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SECURITY ANALYSIS

Complete Financial Solutions

FUNDAMENTAL
ANALYSIS
 FUNDAMENTAL ANALYSIS

Fundamental analysis is the study of economic, industry, and
company conditions in an effort to determine the value of a company's
stock.

Involves analyzing the company’s financial statements and health, its

management and competitive advantages and its competitors and
markets.

There are several possible objectives:

 to conduct a company stock valuation and predict its probable price
evolution,
 to make projection on its business performance,
 to evaluate its management and make internal business decisions,
 to calculate its credit risk.
 STEPS IN FUNDAMENTAL ANALYSIS

Geographical Analysis

Economy Analysis

Industry Analysis

Company Analysis

APPROACHES USED:

Top-down Approach

Bottom-up Approach
 1. GEOGRAPHICAL ANALYSIS
Based on:

 Topography

 Size EMEA
NAR
 Location APAC

 Climate LAC

 Natural resources

 Cost effectiveness
 2. ECONOMY ANALYSIS

The stock market does not operate in a vacuum. To get an
insight into the complexities of the stock market , one needs to
develop a sound economic understanding and be able to
interpret the impact of important economic indicators on stock
markets.

Economic analysis is a process whereby strengths and

weaknesses of an economy are analyzed.
 ECONOMIC ANALYSIS FACTORS

Gross Domestic Product (GDP)

Industrial Production

Inflation

Exchange Rate

Interest Rates

Unemployment Rate

Capital Account Deficit

Government Policy (Monetary & Fiscal)

Consumer Sentiment
 ECONOMIC INDICATORS
Economists use three types of indicators that provide data on the
movement of the economy as the business cycle enters different
phases.

LEADING COINCIDENT LAGGING

Yield curve slope Employees on Non Average Duration of

Agricultural Payrolls Unemployment
Stock Prices Industrial Production Ratio of Trade
Inventories to Sales
Money Supply Manufacturing and Change in Consumer
Trade Scales Price Index for services
 ECONOMIC FORECASTING

Economic forecasting is the process of making predictions
about the economy.

It may be:
1. Short term forecast – upto 3 years
2. Intermediate forecast – 3-5 years
3. Long term forecast – more than 5 years

Forecasting Techniques:
1. Anticipatory surveys
2. Barometric or Indicator Approach
3. Economic Model Building Approach
1. Anticipatory Surveys

It is a survey of expert opinions of those prominent in the

government, business, trade and industry.

Generally it incorporates expert opinion with construction

activities, plant and machinery expenditure, level of
inventory, etc.

It may also include the opinion or future plans of consumers

regarding their spending
2. Barometric Or Indicator Approach

In this approach, various economic indicators are studied to

find out how the economy is likely to behave in the future.

These indicators are classified as:

1. Leading indicators

2. Coincident indicators

3. Lagging indicators
3. Economic Model Building Approach

In this approach the forecaster makes use of various

independent and dependent variables.

He must specify the relationship between these variables.

Assumptions should be clearly stated.

It yields a definite forecast figure based on precisely stated

factors.

Gives the direction and also the magnitude.

 3. INDUSTRY ANALYSIS

OBJECTIVES:

 To understand how industry structure drives competition, which

determines the level of industry profitability

 To assess industry attractiveness

 To forecast future profitability

 To identify key success factors

 PORTER’S FIVE FORCE MODEL

 The five forces are environmental forces that impact on a

company’s ability to compete in a given market.

 They determine the attractiveness of a market i.e., the overall

industry profitability.

 The purpose of five-forces analysis is to diagnose the principal

competitive pressures in a market and assess how strong and
important each one is.
The Five Forces:
1. THREAT OF NEW ENTRANTS

 Economies of Scale

 Product Differentiation
Entry  Capital Requirements
Barriers
 Switching Costs

 Access to Distribution Channels

 Customer loyalty to established

Eg. – Power Industry brands

 Government Policy
2. BARGAINING POWER OF SUPPLIERS

Threatening to
 raise prices or
 reduce quality

Bargaining
Suppliers are likely to be profitable if:

Power of  Supplier industry is dominated by
Suppliers few firms
 Supplier products have few
substitutes
 Supplier products are differentiated

Eg. Auto ancillary  Supplier products have high

industry switching costs
3. BARGAINING POWER OF BUYERS

Compete with supplier industry by:

Bargaining  Bargaining down prices

Power of
 Forcing higher quality
Buyers

 Eg. FMCG Industry

4. THREAT OF SUBSTITUTE PRODUCTS

Buyer propensity to substitute

Relative price performance of
substitutes
Threat of
Buyer switching costs

Substitutes
Perceived level of product

differentiation

Products with improving
performance relative to present
industry products

Eg. Electronic products

5. RIVALRY AMONG COMPETITORS
o Occurs when a firm is pressured or
sees an opportunity

Rivalry
among
o Price competition often leaves the
competitors entire industry worse off

o Advertising battles may increase

total industry demand, but may be
Eg. Telecom Industry
costly to smaller competitors
Cutthroat competition is more likely to occur when:

Numerous or equally balanced competitors

Slow growth industry

High fixed cost

High storage cost

Lack of differentiation

Diverse competitors

High exit barriers

 BUSINESS CYCLE
The economy recurrently experiences periods of expansion and
contraction, although the length and depth of those cycles can be
irregular. This recurring pattern of recession and recovery is
called the Business Cycle.

Stages in Business Cycle:

Expansion

Peak

Contraction

Trough
 STAGES IN BUSINESS CYCLE

Expansion
Contraction
• Production up • Production down
• Employment up • Employment down

Peak
Recession
• Production highest • Trough
• Employment highest • Production lowest
• Inflationary pressures • Employment lowest
(demand more than supply)
The direction in which an economy is heading has a significant
impact on companies’ performance and ability to deliver earnings.
 SENSITIVITY OF INDUSTRIES TO BUSINESS CYCLE

Cyclical Industries
Defensive Industries

• Have above average • Have little sensitivity to the
sensitivity to the state of the business cycle.
economy • Outperform others when
• Outperform other industries economy enters recession.

Eg. Durable goods industries Eg. Food producers and

like: processors
Automobile industry Pharmaceutical firms
Capital goods industry
 INDUSTRY LIFE CYCLE

Industry Life Cycle consists of the stages of evolution through

which an industry progresses as it moves from conception to
stabilization and stagnation.

The stage in which a particular industry (and thus, a firm within

the industry) currently exists plays a major role in the way
investors view its future.
Stages in Industry Life Cycle:

 Introduction
 Growth
 Maturity
 Decline

The industry life cycle helps investors to assess the

growth potential of different companies in an industry.
 4. COMPANY ANALYSIS

Balance sheet analysis

Technical analysis
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