Fundamental analysis (FA) is a method of 

measuring a security's intrinsic

value by examining related economic and financial factors. Fundamental analysts
study anything that can affect the security's value, from macroeconomic factors
such as the state of the economy and industry conditions to microeconomic
factors like the effectiveness of the company's management.

The end goal is to arrive at a number that an investor can compare with a
security's current price in order to see whether the security is undervalued or
overvalued.

This method of stock analysis is considered to be in contrast to technical

analysis, which forecasts the direction of prices through an analysis of historical
market data such as price and volume.

Understanding Fundamental Analysis

All stock analysis tries to determine whether a security is correctly valued within
the broader market. Fundamental analysis is usually done from a macro to micro
perspective in order to identify securities that are not correctly priced by the
market.

Analysts typically study, in order, the overall state of the economy and then the
strength of the specific industry before concentrating on individual company
performance to arrive at a fair market value for the stock.

Fundamental analysis uses public data to evaluate the value of a stock or any
other type of security. For example, an investor can perform fundamental
analysis on a bond's value by looking at economic factors such as interest rates
and the overall state of the economy, then
studying information about the bond issuer, such as potential changes in
its credit rating.

For stocks, fundamental analysis uses revenues, earnings, future growth, return

on equity,
profit margins, and other data to determine a company's underlying value and
potential for future growth. All of this data is available in a company's financial
statements (more on that below).

Fundamental analysis is used most often for stocks, but it is useful for evaluating
any security, from a bond to a derivative. If you consider the fundamentals, from
the broader economy to the company details, you are doing fundamental
analysis.
Fundamental analysis is really a logical and systematic approach to estimating the future dividends
and share price. It is based on the basic premise that share price is determined by a number of
fundamental factors relating to the economy, industry and company. Hence , the economy
fundamentals, industry fundamentals and company fundamentals have to be considered while
analyzing a security for investment purpose. Fundamental analysis is, in other words, a detailed
analysis for the fundamental factors affecting the performance of the companies.

Objectives:To conduct a company stock valuation and predict its probable price evolution.  To
make a projection on its business performance.  To evaluate its management and make internal
business decisions.  To calculate its risk.

Each share is assumed to have an economic worth based on its present and future earning capacity.
This is called its intrinsic value or fundamental value. The purpose of fundamental analysis is to
evaluate the present and future earning capacity of a share based on the economy, industry and
company fundamentals and thereby assess the intrinsic value of the share. The investor can then
compare the intrinsic value of the share with the prevailing market price to arrive at an investment
decision. If the market price of the share is lower than its intrinsic value, the investor would decide to
buy the share as it is underpriced.

The price of such a share is expected to move up in future to match with its intrinsic value. On the
contrary, when the market price of the share is higher than its intrinsic value, it is perceived to be
overpriced. The market price of such a share is expected to come down in future and hence, the
investor would decide to sell such a share. Fundamental analysis thus provides an analytical
framework for rational investment decision-making. This analytical framework is known as EIC
framework, or Economy-Industry- Company Analysis.

Types of fundamental Analysis

Although it is generally accepted that the aim fundamental analysis is to determine the
economic value of a security, it is the practice of fundamental analysis that gives raise to two sub types
namely,
1. Macro fundamental analysis, The top down approach
Macro fundamental analysis focuses on broad economic factors that affect the stock
market as a whole or industry groups of securities. This approach is known as the top
down approach of macro fundamental analysis. The practice of macro fundamental
analysis starts at the over all performance of the economy, its impact on industry groups
and finally down to specific companies in the industry groups.
It is noteworthy that macro fundamental analysis has a more formal and structured
approach and as such this approach is much favored by research department of
investment management companies and brokerage houses.
2. Micro fundamental analysis  The bottom up approach
Micro fundamental analysis starts by considering the current price of a stock and
compares it to measures of value. Hence the current price of stock is compared to its
dividend yield, price to earnings ratio and its price to asset ratio. The resultant valuation
enable comparison to be made amongst stocks are identified by comparison to the
industrial norm. after this phase of analysis, the micro fundamental analysis attempts to
predict industry and economic developments that may positively or negatively the stocks
current price.
 It is pertinent to note that investment icon such as Benjamin Graham, his prodigies
Warren Buffet, Charles Munger and William Ruane tend toward Micro fundamental
analysis.
Economy-Industry-Company Analysis Framework
Fundamental analysis insists that no one should purchase or sell a share on the basis of tips
and rumors. The fundamental approach calls upon the investor to make his buy or sell decision on
the basis of a detailed analysis of the information about the company, the industry to which the
company belongs and the economy. This results in informed investing. For this, a fundamentalist
makes use of the EIC framework of analysis.

