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COMPANY ANALYSIS The stock price has been found to depend on the intrinsic value of the company’s share to the extent of about 50% as per many research studies. Some of the shares of companies may be blue chip stock or growth stocks, which are expanding and diversifying and their growth rates are higher than the market averages. Many investors, who are particularly averse to risk, prefer income stocks. These stocks are expected to give consistent dividends and with a good record of income distribution. It is important to analyze the financial data of the company to assess its functioning and credibility. Elements of Financial Analysis Financial analysis is analysis of financial statements of a company to assess its financial health and soundness of its management. “financial Statement Analysis” involves a study of the financial statements of a company to ascertain its prevailing state of affairs and the reasons therefore. Such a study would enable the public and investors to ascertain whether one company is more profitable than the other and also to state the causes and factors that are probably responsible for this. Analysis and Interpretation: the analysis of financial statements includes: a. b. c. d. Comparison of the financial statements Ratio analysis of two to five years. Fund flow analysis Trend analysis

Ratio Analysis Ratio is a statistical yardstick that provides a measure of relationship between any two variables. It can be effectively used as a toll of management along with fund flow statements and trend analysis for interpretation of the financial statements. Ratios may be classified as: a. Revenue statement ratios: gross profit ratio, operating ratio, expense ratio, net profit ratio. b. Balance sheet ratios: current ratio, debt equity ratio, asset equity ratio, liquidity ratio. Use and Limitations of Financial Ratios Attention should be given to the following issues when using financial ratios: • A reference point is needed. To to be meaningful, most ratios must be compared to historical values of the same firm, the firm's forecasts, or ratios of similar firms. • Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to paint a picture of the firm's situation. • Year-end values may not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio. Average values should be used when they are available. • Ratios are subject to the limitations of accounting methods. Different accounting choices may result in significantly different ratio values. Fund Flow Analysis

therefore. (iii) Useful to internal Financial Management. Addition to investments. in planning replacement of plant facilities or in formulating dividend policies. The changes representing the sources of funds in the business may be issue of debentures. the Cash Flow Statement prepared on an estimated basis for the next accounting period will enable the management to plan and co-ordinate the financial operations probably. c. etc. The statement showing sources and uses of funds is properly kn own as Fund Flow Statements. Shorter the period. reserves and surplus. Since it gives a clear picture of cash inflow from operations (and not income flow of operation). Its main advantages are as follows: (i) Planning and Co-ordination of Financial Operations. Cash Flow Statements Cash Flow statement is an essential tool for short term financial analysis an planning. very useful to internal financial management in considering the possibility of retiring ling-term debts. It enables the management to account for situation when business has earned huge profits yet run without money or when it has suffered a loss and still has plenty of money at the bank. addition to funds. . Decrease in liabilities by paying off loans and creditors. Decrease in net worth by incurring losses. Additions to assets b. (iv) Profit and Cash Positions. The management comes to know how much cash is needed in the future and at what time and how can it be arranged-how much internally and how much from outside. Thus a comparison of original forecast with actual results may highlights trends of movement that might otherwise go undetected. (v) Short-term Financial Decisions. it is possible only from Cash Flow analysis and not from Fund Flow Statement. increase in net worth. Cash Flow Statement helps the management in taking short-term financial decisions. A comparison of cash flow statement of previous year with the budget for that year would indicate to what extent the resources of the enterprise were raised an applied according to the plan. The operation of business involves the conversion of cash into non-cash assets which are recovered back into cash form. Suppose. greater is the importance of Cash Flow Statement.2 The balance sheet of a company reveals its financial ststus at a point of time. withdrawal of funds from business. Cash Flow statement is also a control device for the management. Cash Flow Statement is useful is evaluating Financial policies and current cash position. if firm wants to know its state of solvency after one month from to date. (ii) A Control Device. Since cash is the basis for carrying on operations. d. Changes showing the uses of funds include a. It is especially useful in preparing cash budgets. it is. retention of earnings.

