CHAPTER 4

BASIC ANALYSIS BASIC ANALYSIS

Dr. BALAMURUGAN MUTHURAMAN

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FUNDAMENTAL ANALYSIS

Fundamental Analysis is to evaluate a lot information about the past performance and the expected future performance of companies, industries and the economy as a whole before taking the investment decision. Such evaluation or analysis is called fundamental analysis.

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Fundamental analysis includes:

• Economic analysis

• Industry analysis

• Company analysis

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ECONOMIC ANALYSIS

The performance of a company depends much on the performance of the economy if the economy is BOOM, the industries and companies in general said to be prosperous. On the other hand, if the economy is in DECLINE, the performance of companies will be generally poor.

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INDUSTRY LIFECYCLE

A concept relating to the different stages an industry will go through, from the first product entry to its eventual decline.

The industry life cycle approach has important implications for the investor. It gives an insight into the apparent of investment in given industry a t a given time.

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Industry life cycle theory-the life of an industry can be segregated into,

Pioneering Stage Expansion Stage Stagnation Stage Decline Stage

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INTRODUCTION STAGE/ PIONEERING STAGE

This is the first stage in the industrial life cycle of a new industry where the technology as well as the product are relatively new and have not reached a state of perfection. The pioneering stage is characterized by rapid growth in demand for the output of industry. As a result, there is a great opportunity for profit & highly risk. It’s also called sunrises industries. For example, ‘a leasing industry’ Computer Software & information technology etc.

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GROWTH STAGE /EXPANSION STAGE

This is second stage of expansion or growth and survived the pioneering stage. The stage of an industry are quite attractive for investment purposes. Investors cab get high returns at low  risk because demand exceeds supply in the this stage. Companies will earn increasing amounts of profits and pay attractive dividends.

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MATURITY STAGE/STAGNATION STAGE

This is the third stage in the industry life cycle. In this stage, the growth of the industry stabilizes. The ability of the industry to grow appears to have been lost. sales may be increasing but at a slower rate than that experienced by competitive industries or by the overall economy.  For example, Desktop PC Computers. 

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DECLINE STAGE/ DECAY STAGE

From the stagnation sage the industry passes to the decay stage. This occurs when the products of the industry are no longer in demand. New products and new technologies have come to the market. Customers have change their habits, style and liking. As a result, the industry becomes obsolete and gradually ceases to exist. Thus, changes in social habits, changes in technology and declining demand are the causes of decay of an industry.

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COMPANY ANALYSIS

In the company analysis the investors learn the several bits of information related to the company and evaluates the present & future value of the stock.

It involves a close investigative inspection of the companies financial and non financial aspects with a view to identifying its strength, weaknesses and future business prospects.

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FINANCIAL STATEMENT ANALYSIS

The financial statement analysis is the study of a company’s financial

statement from various viewpoints. The statement gives the historical and current

information about the company’s operation.

Some statements & parameters used in the analysis are: Balance sheet Profit and loss account Comparative financial statements Trend analysis Common size statements Fund flow analysis Cash flow analysis Ratio analysis.

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NON FINANCIAL PARAMETERS

Business of the company The investor should know weather the company is a well

established one, weather it has a good product range.Management

The quality of top management team, the competence and the commitment of CEO matters a lot in shaping the destiny of the company.

Product rangeProgressive co. like ITL & HUL creates competition for

their existing products by launching new products with regular frequency. Hence investor must examine the company.

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NON FINANCIAL PARAMETERS

Foreign CollaborationWhere a company has entered into technical

collaboration with a foreign company, the investor must find out more about the nature of the collaboration agreement.

Research & Development (R & D) Progressive companies spent substantial sums of money on

R & D to upgrade their existing product.

Government RegulationsThe investor must asses the implications of

governmental regulations such as licensing entry barriers, patent registrations.

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