This is all about Fundamental Analysis for trading.

1. Fundamental Analysis
Prepared By Sumit Goyal-LPU

2. Learning outcome
• To learn that how macroeconomic variables affect Indian
Stock Market
• To learn that which qualitative factors affect the valuation of a
company
• To understand various tools for explaining undervaluation or
overvaluation.
• To understand how industry related factors effect the Indian
stock market.
Prepared By Sumit Goyal-LPU

3. Meaning
• An investor who would like to be rational and scientific in his
investment activity has to evaluate a lot of information about
the past performance and the expected future performance
of company, industry and the economy as a whole before
taking investment decision.
Prepared By Sumit Goyal-LPU

4. Decision
• Intrinsic value – the estimated value
• Market price ˂ Intrinsic value - buy
• Market price ˃ intrinsic value - sell
Prepared By Sumit Goyal-LPU

5. Economy
Industry
company
A company belongs to an industry and the industry operates
with in the economy.
Prepared By Sumit Goyal-LPU

6. Concept of
Fundamental Analysis
It is the examination of various factors such as
earnings of the company, growth rate and risk
exposure that affects the value of shares of a
company.
Fundamental analysis consists of:
Economic analysis
Industry analysis
Company analysis
Prepared By Sumit Goyal-LPU

7. Economy
• Global Economy
• Government central policy
– Fiscal Policy
– Monetary Policy
Prepared By Sumit Goyal-LPU

8. Macro Economic Analysis
Gross Domestic Product (GDP)
Savings and investment
Inflation
Interest rates
Budget
Tax structure
Industrial growth rate
Forex reserve and exchange rate
Prepared By Sumit Goyal-LPU

9. Economic analysis
 Industrial growth rate- Average of Growth rates of three
sectors i.e. Service, Industrial, Agriculture
 Infrastructural facilities and arrangements
 Sentiments
Prepared By Sumit Goyal-LPU

10. Economic analysis
• Exchange rates- import, export, balance of
trade deficit
• The excess of imports over exports is called
balance of trade deficit.
• The balance of payment deficit represents the
net difference payable on account of all
transactions such as trade, services and capital
transactions.
Prepared By Sumit Goyal-LPU

11. • Infrastructure- manufacturing activities, roads
and railways to transport raw material and
finished goods.
• Monsoon- as agriculture income rise, the
demand for industrial products will rise.
• Economic and political stability-
Prepared By Sumit Goyal-LPU

12. Industry Analysis
Prepared By Sumit Goyal-LPU

13. Industry Analysis
It is used to analyze the performance of the
industries over the years.
An industry is a group of firms that are engaged in
the production of similar goods and services.
As a firm producing reasonably similar products
which serve the same needs of a common set of
buyers.
Prepared By Sumit Goyal-LPU

14. Basis
• Sensitivity to the business cycle
• Industry life cycle analysis
• Study of the structure and characteristics of
an industry
• Profit potential of industries: Porter Model
Prepared By Sumit Goyal-LPU

15. Sensitivity to the business cycle
• After analyzing the state of macroeconomy,
you can examine its implications for different
industries.
– Sensitivity of sales
– Operating leverage
– Financial leverage
– Automobile V/S Cigarette
Prepared By Sumit Goyal-LPU

16. Industry life cycle analysis
• Pioneering stage
• Rapid growth stage
• Maturity and stabilization stage
• Decline stage
Prepared By Sumit Goyal-LPU

17. Industry charcterstics
• Demand supply curve
• Competitive conditions in the industry
• Technology
• Labour conditions
• Growth of the industry
• Cost structure and profitability
• Nature of the product
• Nature of the competition
• Government policy
Prepared By Sumit Goyal-LPU

18. INDUSTRY ANALYSIS
 PROFIT POTENTIAL OF INDUSTRIES
• FORCES DRIVING COMPETITION PORTER MODEL
POTENTIAL
ENTRANTS
TREAT OF NEW ENTRANTS
BARGAINING INDUSTRY BARGAINING
SUPPLIERS RIVALRY BUYERS
POWER OF AMONG POWER OF
SUPPLIERS FIRMS BUYERS
THREAT OF
SUBSTITUTE
PRODUCTS
SUBSTITUTES
Prepared By Sumit Goyal-LPU

19. Porter Model
• Profit Potential of an industry depends on the
combined strength of the following five basic
competitive forces:-
• Threat of new entrants
• Rivalry among the existing firms
• Pressure from substitute products
• Bargaining power of buyers
• Bargaining power of sellers
Prepared By Sumit Goyal-LPU

20. • Threat of new Entrants- it add capacity, inflate
costs, push price down and reduce
profitability.
• Rivalry among the existing firms- firms in
industry compete on the basis of price,
quality, promotion, services, warranties and so
on.
Prepared By Sumit Goyal-LPU

21. • Pressure from the substitute products-
• Bargaining power of buyers-
• Bargaining power of sellers-
Prepared By Sumit Goyal-LPU

