Fundamental analysis uses economic and financial analysis to predict stock price movements. It involves studying factors like a company's financial reports, industry comparisons, and broader economic changes. The typical approach involves analyzing the overall economy, the relevant industry, the specific company, and determining the company's stock value. Main indicators studied include economic data like inflation, interest rates, and consumer spending.

1. FUNDAMENTAL ANALYSIS
The definition of Fundamental Analysis
Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict
the movement of stock prices.
The fundamental information that is analyzed can include a company's financial reports, and non-
financial information such as estimates of the growth of demand for competing products, industry
comparisons, and economy-wide changes.
In otherwords,Fundamental analysisisthe studyof economic,industry,andcompanyconditionsinan
efforttodetermine the value of acompany'sstock.Fundamental analysistypicallyfocusesonkey
statisticsina company'sfinancial statementstodetermine if the stockprice iscorrectlyvalued.
I realize thatsome people will findadiscussiononfundamental analysiswithinabookon technical
analysispeculiar,butthe twotheoriesare notasdifferentasmanypeople believe.Itisquite popularto
applytechnical analysis tochartsof fundamental data,forexample,tocompare trendsininterestrates
withchangesinsecurityprices.Itisalsopopularto use fundamental analysistoselectsecuritiesand
thenuse technical analysistotime individual trades.Evendiehardtechnicianscanbenefitfroman
understandingof fundamentalanalysis(andvice versa).
Interpretation
Most fundamental informationfocusesoneconomic,industry,andcompanystatistics.The typical
approach to analyzingacompanyinvolvesfourbasicsteps:
1. Determine the conditionof the general economy.
2. Determine the conditionof the industry.
3. Determine the conditionof the company.
4. Determine the value of the company'sstock.
Economic Analysis
The economyisstudiedtodetermine if overall conditions are goodforthe stock market.Isinflationa
concern?Are interestrateslikelytorise orfall?Are consumersspending?Isthe trade balance
favorable?Isthe moneysupplyexpandingorcontracting?These are justsome of the questionsthatthe
fundamental analystwouldasktodetermine if economicconditionsare rightforthe stockmarket.
Industry Analysis
The company's industryobviouslyinfluencesthe outlookforthe company.Eventhe beststockscan post
mediocre returnsif theyare inan industrythatisstruggling.Itis oftensaidthata weakstock ina strong
industryispreferabletoa strongstock ina weakindustry.
Company Analysis
Afterdeterminingthe economicandindustryconditions,the companyitself isanalyzedtodetermine its
financial health.Thisisusuallydone bystudyingthe company'sfinancial statements.Fromthese

2. statementsanumberof useful ratioscanbe calculated.The ratiosfall underfive maincategories:
profitability,price,liquidity,leverage,andefficiency.When performingratioanalysisonacompany,the
ratiosshouldbe comparedto othercompanieswithinthe same orsimilarindustrytogeta feel forwhat
isconsidered"normal."Atleastone popularratiofromeachcategoryisshownbelow.
Main Strategy
To a fundamentalist,the marketprice of astock tendsto move towardsitsintrinsicvalue.If the intrinsic
value of a stock is above the current market price, the investor would purchase the stock, and if the
intrinsic value of a stock was below the market price, the investor would sell the stock.
To start a fundamentalistmakesanexaminationof the currentandfuture overall healthof the economy
as a whole. In this step you should attempt to determine the direction and level of interest rates.
Afteryouanalyzedthe overall economythenanalyze firmsindividually. You should analyze factors that
give the firm a competitive advantage in its sector such as management experience, history of
performance, growth potential, low cost producer, and etc.
General Stepsto Fundamental Evaluation
Eventhoughthere isno one clear-cutmethod,abreakdownispresentedbelowinthe orderaninvestor
mightproceed.Thismethodemploysatop-downapproachthatstarts withthe overall economyand
thenworksdownfromindustrygroupsto specificcompanies.Aspartof the analysisprocess,itis
importantto rememberthatall informationisrelative.Industrygroupsare comparedagainstother
industrygroupsandcompaniesagainstothercompanies.Usually,companiesare comparedwithothers
inthe same group.For example,atelecomoperator(Verizon)wouldbe comparedtoanothertelecom
operator(SBCCorp),not to an oil company(ChevronTexaco).
Intrinsicvalue (fair value).
Before we getanyfurther,we have to addressthe subjectof intrinsicvalue.One of the primary
assumptionsof fundamental analysisisthatthe price onthe stock marketdoesnot fullyreflectastock’s
“real”value.Afterall,whywouldyoube doingprice analysisif the stockmarketwere alwayscorrect?In
financial jargon,thistrue value isknownasthe intrinsicvalue.Forexample,let’ssaythata company’s
stock wastradingat $20. Afterdoingextensivehomeworkonthe company,youdetermine thatit really
isworth $25. In otherwords,youdetermine the intrinsicvalue of the firmtobe $25. Thisisclearly
relevantbecause aninvestorwantstobuystocks that are tradingat pricessignificantlybelow their
estimatedintrinsicvalue.Thisleadsusto one of the secondmajorassumptionsof fundamental analysis:
ECONOMY ANALYSIS
INDUSTRY ANALYSIS
COMPANY ANALYSIS

