2. INTRODUCTION OF FUNDAMENTAL ANALYSIS.
MEANING OF FUNDAMENTAL ANALYSIS.
OJECTIVES OF FUNDAMENTAL ANALYSIS.
TYPES OF FUNDAMENTAL ANALYSIS.
MACRO-FUNDAMENTAL ANALYSIS.
MICRO-FUNDAMENTAL ANALYSIS.
EIC-ANALYSIS FRAMEWORK.
CONLUSION.
REFERENCE.
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4.
5. Fundamental analysis is really a logical and systematic approach to
estimating the future dividends and share price. It is based on the
basic premise that share price is determined by a number of
fundamental factors relating to the economy, industry and
company.
Hence , the economy fundamentals, industry fundamentals and
company fundamentals have to be considered while analyzing a
security for investment purpose.
Fundamental analysis is, in other words, a detailed analysis for the
fundamental factors affecting the performance of the companies.
6. To conduct a company stock valuation and
predict its probable price evolution.
To make a projection on its business
performance.
To evaluate its management and make internal
business decisions.
To calculate its risk.
7. Each share is assumed to have an economic worth based on its present
and future earning capacity. This is called its intrinsic value or
fundamental value. The purpose of fundamental analysis is to
evaluate the present and future earning capacity of a share based on
the economy, industry and company fundamentals and thereby
assess the intrinsic value of the share.
The investor can then compare the intrinsic value of the share with the
prevailing market price to arrive at an investment decision. If the
market price of the share is lower than its intrinsic value, the investor
would decide to buy the share as it is underpriced.
8. The price of such a share is expected to move up in future to match
with its intrinsic value.
On the contrary, when the market price of the share is higher than its
intrinsic value, it is perceived to be overpriced. The market price of such a
share is expected to come down in future and hence, the investor would
decide to sell such a share. Fundamental analysis thus provides an
analytical framework for rational investment decision-making. This
analytical framework is known as EIC framework, or Economy-Industry-
Company Analysis.
9. Although it is generally accepted that the aim fundamental analysis is to
determine the economic value of a security, it is the practice of
fundamental analysis that gives raise to two sub types namely,
1. Macro fundamental analysis,
The top down approach
2. Micro fundamental analysis
The bottom up approach
10. Macro fundamental analysis focuses on broad economic factors that
affect the stock market as a whole or industry groups of securities. This
approach is known as the top down approach of macro fundamental
analysis. The practice of macro fundamental analysis starts at the over all
performance of the economy, its impact on industry groups and finally
down to specific companies in the industry groups.
It is noteworthy that macro fundamental analysis has a more formal and
structured approach and as such this approach is much favored by research
department of investment management companies and brokerage houses.
11. Micro fundamental analysis starts by considering the current price of a
stock and compares it to measures of value. Hence the current price of
stock is compared to its dividend yield, price to earnings ratio and its price
to asset ratio. The resultant valuation enable comparison to be made
amongst stocks are identified by comparison to the industrial norm. after
this phase of analysis, the micro fundamental analysis attempts to predict
industry and economic developments that may positively or negatively the
stocks current price.
It is pertinent to note that investment icon such as Benjamin Graham, his
prodigies Warren Buffet, Charles Munger and William Ruane tend toward
Micro fundamental analysis.
12. Fundamental analysis insists that no one should purchase or sell a
share on the basis of tips and rumors. The fundamental approach
calls upon the investor to make his buy or sell decision on the
basis of a detailed analysis of the information about the
company, the industry to which the company belongs and the
economy. This results in informed investing. For this, a
fundamentalist makes use of the EIC framework of analysis.
13.
14. The analysis is a 3 layer analysis wherein the analysis of economy, industry and
company is carried out. The logic behind 3 layer is that the performance of
the company depends on the performance of the industry and economy as a
whole. In the era of the globalization we may add one more layer to the
diagram to represent the international economy. The multitude of factors
affecting the intrinsic value of an equity share can be broadly categorized
into 3 factors namely:
1. Economic related factors such as-
-growth rate of GDP,
- industrial growth rate,
15. - inflation,
-interest rate,
- government budget and deficit etc.
2. Industry related factors such as
-demand and supply conditions in the industry,
-existence of substitutes,
-government policy etc.
These factors affect only those companies which belong to a specific industry.
3. Company related factors include
-financial performance,
-operating efficiency,
-capital structure,
-competitive edge of the company etc.
16. Fundamental analysis is a structured and formal approach to research
on a stock value and its potential growth. The analytical procedure
facilitates the identification of overvalued and undervalued stocks relatives
to their earnings potential, dividend income potential and to their asset
values, against the backdrop of the economic and the industry environment.
On the basis of research, investment decisions are made such that the odds
are stacked in our of the fundamental analyst.
18. 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.
Fundamental analysis is really a logical and systematic
approach to estimating the future dividends and share price.
Fundamental analysis is performed on historical and
present data, but with the goal of making financial
forecasts.
19. · Fundamental analysis is a method of evaluating a security or
asset by attempting to measure its intrinsic value by examining
related economic, financial and other qualitative and
quantitative factors.
· Fundamental analysts attempt to study everything that can
affect the security's value, including macroeconomic factors
(like the overall economy and industry conditions) and
individually specific factors.
· The fundamental approach is based on an in-depth and all-
around study of the underlying forces of the
economy, conducted to provide data that can be used to
forecast future prices and market developments.
20. · Fundamental analysis can be composed of many
different aspects: the analysis of the economy as the
whole, the analysis of an industry or that of an individual
company.
· A combination of the data is used to establish the true
current value of the underlying asset, to determine
whether they are over- or under-valued and to predict the
future value of the underlying asset based on this
information.
21. · It helps an investor obtain information about the overall
state of the market, attractiveness and state of a specific
security as compared to other securities, However, when and
how to react to the information, derived through
fundamental analysis, is determined using technical analysis.
· Though the basic approach is the same while doing
fundamental analysis, the various factors that affect the value
of the underlying asset keep changing depending upon the
class and nature of the asset under focus.
· For example weather may not play a major factor while
analyzing the value of the share of a company, which is in the
business of Information technology.
22. · 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.
· Fundamental analysis seeks to identify the fundamental
economic and political factors that determine a commodity’s
price. It is basically an analysis of the (current and future)
demand and supply of a commodity to determine if a price
change is imminent, and in which direction and by how much
prices are expected to change. This approach requires gathering
substantial amounts of economic data and political
intelligence, assessing the expectations of market
participants, and analyzing these information to predict futures
price movement
23. · The end goal of performing fundamental analysis is to produce a
value that an investor can compare with the underlying assets
current price in hopes of figuring out what sort of position to take
with that security(under priced = buy, overpriced = sell).
· Fundamental analysis focuses on cause and effect — causes
external to the trading markets that are likely to affect prices in the
market. These factors may include the weather, current inventory
levels, government policies, economic indicators, trade balances
and even how traders are likely to react to certain events.
Fundamental analysis maintains that markets may misprice a
commodity in the short run but that the "correct" price
will eventually be reached.
24. -Profits can be made by trading the mispriced commodity and
then waiting for the market to recognize its & quote ; mistake &
quote ; and correct it.
· Various Techniques of Fundamental Analysis The Demand-
Supply Framework Price Elasticity The Balance Table Stocks-to-
Disappearance Ratio The Tabular and Graphic Approach The
Regression Analysis Econometric Models Seasonal Price Index
Market Demand: Market demand represents how much people
are willing to purchase at various prices. Thus, demand is a
relationship between price and quantity demanded, with all
other factors remaining constant.
