FUNDAMENTAL ANALYSIS

 

•    FUNDAMENTAL ANALYSIS 
FUNDAMENTAL OF INVESTMENT
SAPM
DR. SHASHI AGGARWAL

•    MEANING OF FUNDAMENTAL ANALYSIS

1.       FUNDAMENTAL ANALSYIS ATTEMPT TO MEASURE A SECURITY ‘S INTRINSIC VALUE BY EXAMINING RELATED ECONOMIC AND FINANCIAL FACTORS WHICH CAN BE BOTH QUANLITATIVE AND QUANTITAITVE IN NATURE.

2.      

FUNDAMENTAL ANALYSIS IS PRIMARILY CONCERNED WITH DETERMINING THE INTRINSIC VALUE OR THE VALUE OF THE SECURITY. THE INTRINSIC VALUE IS THEN COMPARED WITH THE SECURITY’S CURRENT MARKET PRICE TO DTERMINE THE WHETHER THE STOCK IS UNDER PRICED OR OVER PRICES. A FUNDAMENTAL ANALYSTS CALCULATES A RANGE OF INTRINSIC VALUES RATHER THAN A SINGLE VALUE.

 

•    INTRINSIC VALUE

•    NARROW VIEW: INVESTMENT VALUE AND INVESTMENT VALUE OF SECURITY IS THE PRESENT VALUE OF ALL FUTURE CASH PAYMENTS TO BE MADE ON THE SECURITY. CASH PAYMENT MAY BE IN ANY FORM E.G DIVIDEND.INTEREST,REPAYMENT OF THE PRINCIPAL AMOUNT,LIQUIDATION PROCESS

•    INTRINSIC VALUE OF THE SHARE MUST BE DETERMINED USING ALL MAJOR FACTORS:-

1.       THE EARNING OF THE COMPANY

2.       GROWTH RATE AND RISK EXPOSURE OF THE COMPANY

3.       THESE FACTORS DEPEND ON THE ECONOMIC ENVIRONMENT AND THE INDUSTRY TO WHICH IT BELONG

•    FUNDAMENTAL ANALYSIS

1.       ECONOMIC ANALYSIS

2.       INDUSTRY ANALYSIS

3.       COMPANY ANALYSIS

•    ECONOMIC ANALYSIS

•    THE LEVEL OF ECONOMIC ACTIVITY HAS AN IMPACT ON INVESTMENT IN MANY WAYS:

1.       IF THE ECONOMY GROWS RAPIDLY,THE INDUSTRY CAN ALSO BE EXPECTED TO SHOW RAPID GROWTH AND VICE VERSA

2.       WHEN THE LEVEL OF ECONOMIC ACTIVITY IS LOW STOCK PRICES ARE LOW AND WHEN THE LEVEL OF ECONOMIC ACTIVITY IS HIGH,STOCK PRICES ARE HIGH

3.       THE ANALYSIS OF MACRO ECONOMIC ENVIRONMENT IS ESSENTIAL TO UNDERSTAND THE BEHAVIOR OF STOCK PRICES

•    MACRO ECONOMIC FACTORS:-

•                GROSS DOMESTIC PRODUCT (GDP): GDP INDICATES THE RATE OF GROWTH OF THE ECONOMY. GDP CONSISTS OF PERSONAL CONSUMPTIONS EXPENDITURE, GROSS PRIVATE DOMESTIC INVESTMENT AND GOVERNMENT ON GOODS AND SERVICES AND NET EXPORT OF GOODS AND SERVICES. THE ESTIMATES OF GDP ARE AVIALBLE ON ANNUAL BASIS. THE GROWTH RATE OF THE ECONOMY IS HIGH THEN IT INDICATES THE FUTURE PROPSPECTS OF THE ECONOMY

•    SAVING AND INVESTMENT: - GROWTH REQUIRES INVESTMENT WHICH IN TURN REQUIRS SUBSTANTIAL AMOUNT OF SAVING. THE SAVING AND INVESTMENT PATTERN OF THE PUBLIC AFFECT THE STOCK TO A GREAT EXTENT.

•    THE INFLATION:-ALONG WITH THE GROWTH OF GDP, THE INFLATION RATE ALSO INCREASES THEN REAL RATE OF GROWTH WOULD BE VERY LITTLE. HIGH RATE OF INFLATION IS HARMFUL

•    INTEREST RATES: - ALSO AFFECTS THE COST OF FINANCING TO THE FIRMS. A DECREASE IN THE INTEREST RATE IMPLIES LOWER COST AND VICE VERSA. AVAILABILITY OF CHEAP FUNDS, ENCOURAGES SPECUALTION AND RISE IN THE MARKET PRICE OF THE SHARES.

