This document discusses various techniques for fundamental analysis of stocks. It describes examining a company's future earnings potential, economic well-being, and impacting factors. The objective is to value stocks compared to their price to determine if they are underpriced or overpriced. Some valuation metrics discussed include earnings per share, price-earnings ratio, dividend payout ratio, and discounted cash flow models. It also covers analyzing the overall economy and industries through factors like GDP, employment, inflation and more. The steps for industry analysis involve studying the industry life cycle and qualitative/quantitative factors. Fundamental analysis is distinguished from technical analysis, which uses historical stock price and volume data to identify trading opportunities.
3. What is Fundamental Analysis
Examination of future earning potential of the company.
Analysis of the economic well-being of a financial entity as opposed
to only its price movements.
Analyses various factors that impact the performance of the
company.
It considers economic, financial and other qualitative and
quantitative factors.
4. Objective
Valuation of stock in comparison to its current price.
Decision to buy or sell the stock on the basis of its valuation in
the market.
Underpriced = buy
Overpriced = sell or short
5. Earnings Per Share
The portion of a company's profit allocated to each
outstanding share
Drawback
6. Price Earning Ratio
A valuation ratio of a company's current share price compared
to its per-share earnings.
= Market Value Per Share
Earnings Per Share(EPS)
Drawback
7. Dividend Payout Ratio
measures the percentage of a company's net income that is
given to shareholders .
=Total Annual Dividends Per Share
Diluted Earnings Per Share
8. Present value of all future cash flows in the form of dividends
plus the present value of the sale price expected .
P= [D1/(1+r)] + [P1/ (1+r)]
Where,
P = Current price/ market price of the share today
D1 = Dividend expected at the end of one year
r = discount rate/ required rate of return
P1= market price/ expected price of share at the end of year 1
9. Presumes that dividend per share is growing at the constant
rate
P= D1/ r-g
Where,
D1 = dividend per share at the end of first year
r = Expected rate of return
g = Constant growth rate
10. It is important to analyse the economic activity in
which all the companies operate.
For economic analysis we can see few economic
indicators.
• Global Economy
• Domestic Economy
The top down analysis of company starts with
global and domestic economy
11. Domestic Economy
1. GDP
2. EMPLOYMENT
3. INFLATION
4. INTEREST RATE
5. BUDGET DEFICIT
6. OTHER FACTORS:- Money supply, Fiscal policy, Monetary Policy,
Labour productivity, Stock Price, FII & FDI investment etc.
12. 1. Introduction:
Second phase of fundamental analysis.
Industries selected in the previous stage are scanned
individually.
A micro study of each industry is carried out.
Objective is to provide information about the best industry for
investment-making.
13. Steps taken for industry analysis:
Study of industry life cycle
Study of qualitative and quantitative factor.
14. Steps taken for industry analysis:
1. Study of industry life cycle:
Pioneering stage
Rapid growth stage
Maturity and Stabilization
Decline/Diversification
15. Steps taken for industry analysis contd..:
2. Study of Qualitative and quantitative factors:
Qualitative factors
Quantitative factors
16. They rely on historical data
Poor predictors of how share price reacts to economic and
industry level changes
Provides poor estimates of expected returns
Do not offer measures of variability of returns
Do not reflect underlying risk reward relationship
17. FUNDAMENTAL
ANALYSIS
TECHNICAL ANALYSIS
It starts with the study of
Financial Statements
Financial analyst attempts to
measure a company's
intrinsic value
Long term approach,
Historical data is taken
under consideration
Fundamental analysis is
used to make an investment
Technical analyst approaches a
security from the charts.
Technical traders believe there is
no reason to analyze a
company's fundamentals
because these are all accounted
for in the stock's price.
Short term data is considered for
analysis of stocks
Technical analysis is used for a
trade