3. inthe longrun,the stock marketwill reflectthe fundamentals.There isnopointinbuyingastockbased
on intrinsicvalue if the price neverreflectedthatvalue.Nobodyknowshow long“the longrun”reallyis.
It couldbe days or years.Thisiswhat fundamental analysisisall about.Byfocusingona particular
business,aninvestorcanestimate the intrinsicvalue of afirmand thusfindopportunitieswherehe or
she can buy at a discount. If all goeswell,the investmentwillpayoff overtime asthe marketcatches up
to the fundamentals.The bigunknownsare:1) You don’tknow if your estimate of intrinsicvalue is
correct; and 2) You don’tknowhowlongit will take forthe intrinsicvalue tobe reflectedinthe
marketplace.
In simple words,the actual value of asecurity,asopposedtoits marketprice or bookvalue isknownas
an intrinsicvalue of stock.The intrinsicvalue includesothervariables suchasbrandname, trademarks,
and copyrights thatare oftendifficulttocalculate andsometimesnotaccuratelyreflectedinthe market
price.One wayto lookat it isthat the market capitalization isthe price (i.e.whatinvestors are willingto
pay forthe company) andintrinsicvalue isthe value (i.e.whatthe companyisreally worth).Different
investorsuse differenttechniquestocalculate intrinsicvalue.
The procedure commonlyusedbyinvestmentanalyststoestimate the intrinsicvalueof astock tradedin
the stock marketconsistsof the followingsteps:
# Estimate the expectedearningspershare of the stock.
# Establishaprice earningmultiplier(orP/Eratio).
# Developavalue anchoranda value range .(EPSx P/E RATIO)
Buy decision:
Market price > intrinsicvalue =don’t‘buy
Market price < intrinsicvalue =Buy
Economy analysis
Economicanalysisprovidesasystematicapproachto answeringthe economicquestions.Economic
indicators are some of the mostvaluable toolsinvestorscanplace intheirarsenals.Consistentintheir
release,wideintheirscope andrange,metricssuchas the ConsumerPrice Index (CPI)andwritten
reportslike the "beige book"are free forall investorstoinspectandanalyze.Policymakers,most
notablythose atthe Federal Reserve,use indicatorstodetermine notonlywhere the economyisgoing,
but howfastit's gettingthere.
What is an economicindicator?
In itssimplestform,anindicatorcouldbe consideredanypiece of informationthatcanhelpan investor
decipherwhatisgoingonin the economy.The U.S.economyisessentiallyalivingthing;atanygiven
moment,there are billionsof movingparts - some acting,othersreacting.Thissimple truthmakes
predictionsextremelydifficult - theymustalways involvealarge numberof assumptions,nomatter
whatresourcesare putto the task. But withthe helpof the wide range of economicindicators,investors
are betterable togaina betterunderstandingof variouseconomicconditions.

4. TYPES OF INDICATORS
An indicatorisanythingthatcan be usedto predictfuture financial oreconomictrends.Forexample,
the social and economicstatisticspublishedbyaccreditedsourcessuchasU.S.governmentdepartments
are indicators.Popularindicatorsincludeunemploymentrates,housingstarts,inflationaryindexesand
consumerconfidence.Official indicatorsmustmeetcertainsetcriteria;there are three categoriesof
indicators,classifiedaccordingtothe typesof predictionstheymake.
Leading- These typesof indicatorssignal future events.Thinkof how the ambertrafficlightindicates
the comingof the redlight.Inthe worldof finance,leadingindicatorsworkthe same waybutare less
accurate than the streetlight.Bond yields are thoughttobe a goodleadingindicatorof the stockmarket
because bondtradersanticipate andspeculate trendsinthe economy(eventhoughthey aren'talways
right).
Lagging- A laggingindicatorisone that followsanevent.Backtoour trafficlightexample:the amber
lightisa laggingindicatorforthe greenlightbecause ambertrailsgreen.The importance of alagging
indicatorisitsabilitytoconfirmthata patternisoccurring or aboutto occur. Unemploymentisone of
the most popularlaggingindicators.If the unemploymentrate isrising,itindicatesthatthe economy
has beendoingpoorly.
Coincident- These indicatorsoccurat approximatelythe same time asthe conditionstheysignify.Inour
trafficlightexample,the greenlightwouldbe acoincidental indicatorof the associatedpedestrianwalk
signal.Ratherthanpredictingfuture events,thesetypesof indicatorschange atthe same time as the
economyor stockmarket.Personal income isacoincidental indicatorforthe economy:highpersonal
income rateswill coincide withastrongeconomy.
Main Macroeconomic Indicators
Macroeconomicindicators are statisticsthatindicate the currentstatusof the economyof a state
dependingonaparticulararea of the economy(industry,labormarket,trade,etc.).Theyare published
regularlyata certaintime by governmentalagenciesandthe private sector.
In truth,these statisticshelpForex tradersmonitorthe economy'spulse;thusitisnotsurprisingthat
these are religiouslyfollowedbyalmosteveryone inthe financialmarkets.Afterpublicationof these
indicatorswe can observe volatilityof the market.The degree of volatilityisdetermineddependingon
the importance of an indicator.Thatis whyitis importanttounderstandwhichindicatorisimportant
and whatit represents.
 Interest Rates Announcement
Interestratesplaythe mostimportantrole inmovingthe pricesof currenciesinthe foreign
exchange market.Asthe institutionsthatsetinterestrates,central banksare therefore the
mostinfluential actors.Interestratesdictate flowsof investment.Since currenciesare the
representationsof acountry’seconomy,differencesininterestratesaffectthe relative worthof
currenciesinrelationtoone another.Whencentral bankschange interestratestheycause the
forex markettoexperiencemovementandvolatility.Inthe realmof Forex trading,accurate
speculationof central banks’actionscanenhance the trader'schancesfor a successful trade.