•    BUDGET:-PROVIDES AN ELABORATE ACCOUNT OF THE GOVERNEMENT REVENUE AND EXPENDITURE. A DEFICIT BUDGET MAY LEADS TO HIGH RATE OF INFLATION AND ADVERSELY AFFECT THE COST OF PRODUCTION, SURPLUS BUDGET MAY RESULT IN DEFLATION. BALANCED BUDGET IS HIGHLY FAVOURABLE TO THE STOCK PRICES

•    THE TAX SRUCTURE

•    THE BALANCE OF PAYMENT:-BALANCE OF PAYMENT IS MEASURE OF THE STRENGTH OF RUPEE ON EXTERNAL ACCOUNT. IF THE DEFICT INCREASES THE VALUE OF THE RUPEE WILL DEPRECEATE. THE INDUSTRIES INVOLVED IN IMPORT AND EXPORT WILL BE AFFECTED BY IT.

•    MONSOONS AND AGRICULTURE:-A GOOD MONSOON LEADS TO HIGHER DEMAND AND IT WILL BRING BOOMNESS IN THE STOCK MARKET

•    INFRASRTUCUTURE FACILITY: A WIDE NET WORK OF INFRASTURCUTUR WILL BRING PROSPERITY IN THE ECONOMY

•    DEMOGRAPHIC FACTORS: PROVIDE DETAILS ABOUT THE POPULATION BY AGE, OCCUPATION, LITERACY AND GEOGRAPHIC LOCATION.NEEDED TO FORECAST THE DEMAND FOR CONSUMER GOODS. THE POPULATION BY AGE INDICATES THE AVIALABILTY OF ABLE WORK FORCE.

 

•    ECONOMIC FORECASTING

1.       ANALYSE THE MACRO ECONOMIC ENVIRONMENT AND FACTORS

2.       THE ECONOMIC ACTIVITIES AFFECT THE CORPORATE PROFIT,INVESTOR ATTITUDE AND THE SHARE PRICES

•    TECHNIQUES USED FOR ECONOMIC FORECASTING

1.       ECONOMIC INDICATORS

2.       DIFFUSION INDEX

3.       ECONOMETRIC  MODEL BUILDING

•    ECONOMIC INDICATORS

FACTORS THAT INDICATE THE PRESENT STATUS, PROGRESS OR SLOW DOWN OF THE ECONOMY.

THE ECONOMIC INDICATORS ARE GROUPED INTO

1.       LEADING

2.       COINCIDENTIAL

3.       LAGGING INDEX

•    THE INDICATORS ARE SELECTED ON :

1.       ECONOMIC SIGNIFICANCE

2.       STATISTICAL ADEQUACY

3.       TIMING

4.       CONFORMITY

•    LEADING INDICATORS

•    INDICATE WHAT IS GOING TO HAPPEN IN THE ECONOMY

•    POPULAR LEADING INDICATORS:

1.       FISCAL POLICY

2.       MONETARY POLICY

3.       PRODUCTIVITY

4.       RAINFALL

5.       CAPITAL INVESTMENT AND STOCK INDICES

•    THE COINCIDENTIAL  AND THE LAGGING INDICATORS

1.       INDICATE WHAT THE ECONOMY IS. THESE ARE GROSS NATIONAL PRODUCT,INDUSTRIAL PRODUCTION ,INTEREST RATE AND RESERVE FUND

2.       THE CHANGES THAT ARE OCCURING IN THE LEADING AND COINCIDENTIAL INDICATORS ARE REFLECTED IN THE LAGGING INDICATOR

3.       IDENTIFIED ARE UNEMPLOYMENT RATE, CONSUMER PRICE INDEX.

•    DIIFUSTION INDEX

1.       IS COMPOSITE OF LEADING,COINCIDENTIAL AND LAGGING INDICATORS

2.       COSNTRUCTED BY NATIONAL BUREAU OF ECONOMIC RESEARCH

3.       REPRESENTS AS THE PERCENTAGE OF COMPONENTS THAT HAS CHANGED OVER A GIVEN SPAN OF TIME

4.       IDENTIFICATION OF BUSINESS CYCLES AND BUSINESS CYCLES TURNING POINTS

•    ECONMETRIC MODEL BUILDING

1.       ASSUMPTIONS ARE SPECIFIED

2.       MATHEMATICAL MODEL DEVELOP TO MEASURE THE RELATIONSHIP BETWEEN DEPENDENT AND INDEPENDENT VARIABLES

3.       USE SIMULTANEOUS EQUATION

 

 

•    INDUSTRY ANALYSIS

•    AN INDUSTRY IS GROUP OF FIRMS THAT HAVE SIMILAR TECHNOLOGICAL STRUCTURE OF PRODUCTION AND PRODUCE SIMILAR PRODUCTS. FOR THE CONVENIENCE OF THE INVESTOR, THE BROAD CLASSIFICATION OF THE INDUSTRY IS GIVEN IN THE FINANCIAL DAILIES AND MAGAZINES.

