Fundamental Analysis:

Meaning
It is a stock valuation method
that uses financial and economic analysis
to predict the movement of stock prices.

Fundamental Analysis:
Meaning

The fundamental information that is analyzed

can include:
Financial information like a company's financial
reports, and
non-financial information such as estimates of
the growth of demand for products sold by the
company, industry comparisons, economy-wide
changes, changes in government policies etc..

Fundamental Analysis:
Definition
Fundamental Analysis attempts to find out the
true value of securities so that the investors
can decide to buy or not to buy the securities at
the current market price.
Therefore, it can be said that the analysis of
the determinants of the fair value of a
security is called the fundamental analysis.

Fundamental Analysis:
Introduction

A fundamental analyst compares the fair /

intrinsic value of the share with its market price.
In case the former is higher than the latter, it
denotes the undervaluation of share in the
market and signals the buying of the share.
If fair / intrinsic value is less than market price,
the share is considered to be over priced and
signals the selling of share.

Fundamental Analysis:
Introduction
Intrinsic Value

Decision

If intrinsic value is greater

than the market price
Under valued security

Buy the security

If intrinsic value is lower

than the market price
Over valued security

Sell the security

If intrinsic value is equal to

the market price.

No action

Fundamental Analysis: A
Framework

Fundamental Analysis is based on the analysis

of the three main ingredients such as:
1.

Economy Fundamentals

2.

Industry Fundamentals

3.

Company Fundamentals
Thus, the Fundamental analysis is a three
phase analysis of (a) Economy (b) Industry &
(c) Company.

Fundamental Analysis:
Phases

Phase Nature of
Analysis

Purpose

Tools &
Techniques

First

Economic
Analysis

To assess
the Economic
general economic Indicators
situation of national
&
international
environment.

Second

Industry
Analysis

To
review
prevailing
conditions with a
specific
industry
audit segment.

Performance
indicators,
demand & supply
position,
competition
&
government
policies

Fundamental Analysis:
Phases

Phase Nature of Purpose

Analysis
Third

Company
Analysis

To
analyze
the financial &
non-financial
aspects of a
company
to
determine
whether
to
buy or sell or
hold on to the
shares of a
company.

Tools &
Techniques

Non
financial
analysis: position of
promoters,
management, product
quality,
corporate
image, location etc.
Financial
analysis:
EPS, sales, profitability,
dividends record, asset
growth etc.

Fundamental Analysis:
Phases

COMPANY ANALYSIS

INDUSTRY ANALYSIS

ECONOMIC ANALYSIS

Fundamental Analysis:
Approaches
Small investors can take a narrow approach to
fundamental analysis. They may start with the
company. This approach may be known as
bottom-up approach.
The basic premise of the bottom-up approach
is that the undervalued shares would provide
superior and better returns irrespective of the
overall economic & industry position.

Fundamental Analysis:
Approaches
A broader framework for fundamental analysis
is known as top-down approach. This
approach attempts to study the economic
scenario, industry position and the company
expectations.
This approach is also known as EconomicIndustry-Company Approach.

Fundamental Analysis:
Approaches

Fundamental Analysis:
Economic
Economic Analysis deals with the analysis of
forces operating in the overall economy.
The economic analysis helps to identify
whether the economic climate is conducive
or not for the growth of the business in general.

Fundamental Analysis:
Economic
The economic analysis involves the analysis of
the following factors:
1.Economic Growth (GDP)
2.Business
Cycles
(Boom,
Recession,
Depression, Recovery)
3.Inflation
4.Interest Rates
5.Monetary Policy, Money Supply & Liquidity

Fundamental Analysis:
Economic
6.Other Factors:
Industrial Growth Rate,
Agricultural Output & Rainfall Pattern,
Foreign Exchange Reserves,
Growth of Infrastructural Facilities,
Global Industrial Linkages,
Savings Pattern,
Population & Employment Scenario,
Economic & Political Stability.

Fundamental Analysis:
Industry
The second phase of fundamental analysis
consists of a detailed analysis of specific
industry, its characteristics, past records,
present state & future prospects.
The purpose of the industry analysis is to
identify the industries with a potential for
future growth.

Fundamental Analysis:
Industry

The pioneering stage:

Associated
with
technological
development.
Rapid growth in production.
Larger profits for early entered firms.
Heavy competition.
Only few efficient companies remain
in the industry.

Fundamental Analysis:
Industry

The expansion stage:

Rate of growth is less than the last stage.

Prices are stable & production is quiet
encouraging.
Competition is high.
Small number of big firms dominate the
industry.
Companies provide safety & security to the
investors for their investment.
This stage is also referred to as the period
of maturity.

Fundamental Analysis:
Industry

The stagnation stage:

Final phase of the growth cycle of industry.

Industry looses its power to expand.
Competition is high.
Demand for the product is reduced
because of the following factors:
a. Change in consumer taste
b. Government Regulation
c. Automation
d. Miscellaneous factors

Fundamental Analysis:
Industry

Key factors in industry analysis are:

1. Past performance of the industry.

2. The permanence of the product & technology of
the industry.
3. Role of government in the industry.
4. Labour conditions related to the industry.
5. Competitive condition in the market.
6. Inter-linkages with other industries.

Fundamental Analysis:
Company
The third element of the E-I-C approach to
fundamental analysis is the company analysis
Company analysis is a method of assessing the
competitive position of a firm, its earnings &
profitability, the efficiency with which it operates
its financial position & its future earnings per
share.

Fundamental Analysis:
Company
Various steps involved are as follows:
1.Analysis of the management of the company.
2.Analysis of the its financial performance.
3.Evaluation of its long-term vision & strategies.
4.Analysis of key success factors.

Fundamental Analysis:
Company
Sources of information are as follows:
1.Balance Sheet or the Position Statement.
2.Income Statement or the Profit & Loss Account.
3.Cash Flow Statement, the statement of sources
& uses of cash.

Fundamental Analysis:
Company
The following factors help in the analysis of a
particular scrip:
1. Marketability
2. Accounting System
3. Profitability
4. Dividend Policy
5. Capital Structure
6. Financial Analysis
7. Operating Efficiency
8. Management Capability