5.  GrossDomestic Product (GDP)
The GDP isthe broadestmeasure of a country'seconomy,andit representsthe total market
value of all goodsand servicesproducedinacountryduringa givenyear.Since the GDP figure
itself isoftenconsideredalaggingindicator,mosttradersfocusonthe two reportsthat are
issuedinthe monthsbefore the final GDPfigures:the advance reportandthe preliminary
report.Significantrevisionsbetweenthesereportscancause considerable volatility.
 ConsumerPrice Index
The ConsumerPrice Index (CPI) isprobablythe mostcrucial indicatorof inflation.Itrepresents
changesinthe level of retail pricesforthe basicconsumerbasket.Inflationistieddirectlytothe
purchasingpowerof a currencywithinitsbordersandaffectsitsstandingonthe international
markets.If the economydevelopsinnormal conditions,the increaseinCPIcanleadto an
increase inbasicinterestrates.This,inturn,leadstoan increase inthe attractivenessof a
currency.
 EmploymentIndicators
Employmentindicatorsreflectthe overall healthof aneconomyorbusinesscycle.Inorderto
understandhowaneconomyisfunctioning,itisimportanttoknow how manyjobsare being
createdor destructed,whatpercentage of the workforce isactivelyworking,andhow many
newpeople are claimingunemployment.Forinflationmeasurement,itisalsoimportantto
monitorthe speedatwhichwagesare growing.
 Retail Sales
The retail salesindicatorisreleasedona monthlybasisandisimportanttothe foreignexchange
trader because itshowsthe overall strengthof consumerspendingandthe successof retail
stores.The reportis particularlyusefulbecause itisatimelyindicatorof broadconsumer
spendingpatternsthatisadjustedforseasonal variables.Itcan be usedto predictthe
performance of more importantlaggingindicators,andtoassessthe immediate directionof an
economy.
 Balance ofPayments
The Balance of Paymentsrepresentsthe ratiobetweenthe amountof paymentsreceivedfrom
abroad andthe amountof paymentsgoingabroad.Inother words,itshowsthe total foreign
trade operations,trade balance,andbalance betweenexportandimport,transferpayments.If
comingpaymentexceedspaymentstoothercountriesandinternational organizationsthe
balance of paymentsispositive.The surplusisafavorable factorforgrowth of the national
currency.
 GovernmentFiscal and Monetarypolicy
Stabilizationof the economy(e.g.,full employment,control of inflation,andanequitable
balance of payments) isone of the goalsthat governmentsattempttoachieve through
manipulationof fiscal andmonetarypolicies.Fiscal policyrelatestotaxesandexpenditures,
monetarypolicytofinancial marketsandthe supplyof credit,money,andotherfinancial assets.

6. Conclusion:There are many economicindicators,andevenmore private reportsthatcan be usedto
evaluate the fundamentalsof forex.It'simportant totake the time to notonlylookat the numbers,but
alsounderstandwhattheymeanandhow theyaffecta nation'seconomy.
INDUSTRY ANALYSIS
Industryanalysisisatype of investmentresearchthatbeginsbyfocusingonthe statusof an industryor
an industrial sector.Whyisthisimportant?Eachindustryisdifferent,andusingone cookie-cutter
approach to analysisissure tocreate problems. Imagine,forexample,comparingthe P/Eratioof a tech
companyto that of a utility.Because youare,ineffect,comparingapplestooranges,the analysisisnext
to useless.
What is Industry Stock Analysis?
Industryanalysisisthe analysismade inaspecificsectororindustry.Thiscomparestostock analysis
whichisthe researchprovidedona particularcompanyand stock,or macroeconomicanalysiswhich
analyzesthe fundamentalsof aspecificcountry.Industryanalysisinvestigatesthe general fundamentals
of the equitieswithinthe industrybutmore importantlyinvestigatesthe state of external factorsand
howtheyshouldaffectthe particularindustryorsubsector.Differentmacroeconomicdataandother
statisticshave a particularbearingoncertainindustriesandanalystsgauge tosee how these datawill
affectthem.Furthermore industryanalystsalsoinvestigate the level of demandsuchasconsumertastes
and supplysuch as competitionwithinthe industryandhow stockpricesshouldgetaffectedbythem.
Whythe needfor Industry Analysis?
Many analystssuggestthatresistingthe businesscycle isfutile.Forthe simple reasonthatmostprices
are governedbylarge financial institutionsthatbuyandsell the majorityof the volume of stocksand
these institutionsgenerallygiveaveryheavyweightingtothe performance orthe expected
performance of a specificindustry.Aftermarketrisk,thisisthe mostinfluential factorinthe
performance of a stock.
To summarize there are tworeasonswhyindustryanalysisisimportant.1.Generallythe performanceof
a companyis a functionof the performance of the industry.Forexample if raw material inaparticular
industryhas gone up thenall the companiesinthe industrywill getaffected.2.Psychological reasons.If
an industrysuddenlygetsinvogue orif a suddenchange inthe newsisperceivedtobe goodor bad for
an industrythe price of the stock will be affectedmainlyfromwhatthe average investorbelievesand
mostinvestorswill followindustrytrends.
How are IndustriesBrokenDown?
Industriesare brokendownbygroupsandsubgroups.Differentbenchmarkindiceswhichtrackstocks
withinacountry have differentlevelsof narrownesstodefine the differentsectorsorindustries.
Narrowingdownindustrieshasitsadvantagesanddisadvantages.The advantagesare thatitwill be a lot
easiertopicka stockfrom a specificindustry,especiallyif one were todevelopalong/shortposition
withthe purpose of removingindustryandmarketrisk.The disadvantage isthatif one islimitedbythe
amountof capital one hasto investitwill be verydifficulttocreate a diversifiedportfoliobecause there
are toomany industriestolearn.