•    UNDERSTANDING THE INDSUTRY IN WHICH A COMPANY OPERATES PROVIDES AN ESSENTIAL FRAMEWORK FOR THE ANALYSIS OF THE INDIVIDUAL COMPANY.

•    AN INDUSTRY ANALYSIS CONSISTS OF THREE MAJOR ELEEMENTS:-

1.       THE UNDERLYING FORCES AT WORK IN THE INDUSTRY

2.       THE OVERALL ATTARACTIVENESS OF THE INDUSTRY

3.       THE CRITICAL FACTORS THAT DETERMINE A COMPANY’S SUCCESS WITH IN THE INDUSTRY

•    NEED OF INDUSTRY ANALYSIS

1.       MARKET SHARE

2.       INDUSTRY GROWTH POTENTIAL

3.       REGULATION

4.       COMPETIVE FORCES

5.       LABOUR SITUATION

6.       GOVERNMENT ATTITUDE

7.       COMPARION OF INDUSTRY

•    CLASSIFICATION OF INDUSTRY ON THE BUSINESS CYCLE

•    GROWTH INDUSTRY:-

1.       HIGH RATE OF EARNING

2.       GROWTH IN EXPANSION

3.       INDEPENDENT OF BUSINESS CYCLE

4.       DEPENDS ONTECHNOLOGICAL CHANGE

§ CYCLICAL INDUSTRY:-THE GROWTH AND PROFITABILITY OF THE INDUSTRY MOVE ALONG WITH THE BUSINESS CYCLE. DURING BOOM PERIOD THEY ENJOY GROWTH AND DURING DEPRESSION THEY SUFFER A SET BCK

•    DEFENSIVE INDUSTRY:-DEFIES THE MOVEMENT OF THE BUSINESS CYCLE. FOOD INDUSTRY WITHSTAND RECESSIION AND DEPRESSION, THE STOCK OF THE DEFENSIVE INDUSTRIES CAN BE HELD BY THE INVESTOR FOR INCOME EARNING PURPOSE. THEY EXPAND AND EARN INCOME IN THE DEPRESSION PERIOD TOO.

•    CYCLICAL GROWTH INDUSTRY:- NEW TYPE OF INDUSTRY THAT IS CYCLICAL AND AT THE SAME TIME GROWING

•    INDUSTRY LIFE CYCLE

•    ATTRIBUTED TO JUILUS GRODENSKY

•                PIONEERING STAGE

•                RAPID GROWTH STAGE

•                MATURITY AND STABAILISATION STAGE

•                DECLINING STAGE

•    INDUSTRY LIFE CYCLE

•    PIONEERING STAGE

1.       DEMAND IS PROMISING BUT TECHNOLOGY IS LOW

2.       DEMAND ATTRATCS MANY PRODUCERS

3.       INTENSE COMPETITION

4.       TRY TO DEVELOP BRAND NAME,DIFFERNETIATION OF THE PRODUCT,PRODUCT IMAGE

5.       NON PRICE COMPEITION

•    RAPID GROWTH STAGE

1.       APPEARNCE OF SURVIVING FIRMS

2.       IMPROVEMENT IN TECHNOLOGY

3.       STABLE GROWTH RATE AND DECLARATION OF DIVIDEND

•    MATURITY AND STABILISATION STAGE

1.       MODERATE GROWTH RATE

2.       SYMPTOMPS OF OBSOLSCENCE

3.       INNOVATION

4.       CLOSE MONITOR OF THE INVESTOR

•    DECLINING STAGE

1.       DEMAND AND EARNING DECLINE

2.       GROWTH WILL BE LOW BETTER TO AVOID INVESTING

•    FACTORS

1.       GROWTH OF THE INDUSTRY: ANALYSIS OF HISTROICAL PERFORMANCE

2.       COST STRUCTURE AND PROFITABILITY:FIXED AND VARIABLE COST

3.       NATURE OF THE PRODUCT: CONSUMER GOODS,INTERMEDIATE GOODS AND PRODUCER GOODS

4.       GOVERNMENT POLICY

5.       LABOUR

6.       RESEARCH AND DEVELOPMENT

7.       NATURE OF THE COMPETITION

8.       SWOT ANALYSIS

•    COMPANY ANALYSIS

•    COMPANY ANALYSIS IS A STUDY OF THE VARIABLES THAT INFLUENCE THE FUTURE OF FIRM BOTH QUALITATIVELY AND QUANTITATIVELY

•    METHOD OF ASSESSING THE COMPEITIVE POSITION OF A FIRM ITS EARNING AND PROFITABILITY

•    THE EFFICIENCY WITH WHICH IT OPERATES, IT’S FINANCIAL POSITION AND ITS FUTURE WITH RESPECT TO THE EARNING OF THE SHAREHOLDERS.