EIC Framework:
The analysis is a 3 layer analysis wherein the analysis of economy, industry and company is
carried out. The logic behind 3 layer is that the performance of the company depends on the
performance of the industry and economy as a whole. In the era of the globalization we may add one
more layer to the diagram to represent the international economy. The multitude of factors affecting
the intrinsic value of an equity share can be broadly categorized into 3 factors namely:
1. Economic related factors such as-
-growth rate of GDP,
- industrial growth rate,
- inflation,
-interest rate,
- government budget and deficit etc.
2. Industry related factors such as
-demand and supply conditions in the industry,
-existence of substitutes,
-government policy etc.
These factors affect only those companies which belong to a specific industry.
3. Company related factors include
-financial performance,
-operating efficiency,
-capital structure,
-competitive edge of the company etc.

Fundamental analysis is a structured and formal approach to research on a stock value and its
potential growth. The analytical procedure facilitates the identification of overvalued and undervalued
stocks relatives to their earnings potential, dividend income potential and to their asset values,
against the backdrop of the economic and the industry environment. On the basis of research,
investment decisions are made such that the odds are stacked in our of the fundamental analyst.

The end goal of performing fundamental analysis is to produce a value that an investor can compare
with the underlying assets current price in hopes of figuring out what sort of position to take with that
security(under priced = buy, overpriced = sell).
Fundamental analysis focuses on cause and effect — causes external to the trading markets that
are likely to affect prices in the market. These factors may include the weather, current inventory
levels, government policies, economic indicators, trade balances and even how traders are likely to
react to certain events. Fundamental analysis maintains that markets may misprice a commodity in
the short run but that the "correct" price will eventually be reached.

-Profits can be made by trading the mispriced commodity and then waiting for the market to
recognize its & quote ; mistake & quote ; and correct it.

Various Techniques of Fundamental Analysis The Demand- Supply Framework Price Elasticity The
Balance Table Stocks-to- Disappearance Ratio The Tabular and Graphic Approach The Regression
Analysis Econometric Models Seasonal Price Index

Market Demand: Market demand represents how much people are willing to purchase at various
prices. Thus, demand is a relationship between price and quantity demanded, with all other factors
remaining constant.

https://www.investopedia.com/terms/f/fundamentalanalysis.asp
https://www.slideshare.net/bhargavibhanu10/fundamental-analysis-33849616#:~:text=Fundamental
%20analysis%20thus%20provides%20an,Economy%2DIndustry%2D%20Company%20Analysis.

A business valuation is a general process of determining the economic value of a

whole business or company unit. Business valuation can be used to determine
the fair value of a business for a variety of reasons, including sale value,
establishing partner ownership, taxation, and even divorce proceedings. Owners
will often turn to professional business evaluators for an objective estimate of the
value of the business.

When valuing a company as a going concern, there are three main valuation methods used by
industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent
transactions.  These are the most common methods of valuation used in investment banking,
equity research, private equity, corporate development, mergers & acquisitions (M&A),
leveraged buyouts (LBO), and most areas of finance.

NET ASSET VALUE METHOD

An asset-based approach is a type of business valuation that focuses on a

company's net asset value. The net asset value is identified by subtracting
total liabilities from total assets. There is some room for interpretation in terms of
deciding which of the company's assets and liabilities to include in the valuation
and how to measure the worth of each.

Identifying and maintaining awareness of the value of a company is an important

responsibility for financial executives. Overall, stakeholder and investor returns
increase when a company’s value increases, and vice versa.
There are a few different ways to identify a company’s value. Two of the most
common are the equity value and enterprise value. The asset-based approach
can also be used in conjunction with these two methods or as a standalone
valuation. Both equity value and enterprise value require the use of equity in the
calculation. If a company does not have equity, analysts may use the asset-
based valuation as an alternative.