7. TYPES OF INDUSTRY O THE BASIS OF INDUSTRY CYCLE
(Industry Cycle Vs Economic Cycle)
A specificindustrycycle isnotnecessarilythe same asthe businesscycle.
1. Countercyclical Industry: Veryoftena specificindustrywill outperformor evendrive inthe opposite
directiontothe general economiccycle.Forexample pharmaceutical stocksare generallyresistantto
the businesscycle.Mostindividualsbuydrugsforthe sole purpose of curingillness,forthisreasonwe
cannot assume thatthere will be muchcorrelationbetweendemandformedicine andthe economy.For
thisreasonas a recessionapproaches,pharmaceutical supermarketandhousingstocksare the generally
recommendedindustries.These industriesare termedas“countercyclical”.
2. Cyclical Industry:A type of an industrythatissensitive tothe businesscycle,suchthatrevenuesare
generallyhigherinperiodsof economicprosperityandexpansion,andlowerinperiodsof economic
downturnandcontraction.Companiesincyclical industriescandeal withthistype of volatilityby
implementingcutstocompensationsandlayoffsduringbadtimes,andpayingbonusesandhiringen
masse ingood times.Cyclical industriesinclude thosethatproduce durable goodssuchasraw materials
and heavyequipment.Forexample,the airlineindustryisafairlycyclical industry;ingoodeconomic
times,peoplehave more disposableincome and,therefore,theyare more willingtotake vacationsand
make use of airtravel.Conversely,duringbadeconomictimes,people are muchmore cautiousabout
spending.Asaresult,theytendtotake more conservative vacationsclosertohome (if theygoat all)
and avoidexpensiveairtravel.
Techniques of industrial analysis:
1. Porter's5 ForcesAnalysis:
The model originatedfromMichael E.Porter's1980 book"Competitive Strategy:Techniquesfor
AnalyzingIndustriesandCompetitors."Since then,ithasbecome afrequentlyusedtool foranalyzinga
company'sindustrystructure anditscorporate strategy.
In hisbook,Porteridentifiedfivecompetitive forcesthatshape everysingleindustryandmarket.These
forceshelpusto analyze everythingfromthe intensityof competitiontothe profitabilityand
attractivenessof anindustry.Figure 1showsthe relationshipbetweenthe differentcompetitive forces.

8. Threat of New Entrants - The easieritisfornew companiestoenterthe industry,the more cutthroat
competitionthere will be.Factorsthatcan limitthe threatof new entrantsare knownas barriersto
entry.Some examplesinclude:
 Existingloyaltytomajorbrands
 Incentivesforusingaparticularbuyer(suchas frequentshopperprograms)
 Highfixedcosts
 Scarcity of resources
 Highcosts of switchingcompanies
 Governmentrestrictionsorlegislation
Power ofSuppliers - Thisis howmuchpressure supplierscanplace on a business.If one supplierhasa
large enoughimpactto affecta company'smarginsandvolumes,thenitholdssubstantialpower.Here
are a fewreasonsthatsuppliersmighthave power:
 There are veryfewsuppliersof aparticularproduct
 There are no substitutes
 Switchingtoanother(competitive) productisvery costly
 The product isextremelyimportanttobuyers - can't do withoutit
 The supplyingindustryhasahigherprofitabilitythanthe buyingindustry
Power ofBuyers - Thisis howmuch pressure customerscanplace ona business.If one customerhas
a large enoughimpactto affecta company'smarginsand volumes,thenthe customerholdsubstantial
power.Here are a fewreasonsthatcustomersmighthave power:
 Small numberof buyers
 Purchaseslarge volumes
 Switchingtoanother(competitive) productissimple
 The product isnot extremelyimportanttobuyers;theycandowithoutthe
productfor a periodof time
 Customersare price sensitive
AvailabilityofSubstitutes - What is the likelihoodthatsomeone will switchtoa competitiveproduct
or service?If the cost of switchingislow,thenthisposesaseriousthreat.Here are a few factorsthat
can affectthe threat of substitutes:
 The main issue isthe similarityof substitutes.Forexample,if the price of coffee
risessubstantially,acoffee drinkermayswitchovertoa beverage like tea.
 If substitutesare similar,itcanbe viewedinthe same lightasa new entrant.
Competitive Rivalry- Thisdescribesthe intensityof competitionbetweenexistingfirmsinan
industry.Highlycompetitive industriesgenerallyearnlow returnsbecause the costof competitionis
high.A highlycompetitive marketmightresultfrom:
 Many playersof aboutthe same size;there isnodominantfirm
 Little differentiationbetweencompetitorsproductsandservices

