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  1. 1. FUNDAMENTAL ANALYSIS • Introduction: The investors’ ultimate aim is to get a reasonable return on his investment. The investor who wants to get a reasonable return should analyze various fundamental factors before committing his hard earned funds and should hold his investment for a reasonable period. Fundamental Analysis helps the investor to identify the right investment outlet and the right entry and exit timings and thus it helps in enhancing the return and reduces the risk of investing.
  2. 2. MEANING OF FUNDAMENTAL ANALYSIS • A method of evaluating a security that entails 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 and company-specific factors. • The aim of Fundamental analysis is to forecast the future price movements of the company compare with the security's current price.
  3. 3. OBJECTIVES OF FUNDAMENTAL ANALYSIS: • 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 credit risk.
  4. 4. EIC OF FUNDAMENTAL ANALYSIS: 1) Economic Analysis 2) Industry Analysis 3) Company Analysis
  5. 5. MEANING OF ECONOMIC ANALYSIS: FOR EXAMPLE RISING INFLATION RATES AND INTEREST RATE • Economic analysis is the study of supply and demand and the choices (decisions) and incentives (pricing, taxes, etc.), so that scarce resources are used efficiently. Economic analyses involve mathematics and statistics, modeling, simulation, and optimization methods.
  6. 6. CONCEPT OF ECONOMIC ENVIRONMENT • Internal Environment – To analysis strength and weakness of the company and its are controllable in nature. • External Environment - To analysis opportunities and threats of the company and its are not controllable in nature. • Micro economic environment: Supplier Customers Financial intermediaries Trade unions Competitors Public
  7. 7. CONTINUE… • Macro economic environment: GDP Savings and investment Balance of payment Budget Inflation Tax structure Demographic structure Infrastructural Facilities
  8. 8. FACTORS AFFECTING ECONOMIC FORECASTING: • GDP • Inflation • Interest rates • Government revenues, expenditure and deficit • Exchange rates • Infrastructure • Monsoon • Economic and political stability
  10. 10. VARIOUS KINDS OF ECONOMIC FORECATING METHOD: • There are many forecasting techniques available to assist in business planning. Many forecasting techniques use past or historical data in form of time series. A time series is simply a set of observations measured at successive points in time or over successive periods of time. Forecasts essentially provide future values of the time series on a specific variable such as sales volume. • Its should be classified into two types are
  11. 11. CONTINUE • Qualitative Method When historical data are not available, qualitative forecasting techniques are used. Such techniques generally employ the judgment of experts in the appropriate field to generate forecasts. • Quantitative Method Quantitative forecasting methods are used when historical data on variables of interest are available— these methods are based on an analysis of historical data concerning the time series of the specific variable of interest and possibly other related time series. There are two major categories of quantitative forecasting methods.
  12. 12. VARIOUS ANALYSIS OF QUANTITATIVE METHOD: • The first type uses the past trend of a particular variable to base the future forecast of the variable. As this category of forecasting methods simply uses time series on past data of the variable that is being forecasted, these techniques are called time series methods. • The second category of quantitative forecasting techniques also uses historical data. But in forecasting future values of a variable, the forecaster examines the cause-and-effect relationships of the variable with other relevant variables
  13. 13. TECHIQUES OF ECONOMIC FORECASTING: 1) Survey Expert opinion – Delphi Techniques Cross – Impact Analysis Multiple scenarios 2) Economic Indicators Pro cyclic Counter cyclic Acyclic Other indicators Leading indicators Coincidental indicators Lagging economic indicators
  15. 15. STOCK INVESTMENT DECISION • Population of the country • Research and Development facilities • Capital Formation • Resources • Gross Domestic Product (GDP) • Savings and Investments • Rate of Inflation • Budget Proposals • The taxation policy • Balance of Payment of Currency value • Monsoon and Agriculture
  16. 16. Businesses, governmental entities, and other organizations face great uncertainty and risks when making decisions about major investments in new manufacturing facilities, new products, new markets, new technologies, new programs, and when acquiring other companies. Economic feasibility studies provide the facts and analytical rigor to improve these types of strategic decisions.
  17. 17. The term “economic impact analysis” refers to rigorous surveys, research, and modeling to estimate the direct and indirect economic effects of an entity or event on the local, county, state, or economy, as measured by employment, tax revenue, income, or gross product (overall economic output).