Many stakeholders will also calculate the asset-based value and use it
comprehensively in valuation comparisons. The asset-based value may also be
required for private companies in certain types of analysis as added due
diligence. Furthermore, the asset-based value can also be an important
consideration when a company is planning a sale or liquidation.

https://www.investopedia.com/terms/a/asset-based-approach.asp#:~:text=There%20are%20several
%20methods%20available,of%20its%20assets%20and%20liabilities.

Consider using the Net Asset Value Method for valuing a business when:

1. The company holds significant tangible assets, and there are no significant intangible assets.
2. There is little or no value added 10 the company’s products or services from labor.
3. The balance sheet reflects all the company’s tangible assets; that Is, the company has not
expensed any tangible assets that continue to benefit the company.
4. The company is expected to continue as a going concern.·
5. The ownership Interest being valued is either a controlling interest or has the ability to cause the
sale of the company’s assets.·
6. The company has no established earnings history or a volatile earnings/cash now history.
7. A significant portion of the company’s assets are composed of liquid assets or other investments
(such as marketable securities, real estate investments, mineral rights).
8. The business depends heavily on competitive contract bids, and there is no consistent,
predictable customer base.
9. It is relatively easy to enter the company’s industry (for example, small machine shops and retail
shops).
10. The company is a start-up business.

https://investmentbank.com/net-asset-value-method/
The asset-based approach to valuation focuses on a company's net asset value (NAV), or the fair market
value of its total assets minus its total liabilities, to determine what it would cost to recreate the
business. While there is some room for interpretation in terms of deciding which of the company's
assets and liabilities to include in the valuation, an asset-based valuation approach is generally the
easiest to apply relative to the traditional income-based and market approaches.

CAPITALIZED EARNINGS METHOD

The capitalized earnings method consists of calculating the value of a
company by discounting future profits with a capitalization rate adjusted to
the determining date for the valuation. 

In the context of the capitalized earnings method, a company is considered as an

investment. Attention is therefore focused solely on the future profits that the
company will make, on the associated risks or on earnings projections. Operating
assets are seen only as a way of making profits and no specific value is allocated
to these.

To calculate capitalized earnings, the company’s profits are estimated for the
following two to five years from the valuation date. It is important to point out that
this refers to adjusted profits. Extraordinary and non-operating income and
expenses, along with salaries not conforming to the market, must be adjusted.
Adjusted operating profits are discounted using a capitalization rate
corresponding to an earnings projection adapted to the risk of this specific
company. If the company has assets not essential to operation (e.g. real estate
outside the company or surplus liquidities), these will be calculated separately,
then added to the capitalized earnings calculated.

If we set aside detailed planning for future financial years, we can proceed with a
simplified calculation of capitalized earnings. To do this, long-term operating
profit is estimated, then discounted with the capitalization rate:

As a general rule, the valuation of future earnings is often based on the adjusted

average operating profit for the last three years. When being calculated, annual
figures are adjusted based on non-operating expenses and earnings which are
outside the period and extraordinary in nature, along with an objective salary for
the entrepreneur.

The capitalization rate is calculated as follows, remembering that the

corresponding figures may vary depending on the company's size, sector and
individual circumstances.

 Risk-free interest rate

 Market risk premium
  Rate for small companies
 Rate of non-liquidity
 Rate for risk specific to the company: on a case-by-case basis

Calculation of the capitalization rate, particularly in the area of risks specific to

the company, requires a subjective valuation of several factors such as position
on the market, customer risk, supplier risk, personnel risk, etc. Bearing in mind
the fact that even the slightest change made to the capitalization rate can have a
major influence on capitalized earnings, it is not surprising that this point is the
subject of much debate.

https://www.kmu.admin.ch/kmu/en/home/concrete-know-how/acquiring-selling-
closing-business/transferring-a-company/valuing-company/capitalized-
earnings.html#:~:text=The%20capitalized%20earnings%20method
%20consists,is%20considered%20as%20an%20investment.

Enterprise multiple, also known as the EV multiple, is a ratio used to determine

the value of a company. The enterprise multiple, which is enterprise value
divided by earnings before interest, taxes, depreciation, and amortization
(EBITDA), looks at a company the way a potential acquirer would by considering
the company's debt. What's considered a "good" or "bad" enterprise multiple will
depend on the industry. 

Enterprise value multiple is the comparison of enterprise value and earnings before interest, taxes,
depreciation and amortization. This is a very commonly used metric for estimating the business
valuations. It compares the value of a company, inclusive of debt and other liabilities, to the actual
cash earnings exclusive of the non-cash expenses.

