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FUNDAMENTAL ANALYSIS

THREE PHASE ANALYSIS

 ‘EIC’ APPROACH, OR,


 ‘CIE’ APPROACH

TWO SIDES OF THE COIN:


•PERFORMANCE
ANALYSIS •CURRENT TRENDS

•VALUES BASED ON •DEMAND FOR & SUPPLY


BOOKS OF STOCKS IN THE MARKET

•VALUES BASED ON •MARKET BASED ON


INVESTMENT APPROACH INVESTMENT APPROACH

FUNDAMENTAL TECHNICAL ANALYSIS


ANALYSIS
ECONOMIC ANALYSIS

FA 1
KEY ECONOMIC INDICATORS
 LEADING INDICATORS: Predict what is likely to
happen in economy.
Eg. Agricultural production
Corporate profits
Money supply
Credit position etc.
 COINCIDENTAL INDICATORS : Highlights the current
position of the economy
Eg. GDP
Interest rates
Money market rates
Reserve bank funds etc.
 LAGGING INDICATORS: Explains what has already
taken place.
Eg. Large scale unemployment
Outstanding debt
Past interest rates of commercial banks etc.
INDUSTRY ANALYSIS

FA 2
LIFE CYCLE OF AN INDUSTRY
 PIONEERING STAGE
 EXPANSION STAGE
 STAGNATION STAGE
 DECLINING STAGE

INVEST: ?
DISINVEST: ?
SWOT ANALYSIS
SOME ISSUES TO BE ADDRESSED:
1. Are the sales of the industry growing or stagnant?
2. Overall ROI of the industry.
3. What are the important cost component of the
industry and its impact on the performance/
4. Is the industry dominated by one or two major
companies? No. of domestic and multinational players.
5. Impact of taxation – direct or indirect taxes.
6. Is the industry highly competitive?
7. Is the industry fully exploited? Etc.
MARKET STRUCTURE
 Absolute monopoly
 Imperfect competition
 Perfect competition
Competitive Forces And Industry
Profitability
 Michael Porter 5- Force Analysis:
1. Treat of new entrants.
2. Threat of substitutes.
3. The bargaining power of the buyers
4. The bargaining power of suppliers
5. The rivalry among the existing players.
COMPANY ANALYSIS: PART I

FA 3
GENERAL ANALYSIS
 NON-FINANCIAL ANALYSIS:
ASPECTS-
1. History/ promoters and management
2. Technology / foreign collaborations/ Economies of
scale etc.
3. Product range/ marketing/ selling & distribution
4. Industry relations/ productivity etc.
5. Environment
INVESTORS & SWOT ANALYSIS
More opp.
CHAOTIC HIGH INVESTMENT
& less threats

Balanced opp.
& threats
MEDIUM INVESTMENT SITUATION

Less opp. &


DISASTROUS COMPLACENT
More threats
Less strngt. Bal.Strngt More strngt.
More weakness & weakness less weakness
THE ‘S’ CURVE APPROACH OF THE FIRM

 INITIAL PHASE: Distinct features


1. High level of uncertainty regarding markets &
technology
2. Slow rate of sales growth
3. Need for rapid changes in product design &
manufacturing
 GROWTH PHASE: Distinct features
1. Raising demand
2. Greater predictability in/ for the markets
3. Entry of competition.
 MATURITY PHASE: Distinct features
1. Low market growth
2. Relative stability
3. Intense competition
4. Imbalance in capacity related to business cycle.
 DECLINE PHASE: Distinct features
1. Emergence of substitutes leading to a decline in
sales volume.
2. Chronic overcapacity
3. Low or negative industry profits.
 DISCONTINUITY PHASE: Distinct features
1. Ownership transfer
2. New management/ fresh funds
3. Unrelated diversification
4. Turn around- a new & fresh ‘S’ curve emerges.

Q. What should a smart investor do in case of


‘unrelated diversification’?
COMPANY ANALYSIS : PART II

FINANCIAL ANALYSIS : FA 3
RATIOS FOR COMPANY ANALYSIS
EARNINGS & DIVIDEND LEVELS
 ROE

 BV PER SHARE

 EPS

 DIVIDEND PAYOUT RATIO

 DPS

GROWTH PERFORMANCE
 CAGR: SALES, EPS, AND DPS

 SUSTAINABLE GROWTH RATE


RISK EXPOSURE
 BETA

 VOLATILITY OF RETURN ON EQUITY

VALUATION MULTIPLES
 PRICE TO EARNINGS RATIO

 PRICE TO BOOK VALUE RATIO


VALUATION MULTIPLES

The Price / Earnings Ratio


 P/E ratio is the most commonly used metric

worldwide – to compare firms and their valuations.


As is evident, it is the ratio of the firm’s share price
to its earnings per share
 P/E = Price per share / Earnings per share =

Market Capitalization / Earnings


 The ratio is widely used due to its inherent simplicity
– as it captures the price you are paying for every
rupee worth of earnings in a company.
The Drivers

 The P/E ratio depends on a variety of factors –


such as size, risk etc.
 •The safer a business, higher the valuation it
commands. Cyclical companies such as commodity
companies generally have lower P/E ratios. Higher
the perceived risk, lower the P/E the market
attributes to the stock
 •Higher the growth – higher the P/E. High growth
companies will command higher P/E. Higher the
growth, lesser the number of years to get the
returns in investment, and hence higher the multiple
the stock will command.
VALUATION MULTIPLES

P / B = Price per share / Book Value per share =


Market Capitalization / Book Value
 This is useful when earnings are negative – but book
value is positive.
 Also, it is useful when earnings are volatile or can

be manipulated.
 Since this is an accounting measure, it also acts as a
conservative estimate – comparing the price of the
share to the book value of its equity – which is less
distorted on the upside than the market value.
VALUE MULTIPLES

Value Multiples are ratios calculated for the entire


firm rather than just the equity holder
Firm value :
 Firm Value = Market Value of Equity + Market

Value of Debt
 Enterprise Value = Market Value of Equity +

Market Value of Debt – Cash


 The multiples that can be used are EV/ EBITDA , EV
/ Sales and EV / Invested Capital.

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