Fundamental Analysis
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Security Analysis Fundamental Analysis
Security Analysis
Examining the Risk – Return characteristics of individual securities. Determination of the Intrinsic Value of a Security – Equity/Debt.
By forecasting the earnings and dividends/interest expected from the security By choosing a discount rate which reflects the risk of the security.
Strategize investment policy:
Buy under-priced securities and Sell over-priced securities Build the portfolio of your choice
Approaches to Security Analysis
Fundamental Analysis
Technical Analysis
E-I-C Model Dow Theory, Price Charts, Moving Averages, etc..
Efficient Market Theory
Random Walk Theory
Fundamental Analysis Meaning:
It is a logical and systematic approach to estimate 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.
Purpose:
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/economic worth of the share.
Fundamental Analysis E – I – C Frame work ECONOMY
INDUSTRY
COMPANY ANALYSIS
ANALYSIS ANALYSIS
Fundamental Analysis
Researchers have found that stock price changes can be attributed to the following factors:
Economy-wide factors: 30% - 35% Industry factors: 15% - 20% Company factors: 30% - 35% Other factors: 15%- 25%
FA involves a three-step examination, which calls for:
Understanding of the macro- economic environment and developments (Economy Analysis) Analyzing the prospects of the industry to which the firm belongs (Industry Analysis) Assessing the projected performance of the company and the intrinsic value of its share (Company Analysis).
Economy Analysis
A study of the economic variables would give an idea about future corporate earnings and the payment of dividends and interest to investors.
Economy-wide Factors:
Growth rates of the economy
GDP, GNP, NNP
Inflation rate Interest rates Government Revenue, Expenditure and Deficits Exchange rates Infrastructure Monsoon Economic and political stability
Economic Forecasting
The central theme in economic forecasting is to forecast the national income with its various components.
GNP
It is an indicator of the level and rate of growth of economic activities.
Economic Forecasting Techniques
Anticipatory Surveys Barometric or Indicators Approach Leading Indicators Coincidental Indicators Lagging Indicators
Econometric Model Building Opportunistic Model Building or Sectoral Analysis
Industry Analysis
It refers to an evaluation of the relative strengths and weakness of industries. Objective:
To assess the prospects of various industries
Industry Analysis
This section is divided into four parts:
Sensitivity to the Business Cycle Industry Life Cycle Analysis Study of the Structure and Characteristics of an Industry Profit Potential of Industries: Porter Model
Industry Analysis Sensitivity to the Business Cycle
The sensitivity of the firm’s sales to business conditions The Operating Leverage Financial Leverage
Industry Analysis Industry Life Cycle Analysis
To determine the stage of growth through which the industry is passing.
Stages:
Pioneering Stage Rapid Growth or Expansion Stage Maturity or Stagnation Stage Decline Stage
Industry Analysis Study of the Structure and characteristics of an Industry:
Demand and Supply Gap Competitive Conditions in the Industry Permanence Labour Conditions Attitude of Government Supply of Raw Materials Cost Structure
Industry Analysis Profit Potential of Industries: Porter Model
The profit potential of an industry depends on the combined strength of the following 5 basic competitive forces:
Threat of new entrants Rivalry among the existing firms Pressure from substitute products Bargaining power of buyers Bargaining power of sellers
Micheal E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competition, The Free Press, 1980.
Forces Driving Industry Competition
Threat of New Entrants Bargaining power of suppliers
Threat of Substitute Products
Bargaining power of Buyers
Security Analysis
Examining the Risk – Return characteristics of individual securities. Determination of the Intrinsic Value of a Security – Equity/Debt.
By forecasting the earnings and dividends/interest expected from the security By choosing a discount rate which reflects the risk of the security.
Strategize investment policy:
Buy under-priced securities and Sell over-priced securities Build the portfolio of your choice
Approaches to Security Analysis
Fundamental Analysis
Technical Analysis
E-I-C Model Dow Theory, Price Charts, Moving Averages, etc..
Efficient Market Theory
Random Walk Theory
Fundamental Analysis Meaning:
It is a logical and systematic approach to estimate 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.
Purpose:
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/economic worth of the share.
Fundamental Analysis E – I – C Frame work ECONOMY
INDUSTRY
COMPANY ANALYSIS
ANALYSIS ANALYSIS
Fundamental Analysis
Researchers have found that stock price changes can be attributed to the following factors:
Economy-wide factors: 30% - 35% Industry factors: 15% - 20% Company factors: 30% - 35% Other factors: 15%- 25%
FA involves a three-step examination, which calls for:
Understanding of the macro- economic environment and developments (Economy Analysis) Analyzing the prospects of the industry to which the firm belongs (Industry Analysis) Assessing the projected performance of the company and the intrinsic value of its share (Company Analysis).
Economy Analysis
A study of the economic variables would give an idea about future corporate earnings and the payment of dividends and interest to investors.
Economy-wide Factors:
Growth rates of the economy
GDP, GNP, NNP
Inflation rate Interest rates Government Revenue, Expenditure and Deficits Exchange rates Infrastructure Monsoon Economic and political stability
Economic Forecasting
The central theme in economic forecasting is to forecast the national income with its various components.
GNP
It is an indicator of the level and rate of growth of economic activities.
Economic Forecasting Techniques
Anticipatory Surveys Barometric or Indicators Approach Leading Indicators Coincidental Indicators Lagging Indicators
Econometric Model Building Opportunistic Model Building or Sectoral Analysis
Industry Analysis
It refers to an evaluation of the relative strengths and weakness of industries. Objective:
To assess the prospects of various industries
Industry Analysis
This section is divided into four parts:
Sensitivity to the Business Cycle Industry Life Cycle Analysis Study of the Structure and Characteristics of an Industry Profit Potential of Industries: Porter Model
Industry Analysis Sensitivity to the Business Cycle
The sensitivity of the firm’s sales to business conditions The Operating Leverage Financial Leverage
Industry Analysis Industry Life Cycle Analysis
To determine the stage of growth through which the industry is passing.
Stages:
Pioneering Stage Rapid Growth or Expansion Stage Maturity or Stagnation Stage Decline Stage
Industry Analysis Study of the Structure and characteristics of an Industry:
Demand and Supply Gap Competitive Conditions in the Industry Permanence Labour Conditions Attitude of Government Supply of Raw Materials Cost Structure
Industry Analysis Profit Potential of Industries: Porter Model
The profit potential of an industry depends on the combined strength of the following 5 basic competitive forces:
Threat of new entrants Rivalry among the existing firms Pressure from substitute products Bargaining power of buyers Bargaining power of sellers
Micheal E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competition, The Free Press, 1980.
Forces Driving Industry Competition
Threat of New Entrants Bargaining power of suppliers
Threat of Substitute Products
Bargaining power of Buyers
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