Fundamental Analysis

Dr Saif Siddiqui

Fundamental Analysis
Fundamental analysis
the practice of evaluating the information contained in

economic factors (economic analysis)

industry reports and (industry analysis) financial statements (company analysis) to determine the intrinsic value of a firm

Basic assumptions
is that the price on the stock market does
not fully reflect a stocks real value. in the long run, the stock market will reflect the fundamentals.

Basic philosophy
By focusing on a particular business, an investor can estimate the intrinsic value and find opportunities where he or she can

buy at a discount.
If all goes well, the investment will pay off over time as the market catches up to the

fundamentals.

The big unknowns are:

You dont know if your estimate of intrinsic
value is correct; and You dont know how long it will take for the intrinsic value to be reflected in the marketplace.

Criticisms of Fundamental Analysis

The biggest criticisms of fundamental analysis come primarily from two groups:

proponents of technical analysis

believers of the efficient market hypothesis.

Fundamental Analysis versus Technical Analysis

Fundamentalists
Analysts who utilize fundamental analysis in an attempt to forecast future stock price movements

Fundamental Analysis versus Technical Analysis

Technical analysis
examination of supply and demand for securities to determine trends in price movements of stocks or financial instruments

Fundamental Analysis versus Technical Analysis

Technicians
the term given to analysts who examine stocks and financial markets using technical analysis

Economic Analysis
Forecasting business cycles
to determine when to expect changes in the business cycle,or the direction in which aggregate economic activity is moving

Economic Analysis
Business cycle
the movement in aggregate economic
activity as measured by the gross domestic product (GDP)

Expansion
increasing economic activity

Contraction
decreasing economic activity

Economic Analysis
Gross Domestic Product (GDP)
a measure of all of the goods and services produced in the economy

during a specified time period

Recession
two consecutive quarters of economic contraction, or decline, in the GDP

Business Cycles - Monetary Policy and Fiscal Policy

Monetary Policy
the means by which the RBI influences

economic conditions by managing the

nations money supply

Business Cycles - Monetary Policy and Fiscal Policy

Fiscal Policy
Government spending, which is primarily supported by the governments ability to tax individuals and businesses

Business Cycles - Monetary Policy and Fiscal Policy

Deficit spending
situation that occurs when the government spends more than it collects in taxes

Industry Analysis
Each industry has differences in terms of its
customer base, market share among firms, industry-wide growth, competition, regulation and business cycles.

Industry Analysis
Customers
Some companies serve only a handful of customers, , while others serve millions. For example, a military supplier who has 100% of its sales with the Indian government. One change in government policy could potentially wipe out all of its sales.

Industry Analysis
Market Share
Company's present market share can tell volumes about the company's business. Market share is important because of economies of scale.

Industry Analysis
Industry Growth
Examine whether the amount of customers in the overall market will grow. This is crucial because without new customers, a company has to steal market share in order to grow. In some markets, there is zero or negative growth, a factor demanding careful consideration.

Industry Analysis
Competition
looking at the number of competitors goes a long way in understanding the competitive landscape for a company. Industries that have limited barriers to entry and a large number of competing firms create a difficult operating environment for firms.

Industry Analysis
Regulation
Certain industries are heavily regulated due to the importance or severity of the industry's products and/or services. They can drastically affect the attractiveness of a

company for investment purposes.

Industry Analysis
Industry life cycle
the various phases of an industry with respect to its growth in sales and its competitive conditions

Industry Life Cycle

Industry Sales Expansion (Growth) Introductory

Mature

Life-Cycle Stages

Company Analysis
Business Model
One of the most important questions that should be asked is: What exactly does the company do? This is referred to as a company's business model it's how a company makes money.

Company Analysis
Competitive Advantage
A company's long-term success is driven largely by its ability to maintain a competitive advantage and keep it. When a company can achieve competitive advantage, its shareholders can be well rewarded for decades.

Company Analysis
Management
A company relies upon management to steer it towards financial success. Even the best business model is doomed if the leaders of the company fail to properly execute the plan.

Company Analysis
Past Performance
Check and see how executives have done at other companies in the past. Identify the companies they worked at in the past and do a search on those companies and their performance.

Company Analysis
Financial and Information Transparency
Sufficient transparency implies that a company's financial releases are written in a manner that stakeholders can follow what management is doing and therefore have a clear understanding of the company's current financial situation.

Company Analysis
Stakeholder Rights
This aspect of corporate governance examines the extent that a company's policies are benefiting stakeholder interests, notably shareholder interests.

Company Analysis
Financial statement analysis
Comparison to other similar firms Forecast direction for future Predict earnings and dividends Risk evaluation

Investment Professionals Advice

Be disciplined with your investment approach Know the company in which you invest

Choose firms that are in strong financial

positions Stay with the investment until it no longer satisfies your investment goals