9.  A mature industrywithverylittlegrowth;companiescanonlygrow by stealing
customersawayfromcompetitors
2. Industry lifecycle:
an industry life cycle can be classifiedinto4stages:
Start-up stage in whichgrowthisextremelyfast, consolidationstage inwhichgrowthisnotas fast as
start-upstage but isfasterthan the general economy, maturitystage inwhichgrowthisnot fasterthan
the general economyandthe relative decline stage inwhichthe growthrate is lessthanthat of general
economy.
( Stagesin Industry LifeCycle)
1. Start-Up Stage
Newtechnologieslike personal computersorwirelesscommunicationportraythe initial stagesof an
industry.Atthisstage,itis verydifficulttoanticipate whichfirmswill succeed;some firmswill be atotal
successwhile some mightfail completely.Hence,the riskinvolvedinselectinganyspecificfirminthe
industryisquite highatthisstage.
However,atthisstage,since the newproducthas notyet floodeditsmarket,there will be arapid
growthin salesandearningsatindustrylevel.Like,forexample,in1980’s, personal computerswere a
part of veryfewhouses,while onthe otherhand,productslike fansorevenrefrigeratorswere partof
almosteveryhousehold.Sonaturally,the growthrate of productslike refrigeratorswill be muchless.
2. ConsolidationStage
Once the product has proveditself inthe market,several leadersinthe industrystartsurfacing.The
start-upstage survivorsbecome more stable andmarketshare canbe easilyenvisaged.Thus,the
performance of the industryingeneral will be more minutelytrackedbythe performance of the firms
that have survived.Asthe productbreaksthroughthe marketplace andis usedcommonly,the growth
rate of the industryisstill fasterthanthe restof economy.

10. 3. Maturity Stage
The product has attainedthe full aptitudetobe consumedatthisstage by the users.So,any growth
fromthispointjusttracks the growthof the economyingeneral.Atthisstage,asthe productgets more
and more standardized,itcompelsthe producerstocompete heavilyonprice basis.Asaresult,the
profitmarginsare loweredandaddto the pressure onprofits.Most often,firmsatthisstage are
referredtoas cash cows as theircash flowsare quite consistentbutofferverylittle opportunityfor
growthof profit.Insteadof reinvestingthe cashflowsinthe company,theyare best milked from.
4. Relative Decline
In thisstage followingfeaturesare identified.
• costsbecome counter-optimal
• salesvolume declineorstabilize
• prices,profitabilitydiminish
• profitbecomesmore achallenge of production/distributionefficiencythanincreasedsales.
MAIN FACTORS TO BE CONSIDERED DURING THE INDUSTRY ANALYSIS:
Capital Requirements
The capital costs of gettingestablishedinanindustrycanbe so large as to discourage all butthe largest
companies.The duopolyof BoeingandAirbusinlarge passenger jetsisprotectedbythe huge capital
costs of establishingR&D,production,and service facilitiesforsupplyingthese planes.Similarywiththe
businessof launching commercial satellites:the costsof developingrocketsandlaunchfacilitiesmake
new entryhighlyunlikely.Inotherindustries,entrycostscanbe modest.One reason whythe e-
commerce boomof the late 1990s endedinfinancial disasterformost participantsisthatthe initial
setupcostsof newinternet-basedventureswere typically verylow.Acrossthe servicesectormore
generally,startupcostsare still such thatindividual,self-financingentrepreneurscanenter.For
example,inthe hamburgerbusiness,franchise costsfora restaurantare around $350,000 fora Wendy’s
and about$1 millionforaBurger King.
Economiesof Scale
In industriesthatare capital orresearchor advertisingintensive,efficiencyrequires large-scale
operation.The problemfornewentrantsisthattheyare facedwiththe choice of eitherenteringona
small scale andacceptinghighunitcosts,or entering ona large scale and runningthe riskof
underutilizedcapacitywhiletheybuildup salesvolume.Inautomobiles,itisgenerallyreckonedthatto
be a low-costproducer, salesof overfourmillionvehiclesayearare necessary.These economiesof
scale have deterredentryintothe industrysothatthe onlynew entrantsinrecentdecadeshave

