Drivers
• Sales
• ROCE
• Competition
• Critical cost component
• Who are the players
• Technology
• Taxation
• Export potential
• Market evaluation
SWOT
Classification of Industries
• Growth Industry
• Cyclical Industry
• Defensive Industry
Financial statement analysis
• Balance sheet
• Income statement
• Cash flow statements
