Fundametal AnalysisApna Sapna Money-Money

EEB 2

Money doesn't create man but it is the man who created money.

-Warren Buffet

Fundamental Analysis

By:ArunBalasubramanianNikhilViral

•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 7-month 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

• Cash Ratio=Cash+cash equivalents+Invested funds/current liabilities

• Gross profit Margin• Operating profit Margin• Net profit Margin

• Current Ratio=Current Asset/current Liabilities

• Quick Ratio=Cash & equivalent+short-term Investment+ a/c receivable/Current Liabilities

• Return on capital employed=net income/capital employed

• Debt ratio=total liabilities/total asset

• Return on Asset=Net Income/Avg total Asset

• Return on equity=net income/avg shareholder’s equity

• Cash flow to debt ratio=Operating Cash Flow/Total debt

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

• Debt-equity ratio=total liabilities/shareholder’s equity

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

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

Beta0=no corelation to market+ve=follows market-ve=inversely follows

market

• 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

Thank You