Traditional methods of security analysis - Fundamental Analysis

Shyamala Devi
Shreya Pathak
Aseem Kumar
Bhartendu Gautam
P. Brijesha
Avunoori Satish

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.

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

Earnings Per Share
 The portion of a company's profit allocated to each
outstanding share
 Drawback

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

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

 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

 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

 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

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.

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.

Steps taken for industry analysis:
 Study of industry life cycle
 Study of qualitative and quantitative factor.

Steps taken for industry analysis:
1. Study of industry life cycle:
 Pioneering stage
 Rapid growth stage
 Maturity and Stabilization
 Decline/Diversification

Steps taken for industry analysis contd..:
2. Study of Qualitative and quantitative factors:
 Qualitative factors
 Quantitative factors

 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

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

Traditional methods of security analysis - Fundamental Analysis

Traditional methods of security analysis - Fundamental Analysis

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Traditional methods of security analysis - Fundamental Analysis