This document discusses fundamental analysis and technical analysis techniques for evaluating stocks. Fundamental analysis examines macroeconomic conditions, industry trends, and company financials to determine a stock's intrinsic value and predict future performance. Technical analysis focuses on analyzing stock price movements and market indicators to identify trends. Key aspects of fundamental analysis covered include economic analysis, industry life cycles, and quantitative/qualitative company analysis using metrics like earnings, cash flows, and management quality.

1. Fundamental Analysis – Risk and Return sources of Risk –
Dividend Policy and valuation – Leverage and
valuation. Technical Analysis - Security price
movements –Market Hypotheses – Behaviour of stock
prices.

2. Fundamental Analysis
Fundamental analysis is a combination of
economic, industry and company analyses,
to obtain a stock’s current fair value and to
predict its future value.

3. Economic Analysis
An analysis of macro economic
environment is essential to understand the
behavior of stock prices. When the level of
economic activity is low, stock prices are
low and vice-versa.

4. Macro Economic Indicators
 Gross Domestic Product: Money value of
the goods and services produces in the
economy during a specific period.
 Growth in GDP  Growth in economy
and business and more returns for the
investors.

5.  Savings and Investments: Higher the savings higher
the investment and higher the GDP.
 Inflation: Higher inflation rate has a negative impact
on the stock market.
a) High raw material cost
b) Non-availability of cheap credit
c) Low earnings
 Interest rates: Base rate, CRR, SLR, Repo rate
 Budget and Fiscal Deficit
 Monsoon and Agriculture
 Infrastructure Facilities

6.  Tax Structure
 Balance of Payments
 FDI
 Investment by FIIs
 Business Cycles and Investor Psychology:
a) Boom : High profit, high turnover, business expansion,
mergers and acquisitions . Investors are optimistic about
the market and the stock market reaches a new high.
b) Recession: Economic growth declines, Fear grips the
market.
c) Depression: Investor becomes pessimistic about the
market and the stock market reaches a low level.
d) Recovery: Economy slowly recovers. The mood
changes to hope and caution.

7. Economic Forecasting
Economic Indicators: Any economic variable that
predicts the future of financial or economic trends.
 Early diagnosis of cyclical movements
 To identify the turning points of business cycles.
 To know the present status, progress /slow down of
the economy.
Classification of Indicators:
 Leading Indicators
 Coincidental Indicators
 lagging Indicators

8. Leading Indicators:
 Indicates what is going to happen in the economy.
 Helps to predict the path of the economy.
 Popular Leading indices- Fiscal policy, Monetary
policy, Capital investment, Stock Indices.
Coincidental Indicators:
 Indicates the state of the economy.
 Popular Coincidental indices- GNP, Industrial
Production, Interest rates and reserve funds.
Lagging Indicators:
 Unemployment rate, Consumer Price Index and flow
of foreign funds.
Diffusion and Composite Indices
Econometric Models

9. Industry Analysis
An analysis of performance, prospects and
problems of an industry of interest is known as
industry analysis.
An industry is a group of firms that have a similar
technological structure of production and
produce similar products.
Kinds of Industries:
 Growth Industry
 Cyclical Industry
 Defensive Industry
 Cyclical growth industry

10. Industry Life Cycle
 Pioneering Stage: Severe competition and only the fittest
company can survive. Tough to select companies for
investment because the survival rate is unknown.
 Rapid Growth Stage : The companies survived the first stage
remain here. Uses improved technology, produces high
quality products. Companies have high earnings and
declare dividends. It is advisable to invest in the companies
of the industry that is in growth stage.
 Maturity and stabilization stage: Less growth rate,
obsolescence in technology. Investors should closely
monitor the events.
 Declining Stage: Growth declines and investment in the
companies lead to loss.

