Fundamental analysis

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Fundamental analysis

  1. 1. Fundamental analysis Padmini Srinivasan Padmini Srinivasan © iimb Padmini Srinivasan
  2. 2. Types of analysis <ul><li>Technical Analysis </li></ul><ul><ul><li>Charting </li></ul></ul><ul><ul><ul><li>Patterns in Price Behaviour or volume history </li></ul></ul></ul><ul><ul><ul><li>Predict future price movement </li></ul></ul></ul><ul><li>Fundamental analysis </li></ul><ul><ul><li>Determining value without price </li></ul></ul><ul><ul><li>Analyzing and Interpreting the fundamentals </li></ul></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  3. 3. Research analysis <ul><li>Economic Wide factors = 30 - 35 % </li></ul><ul><li>Industry factors = 15 - 20% </li></ul><ul><li>Company Factors = 30 - 35% </li></ul><ul><li>Others = 15 - 20% </li></ul>Padmini Srinivasan © iimb
  4. 4. Fundamental analysis <ul><li>Understanding the Economic Environment </li></ul><ul><li>Analyzing the Industry </li></ul><ul><li>Assessing the projected performance of the Company </li></ul><ul><li>(One must hone the skill needed for the above) </li></ul>Padmini Srinivasan © iimb
  5. 5. Economic Environment <ul><li>Global economic scenario </li></ul><ul><li>Central Government Policy </li></ul><ul><ul><li>Key Variables </li></ul></ul><ul><ul><li>Growth rate of GDP </li></ul></ul><ul><ul><li>Industrial Growth rate, </li></ul></ul><ul><ul><li>Agriculture and Monsoon, </li></ul></ul><ul><ul><li>Savings and investments, </li></ul></ul><ul><ul><li>Price level and inflation, </li></ul></ul><ul><ul><li>Interest rates </li></ul></ul><ul><ul><li>Infrastructure facilities </li></ul></ul>Padmini Srinivasan © iimb
  6. 6. Industry analysis <ul><li>Analyze the prospects of each industry </li></ul><ul><li>Difficult to forecast the future </li></ul><ul><li>Consists of 4 parts </li></ul><ul><ul><li>Sensitivity to the business cycle </li></ul></ul><ul><ul><li>Industry life cycle analysis </li></ul></ul><ul><ul><li>Structure and characteristics </li></ul></ul><ul><ul><li>Profit Potential of the industry </li></ul></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  7. 7. Industry analysis <ul><li>Sensitivity to the business cycle </li></ul><ul><ul><li>Eg: Auto industry vs Pharmaceutical </li></ul></ul><ul><li>Industry life cycle analysis </li></ul><ul><ul><li>What stage of industry eg Start phase, growth phase, maturity or decline stage </li></ul></ul><ul><li>Structure and characteristics </li></ul><ul><ul><li>Profit Potential of the industry </li></ul></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  8. 8. Industry analysis <ul><li>Structure and characteristics </li></ul><ul><ul><li>Nature of competition </li></ul></ul><ul><ul><li>Demand Prospects </li></ul></ul><ul><ul><li>Technology and research </li></ul></ul><ul><li>Profit Potential of the industry </li></ul><ul><ul><li>Porter: Threat of new entrants, Rivalry among existent firms, substitute products , bargaining power of buyers and sellers </li></ul></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  9. 9. Fundamental Analysis <ul><li>To determine the valuation of the share, the analyst must forecast earnings, dividend and the appropriate discount rate </li></ul><ul><li>Earnings potential and the risk are linked to the prospects of the industry and the developments in the macro economy </li></ul>Padmini Srinivasan © iimb
  10. 10. Padmini Srinivasan © iimb Financial Statements Accounting System Measurement & Reporting Business Activities Operating Investment Financing Accounting Environment Capital Market Structure, GAAP,Audit, &Legal system Business Environment Labor Market Capital Market Product Market: Suppliers Customers Accounting Strategy Choice of: Accounting Policy Reporting Format Supplementary- Disclosures Business Strategy Key factors And Risk From Business Activities to Financial Statements
  11. 11. 4 Step Process of analysis <ul><li>Strategy analysis </li></ul><ul><li>Accounting analysis </li></ul><ul><li>Financial analysis </li></ul><ul><li>Prospective Analysis (Growth etc) </li></ul>Padmini Srinivasan © iimb