which in turn is a part of the overall economy. The tight money position. are all relevant to assess the trends in the economy as they have an impact on the industry and the companies. In the Indian economy. the profit margins of the companies etc. The Government being the biggest investor and spender. Although some interest rates in the organized financial system are now freed. the monetary policy and trends in money supply which mainly depend on the government’s budget policy. with some exception however. then the industries and the companies in general may be prosperous. where the public sector plays a vital role. The changes in excise and customs duties. Fifthly. Concomitant with this. availability of power and other infrastructural outputs. incomes are rising and the demand is good. Thirdly. the trends in public investment and expenditure would indicate the likely performance of the Indian economy. it is important for the assessment and forecast of industrial performance. have a major impact on the industrial growth through the cost and availability of credit. These factors do influence the costs and profit margins of companies from both demand and supply sides. As agriculture is the mainstay of the 70% of the population and contributes nearly 35% of the output of the economy. with some exceptions however. the government policy has to be known in advance in all its aspects and there should be no uncertainty about the political system as economic and political factors are interlinked. the performance of companies will be bed in general. If the monsoon is good and agricultural income rise. The monetary situation along with the budgetary policy influences the movement in price level (inflation) and interest rates. In India. particularly in two digits. the government budget policy. Although a mild inflation is good for business psychology. if the economy is booming.3 FUNDAMENTAL ANALYSIS Influence of the Economy Companies are a part of the industrial and business sector. will defeat all business planning. higher degrees of inflation. On the other hand. These will adversely affect the performance of industry and companies. ceteris paribus. there are no business cycles but outputs do fluctuate depending upon the state of the economy. the economic and political stability in the form of stable and long-term economic policies and a stable political system with no uncertainty would also be necessary for a good performance of the economy in general and of companies in particular The Government regulations being all-pervasive in India. the bazaar rates in the unorganized market do reflect the availability of funds in the free markets. Secondly. Political uncertainties and adverse changes in government policy do . Fourthly. its borrowing from the public and credit from the banks and the RBI. the general business conditions in the form of business cycles or the level of business activity to influence the demand for industrial products and the performance of the industry. corporate taxes. the matters to be considered in the first place are the behavior of the monsoon and the performance of agriculture. performance of agriculture. So interest rates in the free markets and the degree of inflation do have a major influence on the economy and the performance of the industries. increasing budget deficits and RBI creation of currency lead to an inflationary spiral. as these influence the demand and income of the people. etc. tax levies and government borrowing programme along with the extent of deficit financing will have a major influence on the performance of the Indian economy. The business earnings and profits are affected by such changes in business conditions. the demand for industrial products and services will be good and industry propsers. imported inputs and a host of other factors. Thus the performance of a company depends on the performance of the economy in the first place. lead to cost escalation sand squeeze on profit margins. If the economy is in recession or stagnation. India has a mixed economy.

The economic and political situation in the country has thus a bearing on the prospects of the company. pricing cost of production. as the Indian economy depends basically on the monsoon and the growth rate of agriculture. The performance of a company is tusk a function of the industry and of the economy in addition to its own performance . The performance of companies will depend among other things upon testate of the industry as a whole. psychological and sentimental factors. there may be some companies of poor growth or no growth at all. etc. The foreign exchange position and the balance of payments situation at any time would also indicate the rigors of government policy with regard to imports. the companies. The performance of companies will depend among other things upon the state of the industry as a whole and the economy. a broad picture of these factors and a forecast of the growth of the economy and of industry would be necessary to decide when to invest and what to invest in. with a huge public sector in our mixed economy. but more importantly. Besides. price and distribution controls. of the company in the industry. prospects. etc. on its own performance. At any stage in the economy. All the above factors of the economy influence the corporate performance and the industry in general. yearly public investment. The Market Price (MP) is a function of intrinsic factors to the extent of about ½ of it and the rest is accounted by the expectations. the performance of the five-year plan. If the industry is prosperous. the market conditions and the share of the company in the market are to be studied before making a projection of its future growth. exports. The economic and political situation in the country has thus a bearing on the prospects of the company. there are some industries which are growing while others are declining. The performance of a company is thus a function not only of the industry and of the economy. recession. The future profitability can be assessed from the half yearly and annual reports. The shape price of the company is empirically found to depend up to 50% on the performance of the industry and economy.As referred to earlier. market reports. as shown below. raw materials. etc. The demand and supply. borrowing.. In any investment analysis. clearance for foreign collaboration and foreign investment.4 adversely affect industrial growth. within the industries may also be propserous although a few may be in a bad shape. There are different phases in the economy such as boom. if the economy is also doing well. The industrial growth in general and of infrastructural industries in particular influences the corporate performance. profit margins and related data juxtaposed with those of the company. and listing requirements on stock exchanges and a host of other matters like import restrictions do affect the performance of companies. any particular industry can be studied with a view to assess the problems. management interviews and Industry and Commerce Association’s publications. press releases. Thus one important factors the fiscal policy which incorporates government expenditure and taxation. AGM’s reports. and which influence both the public and private sectors in the economy. keeping the industry prospects in mind. depression. industry and company. The performance of the economy in India is not cyclical as in the case of developed countries exhibiting business cycles. foreign investment and related matters. If the industry is propserous. The decision to buy has to be on the basis of whether the price of the share is proper and the future profitability is good . the share price of the company is empirically found to depend up to 50% on the performance of the industry and economy. The fundamentals of the company will explain this. The share of the company in which investment is sought is to be analyzed in terms of the fundamentals of the company in the background of the industry’s performance. The industry data are to be examined from the point of view of the product-mix. etc. government expenditure and a host of other factors influence the economy. within the industries may also be prosperous. the companies. Government policy relating to projects. The industries in different stages of growth are shown below:-Even in industries of above average growth. As referred to earlier at any stage in the economy there are some indutries growing fast while orders are declining. components. deficit financing. The capacity utilization of the industry in general and of the company in question within the industry is to be compared. In the above context.

