Unit-III

Security Analysis
• Security analysis is about valuing the
asset, debt, warrants, and equity of the
companies from the outside investors
using publically available information.
• Security analysis is useful in
understanding the price fluctuations of
the securities and behavior pattern of the
market.
Approach to Security Analysis

Security
Analysis

Fundamental Technical
Analysis Analysis

Economic Industry Company

analysis Analysis Analysis
 Fundamental Analysis
• It helps the investor formulate expectation
about the future performance of the company
and the stock.
• It is based on the assumption that the share
price is determined by the fundamental factors
like economy, industry and company.
• Fundamental analysis consists of detailed
analysis of the factors affecting the
performance of company.
 Technical Analysis
• It mainly focuses on the market internal data
and determines the short term price
movements of the securities.
• It identifies and recognizes the trend that
comes to an end when prices start moving in
the opposite direction.
• It can used as an supplement to the
fundamental analysis.
 Classification of Fundamental
Analysis

Fundamental
Analysis

Economic Industry Company

Analysis Analysis Analysis
 Economic Analysis
• Economic analysis is the study of current
and future economic conditions.
• The share price of the company depends
on the performance of the industry and
the economy.
• The future corporate earnings and the
payment of the dividend and the interest
duly depends on the economic factors.
Economic Analysis

GDP

Economic
R&D Inflation
Factors

Agricultur
e
 Industry Analysis
• It is an analysis of homogeneous group of
firms engaged in similar business.
• The performance of the company depends on
the performance of the industry to which it
belongs.
• So the industry analysis should include the
fundamental factors affecting the growth
prospects of the company.
Industry Analysis
Demand &
Supply

Raw
Cost
Structure Factors Material &
Labor

Attitude of
Government
 Industry Analysis
• Industries are found to be in key sector, core
sector and export sector.
• One must invest in those industries which has
demand for whole years and not seasonally.
• The correct time to buy the shares of the
company is during the recovery period so that
a small investor can gain from his investment.
 Company Analysis
• It is the study of those variables which
influence the future of the company both
quantitatively and qualitatively.
• Company analysis involves scrutiny of the
company’s financial and non-financial aspects
with view to identify its SWOT.
• It is also the analysis of the earnings and the
efficiency of the company and the future
prospectus of the shareholders.
Company Analysis (Cont..)
Capital
Structure

Management Factors Profitability

Accounting
policy
 Economic Indicators

Economic
Indicators

Leading Coincidental Lagging

 Leading Indicator
• Help us to account the future course of action
Fiscal Policy
Monetary Policy
Stock Prices
Labor Productivity
GNP
 Coincidental Indicator
• Industrial Position
• Corporate Profit
• Whole sale Price index
• Producer price index
 Lagging Indicator
• Consumer Price Index
• Capital Expenses
• Capitalization Rates
• Flow of foreign funds
 Economic
Forecasting

Long Term Intermediate Short Term

(5-15 years) (3-5 years) (0-3 years)
 Economic Forecasting
• Surveys
• Economic Indicators
• Diffusion Index
• Econometric Model Building
• Opportunistic Model Building
 Classification of Industry
• Manufacturing
• Transportation
• Public Utility
• Plantation
• Sugar
• Miscellaneous Engineering
• Electricity Generation etc.
 Factors of Industry Analysis
• Technology
• Competitive Pressure
• Economic Environment
• Customer Activity
Stages Of Industry Development

Pioneering
Stage

Expansion
Stage

Stagnation Stage
 Company Analysis Tools
• Basic financial statement are the tools for
company analysis
Income Statement
Balance Sheet
Statement of Change in financial position
must be correct, complete, consistent,
comparable.
 Income Statement
When income statement is analyzed there are
certain items which requires particular
attention
• Industry Cost Methods (LIFO& FIFO)
• Depreciation
• Earning from regular operation
• EPS
 Balance Sheet
The following should b concerned more
Original cost of the asset
Book value of the share
Change in capital structure
Depreciation Method
The change in financial position between the
accounting period gives an idea of changes in
working capital, funds from operation-
source& application of funds, Cash Flow
Statement
 Company Analysis Cont…
Other Factors
Dividend yield on Equity share & Preference
share
EPS
P/E Ratio
Stock Value& Par Value
Market Value& Book Value
BEP Analysis
Source of information for company
analysis
• Annual Report
• Financial Dailies
• Directories
• Stock Exchange Directories
• Kotharies Industrial Directory of India
• Times of India Directories
Ratios in Analyzing Performance
• Ratios signifies the relationship between two
related figures.
• It is the most appropriate tool to analyze the
performance.
 Ratios in Analyzing Performance

Ratios

Liquidity Profitability Leverage Activity Financial

Turnover
Solvency
Ratio
 Valuation Models
• Valuation models are first laid down by
Timbergen and Williams
• Valuation models are developed to
calculate share prices and to find out the
relationships between dividends and
interest rates.
• They were further developed by Dodd,
Bodenhorn, Solomon and Miller.
 Factor affect the value of a
Company
• Competitive Edge
• Earnings
• Capital Structure
• Management
• Operating Efficiency
• Operating Leverage
• Financial Analysis
Competitive Edge Management
Market Share Ability to get along with
Growth of Share people
Stability of Sales Leadership
Sales Forecast Analytical Competence
Earnings Industry
Change in Sales& Cost Operating Efficiency
Debt Method Low operating ratio to
meet growing demand
Depletion of resources
Operating Leverage
Inventory A/C Method
Financial Analysis
Wages, Salaries
Balance Sheet
Income Sources
P&L A/C
 Technical Analysis
• Technical Analysis will help to make decisions
when to buy and sell
• Timing of investment is therefore, a vital
importance for trading in the stock market
• Technical analysis consider that it is waste of
time to look in the intrinsic value of the share
for analyzing
According to Technical Analysis the prices are
determined by the following manner
• Demand & Supply of Securities in the market
• Consider the past behavior and find out the
history of price movement
• Make useful projection of price movement
and determine the future price
• Typical Charts are made for making prediction
• Charts are used to find out the total broad
spectrum of the market
 Assumption of technical analysis
• Market value of Security depends on Demand
and Supply factors of the market
• Both Rational and irrational factors which
determines the price
• Movement will in a particular direction for
some length of time
• The above trend is continued until the is a
change in the supply and the demand