  12. 12. others <ul><li>Order positions </li></ul><ul><li>Regulatory framework </li></ul><ul><li>Technology capabilities </li></ul><ul><li>HR </li></ul><ul><li>Evaluation of management “mark of a good management is not how it runs its business but how it changes them” </li></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  13. 13. Company Analysis <ul><li>Important parameters for analysis </li></ul><ul><ul><li>EPS of the coming years </li></ul></ul><ul><ul><li>And a reasonable earnings multiple, given the growth prospects, risk exposure and other characteristics of the firm </li></ul></ul><ul><li>For this we need historical data </li></ul><ul><ul><li>Of Earnings, Growth, Risk and Valuation </li></ul></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  14. 14. Earnings Level <ul><li>Return of Equity </li></ul><ul><ul><li>Equity Earnings </li></ul></ul><ul><ul><li>Net worth </li></ul></ul><ul><ul><li>Denoting the earnings for the shareholder </li></ul></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  15. 15. Earnings analysis <ul><li>ROE can be decomposed into </li></ul><ul><li>PAT X Sales X Asset </li></ul><ul><li>Sales Assets NW(SC+RS) </li></ul><ul><li>PBIT X Sales X PBT X PAT X Asset </li></ul><ul><li>Sales Assets PBIT PBT Equity </li></ul><ul><li>Op. eff Asset eff, int , tax, Leverage </li></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  16. 16. Other important calculations <ul><li>Book Value of the share </li></ul><ul><ul><li>Paid up capital / number of shares </li></ul></ul><ul><li>Earnings per share </li></ul><ul><li>PAT / number of Equity shares </li></ul><ul><li>Dividend Payout </li></ul><ul><ul><li>Equity Dividend / PAT </li></ul></ul><ul><li>Dividend per share </li></ul><ul><li>Growth performance of sales and EPS(CAGR) </li></ul><ul><li>Look out for Beta </li></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  17. 17. Growth <ul><li>Look at Growth : Compounded annual growth rate </li></ul><ul><li>Sustainable growth rate without Loans: </li></ul><ul><li>= ROE X retention ratio </li></ul><ul><li>where retention ratio = ( PAT – Dividend) / PAT </li></ul><ul><li>Using this model: we can estimate the stock price as </li></ul>Padmini Srinivasan © iimb
  18. 18. Stock Price Model 1 <ul><li>If Rs. 2 per share is the dividend and 15% is ROE and .6 is the retention ratio, estimate the share price ? </li></ul><ul><li>Price = Div per share / ROE – Growth rate </li></ul><ul><li>= 2 / (.15 -.06) = Rs. 22.22 </li></ul><ul><li>Useful for sensitivity analysis </li></ul>Padmini Srinivasan © iimb
  19. 19. Intrinsic value using PE Ratio <ul><li>Estimate the future EPS </li></ul><ul><li>Based on correct forecasting of the PAT in the future based on growth assumptions etc) </li></ul><ul><li>Establish a PE multiple </li></ul><ul><ul><li>based on last years earnings or trailing 12 month PE or based on some expected earnings also look out for similar companies PE </li></ul></ul><ul><li>Projected EPS X Projected PE = Value Anchor </li></ul><ul><li>Always give a range </li></ul>Padmini Srinivasan © iimb
  20. 20. Strategy for identifying securities <ul><li>Intrinsic Value > Market Value Buy </li></ul><ul><li>Intrinsic Value < Market Value Sell </li></ul><ul><li>Intrinsic Value = Market Value Hold </li></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  21. 21. Some keys to investing <ul><li>Establish Value Anchors </li></ul><ul><li>Assess the market Price behaviour (Psychology) </li></ul><ul><li>Combine fundamental and technical analysis </li></ul><ul><li>Develop sound strategies for growth stocks </li></ul><ul><li>Beware of games operators play </li></ul><ul><li>Take Swift corrective action ie keep stop loss </li></ul><ul><li>Have discipline </li></ul><ul><ul><li>Source: Investment Analysis and Portfolio Management by Prasanna Chandra </li></ul></ul>Padmini Srinivasan © iimb Padmini Srinivasan
  22. 22. Thanks Any Questions Padmini Srinivasan © iimb

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