fundamental-analysis.ppt

7/27/2019 fundamental-analysis.ppt

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Submitted by:

Sakshi wali

MBA III Sem

Submitted to :

Mr. Bhanu Pratap Narania


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Fundamental analysis is a method of evaluating a

security or asset by attempting to measure itsintrinsic value by examining related economic,

financial and other qualitative and quantitative

factors.


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Fundamental analysts attempt to study everything

that can affect the security's value, includingmacroeconomic factors (like the overall economy

and industry conditions) and individually specific

factors.


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Fundamental analysis can be composed of many

different aspects: the analysis of the economy asthe whole, the analysis of an industry or that of

an individual company.


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Thus it is important for an analyst to identify the

factors that are likely to affect the value of the

underlying asset and then resort to the study of

the said factors.


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Fundamental Analysis thus involves 3

steps

Economic analysis

Company analysis

Industry 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 RECESSION, the

performance of companies will be generally poor.

Investors are interested in studying those economic varieties,

which affect the performance of the company in which they

proposed to invest. An analyzed of those economic variable

would give an idea about future corporate earnings and the

payment of dividends and interest to investors.


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Factors affecting economic analysis

GNP

SAVING AND INVESTMENT

INFLATION

INTEREST RATE

AGRICULTURE

MONSOON

GOVERNMENT EXPENDITURES, REVENUES AND

DEFICITS

POLITICAL STABILITY

INFRASTRUCTURE


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GNP/ Geometric Model

GNP represents the aggregate value of goods and services

produced in the economy. It reflects the over all performance

of the economy. The growth rate of GNP indicates the growth

rate of the economy the higher the rate of growth of GNP, themore favorable is it for the stock market and vice versa


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Saving & investment

Savings and investment denote that position of GNP, which is

saved and invested savings increases in India since eighties

now the rate of savings is 25% from 21% in 80s, which

indicates the growth of capital market. The higher the level ofsavings interest, the more favorable is it for the stock marketed

vice versa


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Inflation

Inflation has considerate impact on the performance of

companies. Higher rates of inflation upset business plans and

erode purchasing power in the hands of consumers. This will

result in lower demand for products. Thus high rates of inflation

in an economy are likely to affect the performance of companiesadversely. However industries and companies prosper during

periods of low inflation. Hence an investor has to evaluate the

inflation rates prevailing in the economy currently as well as the

trend of inflation likely to prevail in the future.


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Agriculture

Agriculture forms a major part of the Indian economy. Some

companies are using agricultural raw material as inputs and

some others are supplying inputs to agriculture. Such

companies are directly affected by changes in agriculturalproduction. Hence, the increase/decrease in agricultural

production has a significant bearing on the industrial production

and corporate performance


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Rate of interest

The cost and availability of credit for companies are

determined by the rates of interest prevalent in an economy. A

low interest rate stimulates investment by making credit

available easily and cheaply. As a result cost of finance for

companies decreases which assures higher profitability. Onthe other hand, higher interest rates result in higher cost of

production, which may lead to lower profitability and lower

demand. Hence an investor has to consider the interest rates

prevailing in the economy and evaluate their impact on the

performance and profitability of the companies.


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GOVT. REVENUE, EXPENDITURE &

DEFICITS

Government is the largest investor and spender of money. So

the trends in government revenue expenditure deficits have

a significant impact on the performance of industries and

companies. So the investor has to evaluate these carefully toassess their impact on his investments.


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Infrastructure

The development of an economy very much on the

availability of infrastructure. It includes electricity, roads and

railways, communication channels etc. The availability of

infrastructural facilities affects the performance of

companies. Bas infrastructure leads to inefficiencies, lowerproductivity, wastage and delays and vice versa. Thus an

investor should assess the status of infrastructural facilities

available in the economy before finalizing his investment

avenues.


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Monsoon

The Indian economy is essentially an agrarian economy and

agriculture forms a very important sector of the Indian

economy. But the performance of agriculture to a very great

extent depends upon the monsoon. The adequacy of the

monsoon ensures the success of the agricultural activities in

India and vice versa. Hence the progress and adequacy of

the monsoon becomes a matter of great concern for an

investor in India.


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Political Stability

A stable political environment is necessary for steady and

balanced growth. No industry or company can grow and

prosper in the midst of political turmoil. Such long term

economic policies are needed for industrial growth. Suchstable policies can be framed only by stable political

systems.


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Industry Analysis

Industry analysis indicates to an investor whether the

industry is a growth industry or not. It gives an investor a

choice of the industry in which the investments should be

made.