technology. The most important variable influencing the company’s performance is management. We have to consider the quantifiable factors and qualitative to consider the capital efficiency and the sales turnover and the profitability margins. profit margins and related data juxtaposed with those of the company. distribution. The state of the capital market and the capacity to raise capital from the market not only depend on the performance of the companies but of the economy and the industry as well. companies ‘financial structure. retention policy. any particular industry can be studied with a view to assess the problems. Labour conditions in the industry should also be looked into and have a bearing on growth prospects. etc. The industrial position not only depends upon the economic growth but on the nature of the industry itself. controls on imports and tax policy. popularity and integrity of the management. etc. etc. In the area of market. e. protection or tariff preferences. would influence the cost of production and the profit margins of the industry. prospects. Only shares which are underpriced are to be generally purchased. bonus policy and liquidity ratios. their domestic availability and the problems of the industry in general. the quality. cost and profit margins. demand. In many industries. retention policy. the financial highlights of the companies. financial viability. as also the prospects of growth. Generally. The pricing and the Government controls on prices. inputs and raw materials. The market capitalization of a share is to be compared with the book value and the intrinsic worth of the company. The information for this purpose is to be secured from the annual reports of the company. book value. have a major influence on the market from the point of view of supply.5 based on a rational forecast for the future. growth orientation. nature of the products. cost of production. expansion plans. Rating of collaborators. are to be looked into. components.. tax planning. etc. The popularity of the management is known from their track record. raw materials. distribution of dividends and bonus. etc. leverage. namely. etc. Management efficiency. In the area of financial management. balance sheets. press reports. . financial management. Uniqueness of the product. which are influenced by the industry and the economy are the capacity utilization. the demand for the products produced and the prospects for exports. capability. excise and customs duties etc. the rating of the promoters and management has to be looked into through their plans. In the above context. etc. Location of government policy and patronage. etc. The industry data are to be examined from the point of view of the installed capacity and its utilization. Within the industry the factors which have to be taken into account are the product-mix. d. influence the prospects of the industry. Rating of promoters. b. The P/E ratio and earnings per share. The quantifiable data are based on financial statement Analysis.. dividend record.the market nature of the inputs. installed capacity of the industry -utilization of capacity . liquidity and profitability. R & D. c. The capacity utilization of the industry in general and of the company in question within the industry is to be compared. particularly of electricity. the raw materials and other inputs and their availability domestically. pricing. the various outputs. AGM’s reports management’s press releases and the publications of the Industry and Commerce Associations. The fundamentals of the company are to be analyzed in terms of its financial structure. provided they have the potential for growth and capital appreciation. are to be looked into in this context. The qualitative factors are: a. etc. etc. of the company in the industry. In the company analysis. The honesty and integrity of the management can be seen from the shareholding pattern and the availability of floating stock and the liquidity of shares of the company. The share has to be examined to know whether it is properly priced and reflects its true intrinsic value.

Depreciation. equity. For this purpose. the use of capital is efficient if there is a high sales turnover to gross block. the growth of gross block. the profits will also be high. we have to consider among other things. The company may have only a small profit margin but if the sales turnover is high. the capital efficiency and the sales turnover and the profitability margins. Gross profits-to-sales ratio measures the profit margins. To examine the financial highlights. these ratios of companies within the industry are to be compared with the industry’s overall operating performance in respect of the variables referred to earlier. Similarly. The future profitability can be assessed from the half-yearly and annual reports. management interviews and Industry and Commerce Association’s publications. Similarly.6 The demand and supply. The decision to buy has to be on the basis of whether the price of the share is proper and the future profitability is good based on a rational forecast for the future. taxes. a company uses capital efficiently by having a high turnover of equity. Normally. to be expected from any company to start with. and gross profits are to be analyzed in respect of each company within the industry. it is not worth the purchase. therefore. The riskless return is 12% and a reasonable return is 15%. the market conditions and the share of the company in the market are to be studied before making a projection of its future growth. gross profit to gross block and the dividend policy. The gross profit (GP)is also to be examined in relation to the market capitalization. earning per share and bonus payouts are all to be examined from the point of view of the future prospects of the company in the background of industry performance and possible capital appreciation of the shares. If a company in any industry is less profitable than that. keeping the industry prospects in mind. sales. The stock of the company in which investment is sought is to be analyzed in terms of the fundamentals of the company in the background of the industry’s performance. In this context. press releases. A total return in the form of gross profit of not less than 30% is. the following components may be taken into account. etc. may account for another 15%. AGM’s reports. market reports. . On this basis.