11. beenstate-supportedcompanies(e.g.,Protonof MalaysiaandMaruti of India) or companiesthat
gambledthatlowinputcostswouldoffsettheirscale inefficiency (e.g.,SamsungandSsangyongof
Korea,bothof whichwere inacute difficultyby 2000). The mainsource of scale economiesisnew
productdevelopmentcosts.Thus, developingandlaunchinganew model of car typicallycostsover$1.5
billion.Similarly inpassengerjets,the $20 billionrequiredtodevelopAirbus’sproposedA380
superjumbo meansthatsalesof over800 planesare necessarytobreakeven.Once Airbus had
committedtothe project,thenBoeingwaseffectivelyexcludedfromthe superjumbo segmentof the
market.
AbsoluteCost Advantages
Apart fromeconomiesof scale,establishedfirmsmayhave acost advantage overentrants simply
because theyenteredearlier.Absolute costadvantagesoftenresultfromthe acquisitionof low-cost
sourcesof raw materials.Saudi Aramco’saccesstothe world’s biggestandmostaccessibleoil reserves
give itan unassailable costadvantage over Shell,ExxonMobil,andthe otherwesternmajorswhose
productioncostsperbarrel are at leastthree timesthose of Saudi Aramco.Absolute costadvantages
may alsoresultfromeconomiesof learning.Sharp’scostadvantage inflatscreenTVsresults fromits
earlyentryintothismarketand itsabilitytomove downthe learning curve fasterthanSonyor Philips.
Product Differentiation
In an industrywhere productsare differentiated,establishedfirmspossessthe advantages of brand
recognitionandcustomerloyalty.The percentage of USconsumers loyal toa single brandvaries from
under30 percentinbatteries,cannedvegetables, andgarbage bags,upto 61 percentintoothpaste,65
percentinmayonnaise,and 71 percentincigarettes.6New entrantstosuchmarketsmustspend
disproportionately heavilyonadvertisingandpromotiontogainlevelsof brandawarenessandbrand
goodwill similartothatof establishedcompanies.One studyfoundthat,compared toearlyentrants,
late entrantsintoconsumergoodsmarketsincurredadditional advertisingandpromotionalcosts
amountingto 2.12 percentof salesrevenue. Alternatively,the new entrantcanaccepta niche position
inthe marketor can seektocompete bycuttingprice.
Access to ChannelsofDistribution
Whereaslackof brandawarenessamongconsumersactsas a barrierto entry to new suppliersof
consumergoods,a more immediate barrierforthe new company islikelytobe gainingdistribution.
Limitedcapacitywithindistributionchannels(e.g., shelf space),riskaversionbyretailers,andthe fixed
costs associatedwithcarryinganadditional productresultinretailersbeingreluctanttocarrya new
manufacturer’s product.The battle forsupermarketshelf space betweenthe majorfoodprocessors
(typicallyinvolvinglump-sumpaymentstoretail chainsinordertoreserve shelf space) meansthatnew
entrantsscarcelygeta lookin.

12. Governmental andLegal Barriers
Some economists(notablythose of the ChicagoSchool) claimthatthe onlyeffective barrierstoentry
are those createdbygovernment.Intaxicabs,banking, telecommunications, andbroadcasting,entry
usuallyrequiresthe grantingof alicense byapublicauthority.Frommedieval timestothe presentday,
companiesandfavored individualshave benefitedfromgovernmentsgrantingthemanexclusive right
to ply a particulartrade or offera particularservice.Inknowledge-intensive industries, patents,
copyrights,andotherlegallyprotectedformsof intellectual propertyare majorbarrierstoentry.Xerox
Corporation’smonopolizationof the plain-papercopierindustryuntil the late 1970s wasprotectedbya
wall of over2,000 patentsrelating toitsxerographyprocess.Regulatoryrequirementsand
environmental andsafety standardsoftenputnew entrantsatadisadvantage toestablishedfirms,
because compliance coststendtoweighmore heavilyonnewcomers.
Retaliation
Barriersto entryalsodependonthe entrants’expectationsastopossible retaliation byestablished
firms.Retaliationagainstanewentrantmaytake the formof aggressive price-cutting,increased
advertising, salespromotion,orlitigation.The major airlineshave alonghistoryof retaliationagainst
low-costentrants.Southwestand otherbudgetairlineshave allegedthatselectiveprice cutsby
Americanandothermajor airlinesamountedtopredatorypricingdesignedtopreventitsentryinto
newroutes.8To avoidretaliationbyincumbents,new entrantsmayseekinitial small scale entryinto
lessvisiblemarketsegments.WhenToyota,Nissan,andHondafirst enteredthe USautomarket,they
targetedthe small car segmentspartlybecause thiswasasegmentthathad beenwrittenoff bythe
DetroitBigThree as inherently unprofitable.
The Effectivenessof Barriers to Entry
Empirical researchshowsindustriesprotectedbyhighentrybarrierstend toearnabove average ratesof
profit10 andthat capital requirementsandadvertisingare particularlyimportantimpedimentstoentry
to sourcesof increasedprofitability.11Whetherbarrierstoentryare effective indeterringpotential
entrantsdependsonthe resourcesandcapabilitiesthatpotential entrantspossess.Barriersthatare
effectiveagainstnewcompaniesmaybe ineffectiveagainstestablishedfirmsthatare diversifying from
otherindustries.George Yipfoundnoevidence thatentrybarriersdeterrednew entry.12Some entrants
possessedresourcesthatallowedthemtosurmount barriersandcompete againstincumbentfirms
usingsimilarstrategies.Thus,Mars useditsstrong positioninconfectionerytoenterthe ice cream
market,while Virgin hasuseditsbrandname to entera wide range of industriesfromairlinesto
telecommunications. Othercompaniescircumventedentrybarriersbyadoptinginnovative strategies.
Duringthe late 1990s, a host of establishedconsumerproductscompanies frombanks tobookstores
facednewcompetitionfrome-commerce startupsthatused the internettoby-passconventional
distributionchannels.

