Fundamental Analysis of stocks is a method to calculate the real worthiness of a stock by analyzing different underlying factors of the stock. Fundamental Analysis helps to calculate intrinsic value of stock Fundamental Analysis is a key strategy to invest in stocks.
Fundamental Analysis
Fundamental analysis guides the investors to pick up right security in
in right industry.
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| Fundamental Analysis of stocks |
The
most common way to analyze shares is through fundamental analysis which is
based on using fundamental data such as facts about the financial state of the
company and its markets to make an estimation of future profits. Fundamental
traders then can evaluate if a share is over- or undervalued.
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| Fundamental Analysis importance |
Fundamental analysis is the examination of the underlying forces that
effect the well being of economy, industry groups and companies. As with most
analysis, the goal is to derive a forecast and profit from future price
movements.
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| Threats & Opportunities to be analysed |
At the company level, fundamental analysis may involve examination of
financial data, management, business concept and competition. At the industry
level, there might be an examination of supply and demand forces for the
products offered. For the national economy, fundamental analysis might focus on
economic data to assess the present and future growth of economy. To forecast
future stock prices, fundamental analysis combines economic, industry and
company analysis to derive a stock’s current fair value .
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| Fundamental Analysis |
Fundamental Analysis
Fundamental Analysis is broken into three distinct
Parts. Viz.
A) Economic
Analysis.
B) Industry
Analysis.
C) Company
Analysis.
A) The
Economic Analysis:
1. The
Political Equation.
2. Foreign
Exchange Reserves
3. Foreign
Exchange Risk
4. Restrictive
Practices.
5. Foreign
Debt and the Balance of Trade
6. Inflation.
7. The
Threat of Nationalization
8. Interest
Rates.
9. Taxation.
10. Government
Policy.
11. Domestic
Savings & its utilization.
12. The
Infrastructure.
13. Budgetary
deficit.
14. Monsoons.
15. Employment.
The
Economic cycle:
Four
stages are……….
1. Depression.
2. Recovery
3. Boom
4. Recession
Ø …………The
Investment Decision.
B) Industry Analysis:
1) Cycle:
i.
Entrepreneurial or nascent stage
ii.
Expansion or growth stage
iii.
Stabilization or Maturity stage
iv.
Decline or Sunset stage.
2) Industry
Vis-à-vis Economy
3) Competition
a) Barrier
to Entry:
i.
Economies of Scale
ii.
Product differentiation
iii.
Capital requirement
iv.
Switching Costs
v.
Access to distribution channels
vi.
Cost disadvantages independent of Scale
vii.
Government policy
viii.
Expect Retaliation
ix.
Cost of capacity additions
b) The
Threat of Distribution
c) Bargaining
power of the Buyers
d) Bargaining
power of Suppliers
e) Rivalry
among competitors
Ø Selecting
an Industry……………
Company
Analysis
Ø Intrinsic Value
1. The
Management
2. The
Company
3. The
Annual Report
4. Ratios
5. Cash
flow
1) The
Management:
i.
Family Management
ii.
Professional Management
2) The
Company:
3) Annual
Report:
a) Directors
Report
b) Auditors
Report
c) Financial
Statements
i.
Balance Sheet
ii.
P&L
A/C
d) Schedules
and Notes to the Accounts
4) Ratios
5) Cash
flow
RATIOS
A)
Profit
and Loss Ratios
1)
Sales to cost
of goods sold
2)
Selling
expenses to sales
3)
Net Profit to
sales
4)
Gross Profit
to sales
B)
Balance Sheet Ratios
1)
Show holders
equity to borrowed funds
2)
Current assets
to current liabilities
3)
Liabilities to
net worth
4)
Debt to assets
5)
Liabilities to
assets
C)
Balance Sheet & Profit and Loss Accounts Ratios
1)
Earnings to
share holders funds
2)
Net income to
assets employed
3)
Sales to stock
4)
Sales to
Debtors
5)
Cost of goods
sold to creditors
D)
Financial statements and market Ratios
1)
Market Value
to Earning
2)
Book Value to
Market Value
Determine………..
a)
Market Valve
b)
Earnings
c)
Profitability
d)
Liquidity
e)
Leverage
f)
Debt service
capacity
g)
Asset
management/ efficiency
h)
Margins
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