Industry analysis refers to an evaluation of the relative

strength and weakness of particular industries which can be

divided in to three parts, viz.,

1. Life cycle of an industry

2. Characteristics of an industry

3. Profit potential of an industry


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Life Cycle

(a)Pioneering Stage: Technology and product arenewly introduced.

(b)Expansion stage: Those companies which reachedfirst stage grow

further and becomes stronger.

(c)Stagnation Stage: In this stage the growth of theindustries Stabilizes. Sales increases at slower rate.

(d)Decay stage: The industry becomes obsolete andgradually ceases to exist.

Ch i i f i d


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Characteristics of an industry

(a) Relationship between Demand & supply: Excess supply reduces the profitabilityof the industry and insufficient supply tends to improve the profitability. Thus an

investor should estimate the demand and supply gap in an industry.

(b) Period of life: Life of the industry depends on the products and the technology

used by the industry. Technological changes leads to product obsolete. No

investment should be made in such industries.

(c) State of labour: When there is labour revolution, industries cannot become bright.

(d) Governments attitude: The Government may encourage the growth and

development of certain industries by giving much assistance to such industries.

(e) Availability of Raw Material: An industry may depend on internal / external

country for raw material. Sometimes they depend on import of raw material.

(f) Cost structure: It refers to the proportion of fixed costs to variable costs. (Discuss

about Marginal Cost)


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Profit potential of industry

(i) Threat new entrants: New entrants inflate cost, push down the

prices and reduce profitability. An industry which is well protectedfrom the entry of new firms would be ideal for investment.

(ii) Competitions among existing firms: The firm competes with eachother on the basis of price, quality, promotion, service, warrantiesand so on. If the rivalry between the firms in an industry is strong

average profitability of the industry may be discouraged. The rivalryin an industry is high when the following conditions prevail in themarket:

(a) There is a sustained competitive battle

(b) The industry growth is dull

(c) The level of fixed cost is high

(d) There is over capacity in the industry continuing for a long time.

(e) The industry product is considered as a commodity, which

stimulates strong competition.

(f) The industry struggles much to withstand.


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(iii) Pressure from substitute products: Each firm in anindustry face competition from other firms in the same industry

producing substitute products. Substitute products may affect

the profit potential of the industry badly. The pressure from thesubstitute products is found to be high under the following

circumstances:

(a) When the price of the products is attractive

(b) When the cost for the prospective buyers to switch over to

a substitute product is minimum.

(c) When the substitute products are earning greater profits.


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(iv)Bargaining power of buyers: Buyers can bargain for price

reduction asks for better quality and better service. The bargaining

power of a buyer group is said to be high under the following

conditions:

(a) If its capacity to buy is more than the capacity of the seller tosell.

(b) If the cost of the switch over to a substitute product is low.

(c) If it poses a threat of backward integration strongly.

(v) Bargaining power of sellers: Sellers also can exert a competitive

force in an industry and bargain for rise in prices, lower quality, curtail

some of the free services they offer etc. Powerful suppliers can affect

the profitability of the buyer industry badly. Suppliers are said to be

powerful under the following circumstances.

(a) Few suppliers dominate the entire market.

(b) There is no viable substitute for the products supplied.

(c) The switching poses a strong threat of forward integration.

(d) Suppliers also pose a strong threat of forward integration.


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Company Analysis

It involves a close investigative scrutiny of the companiesfinancial and non financial aspects with a view to identifying its

strength, weaknesses and future business prospects.

The financial and non financial aspects are as follows:

Marketing success

Accounting Policies

Profitability


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1. Marketing success: The success of the market of the firm depends on

(a) The share of the company in the industry

(b) Sales

(c) Growth of its sales and stability of sales.

2. Accounting Policies:

A. Inventory Pricing

Cost/market value method

FIFO

LIFO

B. Depreciation methods Straight line method

Sum of the years digit method

C. Non operating income

Dividend

Interest

D. Tax Carry over Provision for taxation


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Profitability: A.(a) Gross profit Margin

(b) Net profit Margin

(c) Earning power

(d) Return on equity

(e) Earning per share

(f) Cash EPS

B. Financial Statement Analysis

> Trading, P& L A/C Analysis> Balance Sheet Analysis

C. Ratio Analysis

> Liquidity Ratios

> Leverage Ratios> Profitability Ratios

> Activity / Efficiency Ratio


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Benefits of fundamental analysis

Finding the value of the company. Determining what thecompany is worth at todays price will enable you to make a

decision to either buy or sell the company

Enables to read the pulse of the company. One can

understand the financial dynamics within the company anddetermine whether is it in a good state or are there some

problems.

Helps to identify potential companies before the general

market.

fundamental-analysis.ppt

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