Fundamental Analysis

• Fundamental Analysis in simple terms is the art of evaluating any

business to its basics and getting an accurate picture of how financially
healthy and sustainable.
• It involves studying a company’s potential for future growth by
considering various micro and macroeconomic factors.
• It is a powerful tool for investors and stakeholders to understand the
growth prospects and financial health of a company.
• It involves examining every aspect of a company’s operations through
its balance sheet, past performance, financial reports, even market
goodwill, management, and consumer behaviour to arrive at the
intrinsic value of its securities.
 Fundamental Analysis: Value Investing
• Stocks Intrinsic Value: The intrinsic value is the actual economic
value of a company or an asset based on an underlying perception of
its true value including all aspects of the business, in terms of both
tangible and intangible factors.
• This value may or may not be the same as the current market value.
• Criteria for investment decision
• If intrinsic value > Market price, Buy the security
• If intrinsic value < Market price, Sell the security
• If intrinsic value = Market price, No Action
 Types of Fundamental Analysis
• Qualitative analysis: Qualitative analysis
involves the study of a company’s goodwill,
consumer behaviour, demand, and
company recognition in broader markets. It
aims to unearth answers to questions like
how it is perceived, how management
decisions or announcements create a buzz
in the market, and how it is different from
its substitutes. In addition, its brand value
and other common factors depict its socio
and economic position in the market.
 Quantitative analysis

• Quantitative analysis is inclined toward statistics,

reports, and data. It is solely based on its
financial statements, quarterly performance,
balance sheets, debt, cash flow, etc. It involves
analyzing numbers, ratios, and values to
understand the price of the shares and the
company’s overall financial health.
Fundamental analysis consists of
three main parts:
 Industry analysis.
 Economic analysis.
 Company analysis.
Industry Analysis -Meaning
• Industry Analysis is a form of fundamental analysis
involving the process of making investment decisions
based on the different stages an industry is at during a
given point in time.
• Approach to Industry Analysis:-
• 1) Sensitive to business Cycle Approach
• 2) Industry life cycle Approach
• 3) Specific features and Characteristics
Sensitive to Business Cycle
Approach
• It has been well accepted that all industries are not
equally sensitive to economic conditions as a business
cycle. For Example, food Industries are really sensitive
to a business cycle whereas luxurious goods are not.
• Investment in higher sensitivity will be riskier. The
sensitivity of Industry to a business cycle is determined
by the following three factors-
 Sensitive to Business Cycle Approach
 Sensitivity to sales: Food vs. Luxury goods
Sensitive to Business Cycle Approach
• It has been well accepted that all industries are not equally
sensitive to economic conditions as a business cycle. For
Example, food Industries are really sensitive to a business
cycle whereas luxurious goods are not.
• The sensitivity of industry to a business cycle is determined
by its sensitivity to business cycles, its sensitivity to sales:-
Food v/s luxurious goods, and also on its operating and
financial leverage.
• Operating Leverage: The degree of operating leverage refers
to a change in profit in respect of a change in sales. Greater
fixed cost greater is operating leverage.
• Financial leverage: It is the use of debt in capital structure. A
higher proportion of debt higher is financial leverage as debt
has to be paid irrespective of sales.
 Industry Life Cycle Approach
• Every Industry Passes through four distinct phases-
• Primary Stage: It is the first stage characterized by promising demand,
low technology, and chaotic competition.
• Rapid Growth: Only a few survive, Tech advanced, low-cost good
products, stable growth.
• Stagnation Stage: Growth rate moderates, symptoms of obsolesce
appear, technological innovation.
• Decline Stage: Demand and earnings decline, and growth of the
industry also declines.
 Specific Features and Characteristics
• Profit Potential of Industries: Porter Model
• SWOT Analysis
• PEST Analysis
 Economic Analysis
• Economic Analysis relates to the analysis of the economy. This is related to study
about the economy in detail and analysing whether economic conditions are
favourable for the companies to prosper or not.
• Factors of Economic Analysis: For the Economic Analysis, the Macro Economic
Factors are studied to know about the condition of an economy or performance of
the security market of any country.
• Gross Domestic Product
• Fiscal Policy
• Monetary Policy
• Saving Rate
• Trade Deficit
• Exchange Rate
 Company Analysis
• Company analysis is a process carried out by investors to evaluate
securities, collecting info related to the company’s profile, products
and services as well as profitability.
• It is method of assessing the competitive position of the company, its
earning, profitability and its future aspects with respect to earning of
its shareholders.
• Factors Affecting Company Analysis:
• Qualitative factors are business models, competitive advantage,
Management, and corporate governance.
• Quantitative factors deal with company growth and industry growth
along with its peers.
 Qualitative Factors
• Under the business model, we need to see what the company does,
what does it sell along the prices at which it sells.
• Competitive advantage shows the uniqueness of the company from its
peers.
• Management and Corporate Governance generally go hand in hand.
• HDFC Bank, Tata Group are good examples of strong and ethical
management along with good
• corporate governance where the company takes efforts to inform
investors about updates.
 Quantitative Factors
• Ratio analysis is a quantitative method of gaining insight into a company's
liquidity, operational efficiency and profitability by studying its financial
statements such as the balance sheet and income statement.
• The various kinds of financial ratios based on the sets of data they
provide are categorized as:
• Liquidity Ratios
• Solvency Ratios
• Profitability Ratios
• Efficiency Ratios
• Coverage Ratios
• Market Prospect Ratios