Fundamental Analysis
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Transcript of Fundamental Analysis
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 E-I-C Model
Technical Analysis Dow Theory, Price Charts, Moving Averages,
etc.. Efficient Market Theory
Random Walk Theory
Fundamental AnalysisMeaning: 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
ANALYSIS
ANALYSIS
COMPANYANALYSIS
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 AnalysisSensitivity 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 AnalysisStudy 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 Buyers
Threat of Substitute Products
Bargaining power of suppliers