Fundametal Analysis

Apna Sapna Money-Money

Money doesn't
create man
but it is the
man who
created
money.
-Warren Buffet
EEB

Fundamental Analysis

By:
Arun
Balasubramanian
Nikhil
Viral

So, you want be a stock analyst?

Fundamental analysis is the cornerstone of investing.
The goal of presentation is to provide a foundation for
understanding fundamental analysis. It's geared primarily
at new investors who don't know a balance sheet and an
income statement.
You will have a much more solid grasp of the language
and concepts behind security analysis and be able to use
this to further your knowledge in other areas without
feeling totally lost.

What is Fundamental Analysis?

Fundamental analysis is the examination of the underlying

forces that affect the well being of the economy, industry
groups, and companies.
As with most analysis, the goal is to derive a forecast and
profit from future price movements.
To forecast future stock prices, fundamental analysis
combines economic, industry, and company analysis to
derive a stock's current fair value and forecast future value.
If fair value is not equal to the current stock price,
fundamental analysts believe that the stock is either over or
under valued and the market price will ultimately gravitate
towards fair value.

Economic Forecast-Macro level

First and foremost in a top-down
approach
would
be
an
overall
evaluation of the general economy.
The economy is like the tide and the
various industry groups and individual
companies are like boats. When the
economy expands, most industry
groups and companies benefit and
grow. When the economy declines,
most sectors and companies usually
suffer. Many economists link economic
expansion and contraction to the level
of interest rates. Interest rates are
seen as a leading indicator for the
stock market as well. As an example a
chart of the S&P 500 and the yield on
the 10-year note over the last 30
years is given. Although not exact, a
correlation between stock prices and
interest rates can be seen. Once a
scenario for the overall economy has
been developed, an investor can break
down the economy into its various
industry groups.

Economic analysis

GDP
Inflation
Interest Rate
Budget
Balance of payment
Monsoon and Agriculture

Industry Group Selection

If the prognosis is for an expanding economy, then certain groups are

likely to benefit more than others.
An investor can narrow the field to those groups that are best suited to
benefit from the current or future economic environment.
Many times it is more important to be in the right industry than in the right
stock!
The chart below shows that relative performance of 5 sectors over a 7month time frame. As the chart illustrates, being in the right sector can
make all the difference.

Industry Analysis

Growth Industry
Cyclical Industry
Product of industry-household or other industries
Labor
Market share

Narrow Within the Group

How do the companies rank according to

market share, product position and competitive
advantage?
Who is the current leader and how will changes
within the sector affect the current balance of
power?
A comparative analysis of the competition
within a sector will help identify those
companies with an edge, and those most likely
to keep it.

Company Analysis
With a shortlist of companies, an investor might
analyze the resources and capabilities within
each company to identify those companies that
are capable of creating and maintaining a
competitive advantage.
We do two types of company analysis
Qualitative Analysis.
Quantitative Analysis.

Qualitative Company Analysis

Management
Product of company

Quantitative Analysis

 Current
Ratio=Current
Asset/current
Liabilities

Cash
Ratio=Cash+cash
equivalents+Invest
ed funds/current
liabilities

Quick Ratio=Cash &

equivalent+shortterm Investment+
a/c
receivable/Current
Liabilities

Gross profit Margin

Operating profit
Margin
Net profit Margin

 Return on
Asset=Net
Income/Avg total
Asset

Return on capital
employed=net
income/capital
employed

Return on
equity=net
income/avg
shareholders
equity

Debt ratio=total
liabilities/total
asset

 Debt-equity
ratio=total
liabilities/sharehold
ers equity

Cash flow to debt

ratio=Operating
Cash Flow/Total
debt

Capitalization
Ratio=Long term
debt/long term
debt+shareholder
s equity

Price/Book value
ratio=stock prices
per
share/shareholder
s equity per share

 Price/Cash Flow
ratio=stock price
per share/OCF per
share

Price/Earnings
Ratio=stock price per
share/EPS
EPS=Net Income-dividend
on preferred stock/avg
outstanding share

Price/Sales
Ratio=share price
per share/Revenue
per share

Beta
0=no corelation to
market
+ve=follows market
-ve=inversely
follows market

Thank You