22. Banking Sector
Supply Liquidity is controlled by the Reserve Bank of
India (RBI).
Demand India is a growing economy and demand for
credit is high though it could be cyclical.
Barriers to entry Licensing requirement, investment in
technology and branch network, capital and
regulatory requirements.
Prepared By Sumit Goyal-LPU

23. Bargaining
power of
suppliers
High during periods of tight liquidity. Trade
unions in public sector banks can be anti
reforms and orchestrate strikes. Depositors
may invest elsewhere if interest rates fall.
Bargaining
power of
customers
For good creditworthy borrowers bargaining
power is high due to the availability of large
number of banks.
Competition High- There are public sector banks, private
sector and foreign banks along with non
banking finance companies competing in
similar business segments. Plus the RBI is
planning to issue new banking licenses.
Prepared By Sumit Goyal-LPU

24. Prepared By Sumit Goyal-LPU

25. Company analysis
Prepared By Sumit Goyal-LPU

26. Company Analysis
In company analysis, the growth of the company is
analyzed by the investor so that the present and
future value of the shares can be known.
The present and future value of shares is affected by
a following number of factors such as:
Competitive edge of the company
Market share
Growth of sales
Stability of the sales
Prepared By Sumit Goyal-LPU

27. Strategy Analysis
• Cost leadership
• Product differentiation
Prepared By Sumit Goyal-LPU

28. Financial Analysis
It involves analyzing the financial statements of the
company.
The financial statements of the company include:
Balance sheet: It shows the status of a company’s
financial position at the end of the year.
Profit and loss account: It shows the profit and
loss made by the company during a period.
Prepared By Sumit Goyal-LPU

29. Analysis of Financial Statements
 It helps the investor in determining the financial position and
progress of the company.
 The various simple analyses that are performed to ascertain
the financial position of the company are:
Comparative financial statement: In this , data
from the current year’s balance sheet is compared
with similar data from the previous year’s balance
sheet.
Trend analysis: It shows the growth and decline of
sale and profit over the years.
Common size income statement: It shows each
item of expense as a percentage of net sales.
Prepared By Sumit Goyal-LPU

30. Fund flow analysis: It is a statement of the
sources and application of funds.
Cash flow analysis: It shows cash inflow and
outflow of a company during the year.
Ratio analysis: It is the numerical relationship
between the two items.
Prepared By Sumit Goyal-LPU

31. Liquidity ratios
• These measures the company’s ability to fulfill
its short term obligations and reflect its short
term financial strength or liquidity.
• Current ratio = CA/ CL
• Quick ratio or acid test ratio =
Current assets- Inventory- Prepaid exp / CL
Prepared By Sumit Goyal-LPU

32. Earning and dividend level
• EPS
• Earning Yield = EPS / Market price
• Dividend yield = DPS/ Market
• Dividend Payout ratio= DPS/EPS
• Price earning ratio= Market price/ EPS
Prepared By Sumit Goyal-LPU

33. • Return on equity (ROE)- Return on equity measures a
corporation's profitability by revealing how much profit a
company generates with the money shareholders have
invested.
Prepared By Sumit Goyal-LPU

34. Growth performance
• CAGR- The year-over-year growth rate of an
investment over a specified period of time.
(Ending value/beg. Value)1/no. of years-1
• Sales, profit, EPS,
Prepared By Sumit Goyal-LPU

35. Risk Exposure
• Beta
• Volatility of ROE
Prepared By Sumit Goyal-LPU

36. Valuation multiples
• Price to earning ratio
• Price to book value ratio
Prepared By Sumit Goyal-LPU

37. Estimate of intrinsic value
• Estimate the expected earning per share.
• Estimate PE ratio
Prepared By Sumit Goyal-LPU

38. Leverage Ratio
• These ratio measures the company’s ability to
meet its long term debt obligations. They
throw a light on the long term solvency of a
company.
• Debt equity ratio = Long term debt/
shareholder’s equity
• Total debt or debt to total assets ratio= total
debt/ total assets
Prepared By Sumit Goyal-LPU

39. • Proprietary ratio = shareholder’s equity/ total
assets
• Interest coverage ratio= EBIT/ Interest
• The coverage ratio means the ability of the
company to meet its interest payment arising
from the debt.
Prepared By Sumit Goyal-LPU

40. Profitability ratio (sales)
• Gross profit ratio
• Operating profit ratio EBIT/ Sales
• Net profit ratio
• Advertisement exp ratio
• Selling exp ratio
• Operating exp ratio = Adm Exp+ selling Exp
• Operating ratio= COGS + operating Exp
Prepared By Sumit Goyal-LPU

41. Profitability related to investment
• Return on assets = EAT/ total assets
• Return on capital employed= EBIT/ Total
capital employed
• Return on equity = EAT/ Shareholders equity
Prepared By Sumit Goyal-LPU

42. Overall profitability
• Return on investment= EAT/ total assets
Prepared By Sumit Goyal-LPU

43. Other variables
• Company’s market share
• Capacity utilization
• Modernization and expansion plans
• Availability of raw materials
Prepared By Sumit Goyal-LPU