13. COMPANYANALYSIS
How to analyze the fundamentalsofthe company?
Basicallyone shouldbe able tojudge atleasthow the companyhas done inpast years,itsdebitstatus,
itscurrent valuation,itsfuture growthprospects,itsearningcapacityetc
So that basedonthese termshe can at leastdecide whethertoinvestinthiscompanyornot.
What you shouldlook for in a company to invest?
1. About Company-
What the companyis doingandwhat are itsbusinesses?
How isthe current demandfortheirproductsand how the demandwill be infuture like innext3to 5
yearsand so? (Itisdifficulttoanalyze the future demand yourself soyoucan visitfinancialwebsitesor
contact us)
2. Earnings -
Thisis veryimportantparameter.Broadlylookintoitslast5 or 10 yearsearningswhetherthe company
has postedprofitsorlosses.
It’sall about earnings.The bottomline isinvestorswanttoknow how much moneythe companyis
makingandhow muchit isgoingto make in the future.
To findthe earningstatusratiosusedare EPS - Earning per share
3. Currentvaluation -
Thisis anotherveryimportantfactorwhichmostof the investorforgetswhile doingtheirinvestments.
Generallymostof the investorsinvestathighervaluationsof sharesandwhenshare pricesstartcoming
downthentheykeepworrying,sothisshouldnothappen.
Before investingone shouldcheckthe currentvaluationof the share price andinvestonlywhenthe
share price is at rightprice and not at overpricedshare.
Thisis whathappenedinJanuary2008. Most of the people investedatveryhighvaluationsandlateron
the share pricesstartedto correct (fallingdown).
To findthe currentvaluationof the stock the ratiosusedare
PE ratio - Price to earning ratio
Book value
PB ratio - Price to book value ratioa
4. Future earningsgrowth -
It isveryimportantto analyze howthe companyisgoingto do infuture.How will be itsreturnsor its
profitsetc?
Basicallymostof the investorsinvestinsharestakingintoconsiderationCompany’sfuture growth
prospects.
To findthe future growthof the stockthe ratios usedare
PEG ratio - Price to earninggrowth ratio
Current EPS and Forward EPS
Price to salesratio
5. Debitstatus -
For any companyto performwell inthe future itisveryimportanttobe debtfree or lessdebitbecause
if companyis havinglarge debitslikeborrowings,loansthenitbecomesdifficultforitto planforany

14. acquisitions,expansionplanstake overplans,dividend payoutand veryimportantitsmostof the net
profitgoesinpayingthe interestandloansandotherdebits.
So inotherwordsif the companyishavingfewerdebitsornodebitthentheyare havinglotsof cash in
handand theyare free totake anydecisionincomingfuture.
MAIN RATIOS TO BE CALCULATED FOR THE COMPANYANALYSIS
NetProfit Margin. A company'snetprofitmarginisa profitabilityratiocalculatedbydividingnet
income bytotal sales.Thisratioindicateshow muchprofitthe companyisable to squeeze outof each
dollarof sales.Forexample,anetprofitmarginof 30%, indicatesthat$0.30 of every$1.00 in salesis
realizedinprofits.
P/E Ratio. The P/E ratio (i.e.,Price/Earningsratio) isaprice ratio calculatedbydividing the security's
currentstock price by the previousfourquarter'searningspershare (EPS).
The P/E Ratio showshowmuchan investormustpayto "buy"$1 of the company'searnings.For
example,if astock'scurrentprice is $20 and the EPS for the lastfour quarterswas$2, the P/E ratio is10
(i.e.,$20 / $2 = 10). This meansthatyou mustpay $10 to "buy" $1 of the company's earnings.Of course,
investorexpectationsof company'sfuture performance playaheavyrole indeterminingacompany's
currentP/E ratio.
A commonapproach isto compare the P/E ratio of companieswithinthe same industry.All else being
equal,the companywiththe lowerP/Eratioisthe bettervalue.
Book Value Per Share. A company'sbookvalue isa price ratio calculatedbydividingtotal netassets
(assetsminusliabilities)bytotal sharesoutstanding.Dependingonthe accountingmethodsusedand
the age of the assets,bookvalue canbe helpful indeterminingif asecurityisoverpricedorunder-
priced.If a securityisselling ata price far below bookvalue,itmaybe anindicationthatthe securityis
under-priced.
Current Ratio. A company'scurrentratio isa liquidityratiocalculatedbydividingcurrentassetsby
currentliabilities.Thismeasuresthe company'sabilityto meetcurrentdebtobligations.The higherthe
ratiothe more liquidthe company.Forexample,acurrentratioof 3.0 meansthat the company'scurrent
assets,if liquidated,wouldbe sufficienttopayforthree timesthe company'scurrentliabilities.
Debt Ratio. A company'sdebtratio isa leverage ratiocalculatedbydividingtotal liabilitiesbytotal
assets.Thisratiomeasuresthe extenttowhichtotal assetshave beenfinancedwithdebt.Forexample,
a debtratio of 40% indicatesthat40% of the company'sassetshave beenfinancedwithborrowed
funds.Debtisa two-edgedsword.Duringtimesof economicstressorrisinginterestrates,companies
witha highdebtratio can experience financialproblems.However,duringgoodtimes,debtcanenhance
profitabilitybyfinancinggrowthata lowercost.
InventoryTurnover. A company'sinventoryturnoverisanefficiencyratiocalculatedbydividingcostof
goodssoldby inventories.Itreflectshow effectivelythe companymanagesitsinventoriesbyshowing
the numberof timesperyear inventoriesare turnedover(replaced).Of course,thistype of ratiois
highlydependentonthe industry.A grocerystore chainwill have amuch higherturnoverthana
commercial airplane manufacturer.Asstatedpreviously,itisimportanttocompare ratioswithother
companiesinthe same industry.