  18. 18. Economic indicators Impact on the stock market GNP -Growth Decline -Favourable -Unfavorable Price Conditions - Stable - Inflation -Favourable -Unfavourable Economy -Boom - Recession -Favourable -Unfavourable Employment - Increase - Decrease -Favourable -Unfavourable Interest Rates - low - high -Favourable -Unfavourable Balance of trade - Positive - Negative -Favourable -Unfavourable Strength of the Rupee in Forex market - Strong - Weak -Favourable -Unfavourable
  19. 19. INTRODUCTION: Under fundamental analysis the next focus area is Industry Analysis. When the investor is ensured about the growth of economy he has to evaluate various industries and select the most promising industry for identifying investment opportunities. Because in a sound economy it is not necessary that all industries will be sound. Therefore it becomes pertinent to carefully select the growth oriented industries for investment.
  20. 20. MEANING OF INDUSTRY: • An industry is a group of firms that have similar technological structure of production, similar materials, technology manpower skill, and distribution system and produce similar products. They target the same customer segment. Following are the examples of Industries; Banking Industry Software Industry Automobile Industry Cement Industry Steel Industry Paper Industry Aluminum Industry Textiles Industry Rubber Industry Leather Industry Chemical Industry Pharmaceutical Industry
  21. 21. CLASSIFICATION OF INDUSTRY: • Growth Industry • Cyclical Industry • Defensive Industry • Cyclical Growth Industry
  23. 23. INDUSTRY ANALYSIS – ISSUES TO BE ANALYSED • Growth of the Industry • Profitability of the Industry • Nature of the Industry • Degree of competition • Government policy • Manpower • Research and development
  25. 25. MEANING OF COMPANY ANALYSIS • Investors conduct company analysis to evaluate securities, gathering information about the company's profile, products or services and profitability. It is also called fundamental analysis. • Selecting a company will involve an analysis of: • The company’s management • The company’s financial statements • Key drivers for future growth
  26. 26. EVALUATING MANAGEMENT • Strong management is vital for companies to perform in accord with the highest expectations of investors. Unfortunately, evaluating the quality of a company’s management team is very difficult, especially for individual investors. • Professionals have the advantage in that they have many contacts within the industry that are familiar with the management team, and they can visit the company and talk with the team personally.
  27. 27. MEASURING FINANCIAL EARNINGS AND FINANCIAL SOUNDNESS OF COMAPANY: • Analysis of financial statement 1) Comparative financial statement 2) Common size statement 3) Trend analysis 4) Fund flow and cash flow analysis 5) Ratio analysis
  28. 28. FORECASTING EARNINGS OF COMPANY: • Earnings are profits. It may be complicated to calculate, but that’s what buying a company is about. Increasing earnings generally leads to a higher stock price and, in some cases, a regular dividend. 1) The cost and sales 2) Depreciation 3) Depletion of resources 4) Employee cost 5) Currency value 6) Capital structure 7) Efficiency of management
  29. 29. FACTORS AFFECTING COMPANY ANALYSIS: • The core strength of the company • Market share • Growth of the share • Profitability
  30. 30. FINANCIAL INDIACTORS: 1)Balance sheet i) Asset side ii) Liabilities side 2) Ratio Analysis i) profitability ratio ii) Leverage ratio iii) ROI iv) ROE v) Intrinsic value 3) Statement of cash flow i) Cash flow from operating activities ii) Cash flow from investing activities iii) Cash flow from financial activities
  31. 31. NON-FIANCIAL INDICATORS • Business of the company • Top management • Product range • Diversification • Foreign collaboration • Availability of cost of inputs • Research and development • Government regulations • Pattern of shareholding and Listing
  32. 32. TECHIQUES OF COMPANY ANALYSIS: • Regression analysis • Correlation analysis • Trend analysis • Decision tree
  33. 33. GRAHAM AND DODD’S INVESTOR RATIO: • In 1934, David Dodd and Benjamin Graham (Warren Buffett’s teacher) wrote what would later be known as the foundation for value investing. • He wrote about their strategy in a book entitled “Security Analysis”
  34. 34. P = M (D + E + A / 3) Where, P = Share Price M = Earnings of firm paying a normal dividend D = Dividends per share E = Earnings per share A = Adjustment for asset values.
  35. 35. SOME OTHER FORMULA • Earning yield = Earning per share Price per share Dividend yield = Dividend per share Price per share Price earning ratios = Price per share Earning per share
  36. 36. ADVANTAGES OF FUNDAMENTAL ANALYSIS • Hidden Gems • Long term trends • Solid Foundation • Understanding of underlying business model
  37. 37. DISADVANTAGE OF FUNDAMENTAL ANALYSIS: • Detailed knowledge of company, industry and economy • Time consuming • Subjective • Variation in fair value • Analyst bias