•    THE FUNDAMENTAL NATURE OF THIS ANALYSIS IS THAT EACH SHARE OF COMPANY HAS AN INTRINSIC VALUE WHICH IS DEPENDENT ON COMPANY’S FINANCIAL PERFORMANCE,QUALITY OF THE MGMT AND RECORD OF ITS EARNING AND DIVIDEND.

•    FINANCIAL INDICATORS

•    THE BASIC APPROACH IS ANALYSED THROUGH THE FINANCIAL STATEMENTS OF THE ORGANIZATION

1.       INCOME STATEMENTS

2.       BALANCE SHEET

3.       STATEMENT OF CHANGES IN THE FINANCIAL POSITION

§ USEFUL FOR INVESTORS,CREDITORS, AS WELL AS INTERNAL MGMT OF THE COMPANY

§ STATEMENT MUST BE CLEARLY JUDGED TO JUDGE TO KNOW THEY ARE CORRECT,COMPLETE,CONSISTENT AND COMPARABLE

§ ACCURACY OF THE FINANCIAL STATEMENTS SHOULD BE JUDGED IF IT IS CERTIFIED BY CA IN PRACTICE

•    FINANCIAL INDICATORS

•    INCOME STATEMENT:-KEY FINANCIAL STATEMENT FOR JUDGING MANAGEMENT’S PERFORMANCE

•    BEST METHOD OF FINDING OUT THE FUTURE OF THE FIRM

•    PAST RECORD BECOMES A BASE FOR MAKING PREDICTION

1.       EARNING FROM REGULAR OPERATION

2.       INVENTORY COST METHOD: FOR EVALUATING INVENTORY

3.       DEPRECIATION: THE RATE AND METHOD USED FOR DEPRECIATION

4.       MATCHING PRINCIPLES:-EXPENSES SHOULD BE SHOWN IN THE SAME YEAR AS THE REVENUE TO WHICH THEY ARE RELATED.

•    EARNING PER SHARES : EARNING AVAILABALE TO EQUITY SHAREHOLDER/NUMBER OF EQUITY SHARES

•    BALANCE SHEET:-SHOWS THE ASSETS,LIABILITES AND OWNER’S EQUITY IN A COMPANY, IT ALSO PROVIDES INFORMATION IN THE FOOTNOTE:

1.       TAXES,DIVIDEND AND OTHER CONTINGENT LIABILITES

2.       THE BASIS OF VALUATION OF ASSETS

3.       DEPRECIATION METHODS

4.       CHANGES IN ACCOUNTING PRINCIPLES AND TECHNIQUES

5.       CHANGES IN CAPITALISATION

•    STATEMENT OF CHANGES IN FINANCIAL POSITION: MOVEMENT OF FUNDS.SOURCES AND APPLICATION OF THE FUNDS

•    RATIO ANALYSIS:-

1.       RETURN ON INVESTMENT

2.       PRICE EARNING RATIO

3.       EARNING PER SHARE

4.       DEBT EQUITY RATIO

•    NON FINANCIAL INDICATORS

1. BUSINESS OF THE COMPANY: WELL ESTABLISHED OR NOT
2. MANAGEMENT:
3. MARKET SHARE OF THE COMPANY
4. PRODUCT RANGE
5. DIVERSIFICATION AND EXPANSION POLICY
6. FOREIGN COLLABORATION 
7. RESEARCH AND DEVELOPMENT
8. GOVERNMENT POLICY

•    TOOLS FOR COMPANY ANALYSIS

•    THE CHOICE OF INVESTMENT DEPENDS:

1.       EXPECTATION ABOUT THE COMPANY’S FUTURE PERFORMANCE

2.       THE STAGE OF BUSINESS CYCEL THAT IS COMPANY IS UNDERGOING

3.       DEMAND FOR COMPANY’S PRODUCTS

4.       LEVEL OF COMPETITION

5.       UNDERSTNDING THE COMPETTIVE ENVORNMENT

•    MICHAEL PORTER ‘S FIVE FORCES MODEL

1.       THREAT OF NEW ENTRANT

2.       RIVALRY AMONG EXISTING FIRMS

3.       PRESSURE FROM SUBSTITUTE PRODUCTS

4.       BARGAINING POWER OF BUYERS

5.       BARGAINING POWER OF SELLERS