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SAPM Fundamental Analysis

SAPM Fundamental Analysis

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02/06/2013

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 Notes Compiled by Prof.V.S.Gopal
FUNDAMENTAL ANALYSIS
Fundamental analysis is examination of the underlying forces that affect the well being of examination of the economy, industry groups, and companies. As with most analysis, thegoal is to derive a forecast and profit from future price movements.
INTERPRETATION
Most fundamental information focuses on economic, industry, and company statistics.The typical approach to analyzing a companyinvolves three basic steps:1.Determine the condition of the generaleconomy.2.Determine the condition of the industry.3.Determine the condition of the company.
ECONOMIC ANALYSIS
The economy is studied to determine if overall conditions are good for the stock market. Is inflation a concern? Are interest rates likely to rise or fall? Are consumersspending? Is the trade balance favorable? Is the money supply expanding or contracting?These are just some of the questions that the fundamental analyst would ask to determineif economic conditions are right for the stock market.
INDUSTRY ANALYSIS
It is the study of industries which are on the upswing. The ideal investment is theinvestment in the growing industries. It is often said that a weak stock in a strong industryis preferable to a strong stock in a weak industry. In order to make productiveinvestments the investor should know the industry classification used in the economy. Itis also enviable to know the characteristics, problems and practices in different industries.
COMAPNY ANALYSIS
 
 Notes Compiled by Prof.V.S.GopalAfter determining the economic and industry conditions, the company itself isanalyzed to determine its financial health. This is usually done by studying the company'sfinancial statements. From these statements a number of useful ratios can be calculated.The ratios fall under five main categories: profitability, price, liquidity, leverage, andefficiency. While performing ratio analysis of a company, the ratios should be comparedto other companies within the same or similar industry to get a feel for what is considered"normal."Phase Fundamental Analysis: -
 PhaseNature oanalysis PurposeTools & Techniques
First
EconomicAnalysisTo assess the generaleconomic situation bothwithin the country andinternationallyEconomic indicators – lead,lag and coincidentalindicators
Second
IndustryAnalysisTo review prevailingconditions within a specificindustry and its segmentsPerformance indicators – aggregate demand & supply position, internal & externalcompetition, government policies
Third
CompanyAnalysisTo analyze the financial &non-finance aspects of acompany to determinewhether to buy, sell, or holdonto the shares of a company Non-financial aspectsanalysis like promoters,management, vital productquality, corporate image,etc. financial aspects likeEPS, sales, profitability,dividend record, assetgrowth
 
 Notes Compiled by Prof.V.S.Gopal
BENEFITS OF FUNDAMENTAL ANALYSIS
Long-term trends: Fundamental analysis is good for long-term investments basedon long-term trends.
Value Spotting:
Sound Fundamental Analysis will help identify companies thatrepresent good value. It can help discover companies with valuable assets, a strong balance sheet, stable earnings and staying power.
Business Expertise:
Fundamental Analysis helps to develop a thoroughunderstanding of the business. The investor becomes familiar with the key revenue and profit drivers behind a company.
Categorization:
Stocks move as a group, by understanding a company’s business,investors can better position themselves to categorize stocks within their relevant industrygroups. Knowing a company’s business and being able to place it in a group can make ahuge difference in relative valuations.The stock market does not operate in a vacuum. Similarly no industry or company canexist in isolation. It is an integral part of the whole economy of a country, more so in afree economy like that of US and to some extent in a mixed economy like that of ours.The importance of 
Economic Analysis
:
To gain an insight into the complexities of the stock market, one needs to developa sound economic understanding and be able to interpret the important economicindicators on stock markets.
The economy is like the tide and the various industry groups and individualcompanies are like boats. When the economy expands, most industry groups andcompanies benefit and grow. When the economy declines, most sectors andcompanies usually suffer.
Investment decisions depend on the state of the economy existing at that particular point of time. E.g. if the economy is expanding then, an aggressive

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