FUNDAMENTAL ANALYSIS OF A STOCK

Presented by

Mr Fahim Akhtar, Secretary General Association for investor's awareness

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SCHEME / SEQUENCE

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What fundamental is

Significance of fundamentals

How to analyze a stock

Forming a view / strategy

FUNDAMENTAL

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Fundamental analysis is performed on historical

and present data, but with the goal of making

financial forecast . There are several possible

objectives:To conduct a company stock valuations and predict its probable price evolution, To make a projection on its business performance, To evaluate its management and make internal business decisions

SIGNIFICANCE OF FUNDAMENTALS

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Give true picture

Emotions can be overcome

Growth can be measured

Investment strategy can be formed

Brings professional approach in trade

HOW TO ANALYZE A STOCK

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DATA REQUIRED

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Financial reports both current and historical All current information about company Plans of company currently in implementation Impact of rules or taxation

WHERE DATA IS AVAILABLE

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Company websites

KSE website

Few forums ( discussion forums)

aia websites

WHAT IS IMPORTANT TO SEE

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Balance sheet Income statement Cash Flow statement

BALANCE SHEETBALANCE SHEET

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A summary of a firm’s financial position on

a given date that shows total assets = total

liabilities + owners’ equity.

INCOME STATEMENTINCOME STATEMENT

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A summary of a firm’s revenues and

expenses over a specified period, ending with net

income or loss for the period

CASH FLOWCASH FLOW

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Provides information what actually happening

in business beyond that either contained in balance

sheet or income statement

BALANCE SHEET

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a. How the firm stands on a specific date.

b. What ALF owned.c. Amounts owed by customers.d. Future expense items already

paid.e. Cash/likely convertible to cash

within 1 year.f. Original amount paid.g. Acc. deductions for wear and

tear.

a. How the firm stands on a specific date.

b. What ALF owned.c. Amounts owed by customers.d. Future expense items already

paid.e. Cash/likely convertible to cash

within 1 year.f. Original amount paid.g. Acc. deductions for wear and

tear.

Cash $ 90 Acct. Rec.cc 394 Inventories 696 Prepaid Exp d d 5 Accum Tax Prepay 10

Current AssetsCurrent Assetsee $1,195 $1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329)

Net Fix. AssetsNet Fix. Assets $ 701 $ 701 Investment, LT 50 Other Assets, LT 223

Total AssetsTotal Assets bb $2,169 $2,169

ALI Fert Balance Sheet (thousands) Dec. 31, 20011ALI Fert Balance Sheet (thousands) Dec. 31, 20011a

ALI FERT – ASSET SIDE

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a. Note, Assets = Liabilities + Equity.

b. What ALF owed and ownership position.

c. Owed to suppliers for goods and services.

d. Unpaid wages, salaries, etc.e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.

a. Note, Assets = Liabilities + Equity.

b. What ALF owed and ownership position.

c. Owed to suppliers for goods and services.

d. Unpaid wages, salaries, etc.e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.

Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxes d d 16 Other Accrued Liab. d d 100 Current Liab.Current Liab. ee $ $ 500 500 Long-Term Debt f f

530 Shareholders’ Equity Com. Stock ($1 par) g g

200 Add Pd in Capital g g

729 Retained Earnings h h 210 Total Total EquityEquity $ $1,1391,139 Total Liab/EquityTotal Liab/Equitya,ba,b $2,169 $2,169

ALI fert Balance Sheet (thousands) Dec. 31, 2011ALI fert Balance Sheet (thousands) Dec. 31, 2011

ALI FERT – LIABILITIES SIDE

a. Measures profitability over a time period.

b. Received, or receivable, from customers.

c. Sales comm., adv., officers’ salaries, etc.

d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for

shareholders.

a. Measures profitability over a time period.

b. Received, or receivable, from customers.

c. Sales comm., adv., officers’ salaries, etc.

d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for

shareholders.

Net Sales $ 2,211 Cost of Goods Sold bb 1,599

Gross Profit $ 612 SG&A Expenses c c 402 EBITd $ 210 Interest Expensee 59 EBT f f $ 151 Income Taxes 60

EATg $ 91 Cash Dividends 38 Increase in REIncrease in RE $ 53 $ 53

Statement of Earnings (in thousands) for Year Ending Statement of Earnings (in thousands) for Year Ending December 31, 2011December 31, 2011a

INCOME STAEMENT

CurrentCurrent

Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities

For ALI Fert December 31, 2007

CurrentCurrent

Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities

For ALI Fert December 31, 2007

Shows a firm’s ability to cover its current

liabilities with its current assets.

Balance Sheet Ratios

Liquidity Ratios

$1,195$1,195$500$500 = 2.392.39

LIQUIDITY RATIO

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ALF Industry

2.39 2.15

2.26 2.09

1.91 2.01

ALF Industry

2.39 2.15

2.26 2.09

1.91 2.01

Year

2011

2010

2009

Current RatioCurrent Ratio

Ratio is stronger than the industry average.

LIQUIDITY RATIO COMPARISION

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Acid-Test (Quick)Acid-Test (Quick)

Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities

For ALF December 31, 2007

Acid-Test (Quick)Acid-Test (Quick)

Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities

For ALF December 31, 2007

Shows a firm’s ability to meet current liabilities

with its most liquid assets.

Balance Sheet Ratios

Liquidity Ratios

$1,195 - $696$1,195 - $696$500$500

= 1.001.00

LIQUIDITY RATIO

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ALF Industry

1.00 1.25

1.04 1.23

1.11 1.25

ALF Industry

1.00 1.25

1.04 1.23

1.11 1.25

Year

2007

2006

2005

Acid-Test RatioAcid-Test Ratio

Ratio is weaker than the industry average.

LIQUIDITY RATIO COMPARISION

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• Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.

• Note that this industry has a relatively high level of inventories.

• Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.

• Note that this industry has a relatively high level of inventories.

RatioRatio ALFALF IndustryIndustry

Current 2.39 2.15

Acid-Test 1.00 1.25

SUMMARY

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• Cash generated by company is sufficient for expansion strategy

• Stock holders wants to know if company can pay dividends

• Suppliers knows they will get their credit supplies paid• Investors wants to evaluate future growth potentials

• Cash generated by company is sufficient for expansion strategy

• Stock holders wants to know if company can pay dividends

• Suppliers knows they will get their credit supplies paid• Investors wants to evaluate future growth potentials

WHY CASH FLOW IS IMPORTANT

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• Cash flow from operating activities• Cash flow from investing activities• Cash flow from financing activities

• Cash flow from operating activities• Cash flow from investing activities• Cash flow from financing activities

FORMAT OF CASH FLOW

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• Find consistent growth• Watch gain in income• Cash flow is to be seen critically• If all these factors do not support try to find and

ascertain reason•

• Find consistent growth• Watch gain in income• Cash flow is to be seen critically• If all these factors do not support try to find and

ascertain reason•

FORMING A STRATEGY

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QUESTIONS

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