11. Other Factors
 Cost Structure and Profitability
 Nature of the product
 Nature of the competition
 Government Policy
 Labour
 Research and Development
 Pollution Standards

12. Analytical Tools
 SWOT Analysis
 Porter’s Five Force Model:
a) Entry of new competitors
b) Threat of substitutes
c) Suppliers’ Bargaining Power
d) Buyers’ Bargaining Power
e) Rivalry among existing firms

13. Company Analysis
Evaluating the financial performance of a company
on the basis of qualitative and quantitative factors is
called company analysis.
Quantitative
Factors
Value of
the
shares
Business Model
Management
Corporate Governance
Corporate Culture
Earning
Competitive Edge
Financial Leverage
Operational Leverage
Production Efficiency
Qualitative Factors

14. Qualitative Factors
 Business Model : It provides a description of the
company’s operations, mode of revenue generation,
nature of expenses, organization structure, and its
sales and marketing efforts.
 Management: The basic objective of the
management is to attain the stated objectives of the
company for the good of all stakeholders.
 Corporate Governance: Set of systems and practices
put in place by company to ensure accountability,
transparency, and fairness in dealings to safe guard
the interest of the stakeholders.
- Structure of the board of directors
- Financial and Information Transparency
- Corporate Culture

15. Quantitative Factors
Earnings of the company:
 Operating Income
 Non-operating Income
Measurement of Earnings:
 Gross Profit = Sales – Cost of Goods Sold
 EBITTDA= Gross Profit – Operating Expenses
 EBIT = EBITDA – (Depreciation and Amortization)
 EAT = EBIT – Tax
Earning Per Share:
EPS = Net Income – Dividends on Preferred Stock
--------------------------------------------------------
Average Outstanding Shares

16. Factors affecting number of outstanding shares:
Stock options, Conversion of Warrants, Convertible preferred
stock, Bonus and Right issues to existing share holders, Share
split, and reverse share split.
Growth in earnings:
Dupont Analysis: Return on Equity/Equity
Lerner and Carleton Model:
EPS =(1-T)[R+(R-1)L/E] E
----------------------
Number of shares outstanding
R= Return on assets before tax, T-Effective Tax Rate
I- Effective Interest Rate L-Total Liabilities E-Equity
 Utilization of assets in the company
 Margin on sales
 Effective cost of the borrowed funds
 Debt-equity ratio
 Equity base of the company
 Effective Tax Rate

17. Price – Earning Multiples
P/E ratio = Market price per share/Earning per share
 If the current P/E ratio is bigger than the expected
P/E ratio, then the stock is overpriced.
 If the current P/E ratio is smaller than the
expected P/E ration, the stock is underpriced.
 If both are equal, no significant changes in prices
are likely to occur.

18. Financial Leverage
The degree of utilization of borrowed funds in business is
known as financial leverage.
Capital Structure: Proportion of long term debt capital and
equity capital in the company.
 A high usage of debt capital (Financial Leverage)
affect the EPS due to high interest payment.
 Financial leverage is advantageous during boom.
 The debt limit depends on the firm’s earning capacity
and its fixed assets.
Degree of financial leverage (DFL) = % in EPS
--------------- (or)
% in EBIT
DFL = EBIT/(EBIT – Interest)

19. Operating Leverage
If a firm’s fixed costs are a major portion of total
cost, the firm is said to enjoy high degree of
operating leverage.
 A relatively small change in sales result in a large
change in return on equity.

20. Competitive Edge:
 Market Share
 Growth of annual sales
 Stability of annual sales
Production Efficiency: producing maximum output at
minimum cost per unit of output
 Increase in profitability
 Low operational costs
 Optimum use of company resources
Productivity: Relationship between inputs and outputs in a
company
 Unit costs
 Stock levels
 Capacity utilization

21. Financial Statement Analysis
 Comparative Financial Statements
 Trend Analysis
 Common size statement
 Fund Flow Analysis- Utilization of profit, financial
source for dividend/capital expenditure/repayment
of debt, usage of sale proceeds of fixed
assets/share/debentures/fixed deposits
 Cash flow analysis
 Ratio Analysis- Liquidity ratios, Turn over ratios,
Leverage ratios, Profitability ratios, Leverage ratios.