15. Strengths of Fundamental Analysis
Long-termTrends
Fundamental analysisisgoodforlong-terminvestmentsbasedonlong-termtrends,verylong-term.The
abilitytoidentifyandpredictlong-termeconomic,demographic,technological orconsumertrendscan
benefitpatientinvestorswhopickthe rightindustrygroupsorcompanies.
Value Spotting
Soundfundamental analysiswill helpidentifycompaniesthatrepresentagoodvalue.Some of the most
legendaryinvestorsthinklong-termandvalue.GrahamandDodd,Warren BuffettandJohnNeff are
seenasthe championsof value investing.Fundamental analysiscanhelpuncovercompanieswith
valuable assets,astrongbalance sheet,stable earnings,andstayingpower..
BusinessAcumen
One of the mostobvious,butlesstangible,rewardsof fundamental analysisisthe developmentof a
thoroughunderstandingof the business.Aftersuchpainstakingresearchandanalysis,aninvestorwill
be familiarwiththe keyrevenueandprofitdriversbehindacompany.Earningsandearnings
expectationscanbe potentdriversof equityprices.Evensome technicianswillagree tothat.A good
understandingcanhelpinvestorsavoidcompaniesthatare prone toshortfallsandidentifythose that
continue todeliver.Inadditiontounderstandingthe business,fundamentalanalysisallowsinvestorsto
developanunderstandingof the keyvalue driversandcompanieswithinanindustry.A stock'sprice is
heavilyinfluencedbyitsindustrygroup.Bystudyingthesegroups,investorscanbetterposition
themselvestoidentifyopportunitiesthatare high-risk(tech),low-risk(utilities),growthoriented
(computer),value driven(oil),non-cyclical(consumerstaples),cyclical(transportation)orincome-
oriented(highyield).
KnowingWho'sWho
Stocksmove as a group. By understandingacompany'sbusiness,investorscanbetterposition
themselvestocategorize stockswithintheirrelevantindustrygroup.Businesscanchange rapidlyand
withitthe revenue mix of acompany.Thishappenedtomanyof the pure Internetretailers,whichwere
not reallyInternetcompanies,butplainretailers.Knowingacompany'sbusinessandbeingable toplace
it ina group can make a huge difference inrelativevaluations.
Weaknesses of Fundamental Analysis
Time Constraints
Fundamental analysismayofferexcellentinsights,butitcanbe extraordinarilytime-consuming.Time-
consumingmodelsoftenproduce valuationsthatare contradictorytothe current price prevailingon
Wall Street.Whenthishappens,the analystbasicallyclaimsthatthe whole streethasgotit wrong.This
isnot to say that there are not misunderstoodcompaniesoutthere,butitisquite brashto implythat
the marketprice,and hence Wall Street,iswrong.

16. Industry/CompanySpecific
Valuationtechniquesvarydependingonthe industrygroupandspecificsof eachcompany.Forthis
reason,a differenttechnique andmodel isrequiredfordifferentindustriesanddifferentcompanies.
Thiscan getquite time-consuming,whichcanlimitthe amountof researchthat can be performed.A
subscription-basedmodelmayworkgreatfor an InternetService Provider(ISP),butisnotlikelytobe
the bestmodel tovalue an oil company.
Subjectivity
Fair value isbasedonassumptions.Anychangestogrowthormultiplierassumptionscangreatlyalter
the ultimate valuation.Fundamental analystsare generallyaware of thisanduse sensitivityanalysisto
presentabase-case valuation,anaverage-casevaluationandaworst-case valuation.However,evenon
a worst-case valuation,mostmodelsare almostalwaysbullish,the onlyquestionishow muchso.
AnalystBias
The majorityof the informationthatgoesintothe analysiscomesfromthe companyitself.Companies
employinvestorrelationsmanagersspecificallytohandle the analystcommunityandrelease
information.AsMarkTwainsaid,"there are lies,damnlies,andstatistics."Whenitcomestomassaging
the data or spinningthe announcement,CFOsandinvestorrelationsmanagersare professionals.Only
buy-side analyststendtoventure pastthe companystatistics.Buy-side analystsworkformutual funds
and moneymanagers.Theyreadthe reportswrittenbythe sell-sideanalystswhoworkforthe big
brokers(CIBC,Merrill Lynch,RobertsonStephens,CSFirstBoston,Paine Weber,DLJto name a few).
These brokersare alsoinvolvedinunderwritingandinvestmentbankingforthe companies.Eventhough
there are restrictionsinplace topreventa conflictof interest,brokershave anongoingrelationshipwith
the companyunderanalysis.Whenreadingthese reports,itisimportanttotake intoconsiderationany
biasesa sell-sideanalystmayhave.The buy-side analyst,onthe otherhand,isanalyzingthe company
purelyfroman investmentstandpointforaportfoliomanager.If there isarelationshipwiththe
company,itis usuallyondifferentterms.Insome casesthismaybe as a large shareholder.
Conclusions
Fundamental analysiscanbe valuable,butitshouldbe approachedwithcaution.If youare reading
researchwrittenbya sell-side analyst,itisimportanttobe familiarwiththe analystbehindthe report.
We all have personal biases,andeveryanalysthassome sortof bias.There is nothingwrongwiththis,
and the researchcan still be of great value.Learnwhatthe ratings meanand the track record of an
analystbefore jumpingoff the deepend.Corporate statementsandpressreleasesoffergood
information,buttheyshouldbe readwithahealthydegree of skepticismtoseparate the factsfromthe
spin.Pressreleasesdon't happenbyaccident;theyare an importantPRtool for companies.Investors
shouldbecome skilledreaderstoweedoutthe importantinformationandignore the type.