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fundamental analysis

fundamental analysis

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Published by: Mohd Mudassir Rahat on Jan 22, 2011
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05/05/2013

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Fundamental Analysis

Dr Saif Siddiqui

Fundamental Analysis
‡ Fundamental analysis
± the practice of evaluating the information contained in ‡ economic factors (economic analysis) ‡ industry reports and (industry analysis) ‡ financial statements (company analysis) ± to determine the intrinsic value of a firm

Basic assumptions
‡ is that the price on the stock market does not fully reflect a stock¶s ³real´ value. ‡ in the long run, the stock market will reflect the fundamentals.

the investment will pay off over time as the market catches up to the fundamentals.Basic philosophy ‡ By focusing on a particular business. an investor can estimate the intrinsic value ‡ and find opportunities where he or she can buy at a discount. . ‡ If all goes well.

and ‡ You don¶t know how long it will take for the intrinsic value to be reflected in the marketplace. .The big unknowns are: ‡ You don¶t know if your estimate of intrinsic value is correct.

Criticisms of Fundamental Analysis ‡ The biggest criticisms of fundamental analysis come primarily from two groups: ± proponents of technical analysis ± believers of the efficient market hypothesis. .

Fundamental Analysis versus Technical Analysis ‡ Fundamentalists ± Analysts who utilize fundamental analysis in an attempt to forecast future stock price movements .

Fundamental Analysis versus Technical Analysis ‡ Technical analysis ± examination of supply and demand for securities ± to determine trends in price movements of stocks or financial instruments .

Fundamental Analysis versus Technical Analysis ‡ Technicians ± the term given to analysts who examine stocks and financial markets using technical analysis .

or ± the direction in which aggregate economic activity is moving .Economic Analysis ‡ Forecasting business cycles ± to determine when to expect changes in the business cycle.

Economic Analysis ‡ Business cycle ± the movement in aggregate economic activity as measured by the gross domestic product (GDP) ‡ Expansion ± increasing economic activity ‡ Contraction ± decreasing economic activity .

in the GDP . or decline.Economic Analysis ‡ Gross Domestic Product (GDP) ± a measure of all of the goods and services produced in the economy during a specified time period ‡ Recession ± two consecutive quarters of economic contraction.

Business Cycles .Monetary Policy and Fiscal Policy ‡ Monetary Policy ± the means by which the RBI influences economic conditions by managing the nation¶s money supply .

Business Cycles . which is primarily supported by the government¶s ability to tax individuals and businesses .Monetary Policy and Fiscal Policy ‡ Fiscal Policy ± Government spending.

Business Cycles .Monetary Policy and Fiscal Policy ‡ Deficit spending ± situation that occurs when the government spends more than it collects in taxes .

Industry Analysis ‡ Each industry has differences in terms of its ± customer base. regulation and business cycles. . ± ± ± ± industry-wide growth. competition. ± market share among firms.

. . ± One change in government policy could potentially wipe out all of its sales. ± For example. while others serve millions. a military supplier who has 100% of its sales with the Indian government.Industry Analysis ‡ Customers ± Some companies serve only a handful of customers.

Industry Analysis ‡ Market Share ± Company's present market share can tell volumes about the company's business. ± Market share is important because of economies of scale. .

. there is zero or negative growth. ± In some markets. a factor demanding careful consideration.Industry Analysis ‡ Industry Growth ± Examine whether the amount of customers in the overall market will grow. ± This is crucial because without new customers. a company has to steal market share in order to grow.

Industry Analysis ‡ Competition ± looking at the number of competitors goes a long way in understanding the competitive landscape for a company. ± Industries that have limited barriers to entry and a large number of competing firms create a difficult operating environment for firms. .

Industry Analysis ‡ Regulation ± Certain industries are heavily regulated due to the importance or severity of the industry's products and/or services. . ± They can drastically affect the attractiveness of a company for investment purposes.

Industry Analysis ‡ Industry life cycle ± the various phases of an industry with respect to its growth in sales and its competitive conditions .

Industry Life Cycle Industry Sales Expansion (Growth) Introductory Mature Life-Cycle Stages .

Company Analysis ‡ Business Model ± One of the most important questions that should be asked is: What exactly does the company do? ± This is referred to as a company's business model ± it's how a company makes money. .

Company Analysis ‡ Competitive Advantage ± A company's long-term success is driven largely by its ability to maintain a competitive advantage and keep it. its shareholders can be well rewarded for decades. ± When a company can achieve competitive advantage. .

.Company Analysis ‡ Management ± A company relies upon management to steer it towards financial success. ± Even the best business model is doomed if the leaders of the company fail to properly execute the plan.

± Identify the companies they worked at in the past and do a search on those companies and their performance.Company Analysis ‡ Past Performance ± Check and see how executives have done at other companies in the past. .

.Company Analysis ‡ Financial and Information Transparency ± Sufficient transparency implies that a company's financial releases are written in a manner that stakeholders can follow what management is doing and ± therefore have a clear understanding of the company's current financial situation.

Company Analysis ‡ Stakeholder Rights ± This aspect of corporate governance examines the extent that a company's policies are benefiting stakeholder interests. . notably shareholder interests.

Company Analysis ‡ Financial statement analysis Comparison to other similar firms Forecast direction for future Predict earnings and dividends Risk evaluation .

Investment Professionals¶ Advice Be disciplined with your investment approach Know the company in which you invest Choose firms that are in strong financial positions Stay with the investment until it no longer satisfies your investment goals .

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