This ratio is also known as “EV/EBITDA ratio” and “EBITDA multiple”. Enterprise multiple can be
used to compare the value of one company to the value of another company within the same
industry. A lower enterprise multiple can be indicative of undervaluation of a company.

Formula and Calculation of Enterprise Multiple

where:EV=Enterprise Value=Market capitalization +total debt−cash and 
cash equivalentsEBITDA=Earnings before interest, taxes, depreciationan
d amortization
Investors mainly use a company's enterprise multiple to determine whether a
company is undervalued or overvalued. A low ratio relative to peers or historical
averages indicates that a company might be undervalued and a high ratio
indicates that the company might be overvalued.

An enterprise multiple is useful for transnational comparisons because it ignores

the distorting effects of individual countries' taxation policies. It's also used to find
attractive takeover candidates since enterprise value includes debt and is a
better metric than market capitalization for merger and acquisition (M&A)
purposes.

Enterprise multiples can vary depending on the industry. It is reasonable to

expect higher enterprise multiples in high-growth industries (e.g. biotech) and
lower multiples in industries with slow growth (e.g. railways).

Enterprise value (EV) is a measure of the economic value of a company. It is

frequently used to determine the value of the business if it is acquired. It is
considered to be a better valuation measure for M&A than a market cap since it
includes the debt an acquirer would have to assume and the cash they'd receive.

https://www.readyratios.com/reference/market/enterprise_value_multiple.html#:~:
text=Enterprise%20value%20multiple%20is%20the,for%20estimating%20the
%20business%20valuations.&text=This%20ratio%20is%20also%20known,
%E2%80%9D%20and%20%E2%80%9CEBITDA%20multiple%E2%80%9D.

https://www.investopedia.com/terms/e/ev-ebitda.asp

DCF Model

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst

forecasts the business’ unlevered free cash flow into the future and discounts it back to
today at the firm’s Weighted Average Cost of Capital (WACC).

A DCF analysis is performed by building a financial model in Excel and requires an

extensive amount of detail and analysis.  It is the most detailed of the three approaches
and requires the most estimates and assumptions. However, the effort required for
preparing a DCF model will also often result in the most accurate valuation. A DCF
model allows the analyst to forecast value based on different scenarios, and even
perform a sensitivity analysis.
For larger businesses, the DCF value is commonly a sum-of-the-parts analysis, where
different business units are modeled individually and added together. To learn more,
see CFI’s DCF model infographic.

Discounted cash flow (DCF) is a valuation method used to estimate the value of

an investment based on its expected future cash flows. DCF analysis attempts to
figure out the value of an investment today, based on projections of how much
money it will generate in the future.

This applies to investment decisions of investors in companies or securities, such

as acquiring a company, investing in a technology startup, or buying a stock, and
for business owners and managers looking to make capital budgeting or
operating expenditures decisions such as opening a new factory, purchasing or
leasing new equipment

The purpose of DCF analysis is to estimate the money an investor would receive
from an investment, adjusted for the time value of money. The time value of
money assumes that a dollar today is worth more than a dollar tomorrow
because it can be invested. As such, a DCF analysis is appropriate in any
situation where a person is paying money in the present with expectations of
receiving more money in the future.

For example, assuming a 5% annual interest rate, $1.00 in a savings account will
be worth $1.05 in a year. Similarly, if a $1 payment is delayed for a year, its
present value is $.95 because it cannot be put in your savings account to earn
interest.

DCF analysis finds the present value of expected future cash flows using
a discount rate. Investors can use the concept of the present value of money to
determine whether future cash flows of an investment or project are equal to or
greater than the value of the initial investment. If the value calculated through
DCF is higher than the current cost of the investment, the opportunity should be
considered.

In order to conduct a DCF analysis, an investor must make estimates about

future cash flows and the ending value of the investment, equipment, or other
asset. The investor must also determine an appropriate discount rate for the DCF
model, which will vary depending on the project or investment under
consideration, such as the company or investor's risk profile and the conditions of
the capital markets. If the investor cannot access the future cash flows, or the
project is very complex, DCF will not have much value and alternative models
should be employed.

Discounted Cash Flow Formula

The formula for DCF is

where:CF=The cash flow for the given year.CF1 is for year one, CF2 is 
for year two,CFn is for additional yearsr=The discount rate
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