Fundamental Analysis Part 1

 Why Fundamental Analysis? Technical Analysis- Short term, Fundamental Analysis- Long
term, need to know the overall health of the business, stocks of fundamentally strong
companies tend to appreciate over long term. Example: TCS, Infosys, Page Industries, Eicher
Motors, nestle, TTK prestige: 20% CAGR (Compounded Annual Growth Rate), Higher the
CAGR faster the wealth creation process, Wealth destructor Companies: Suzlon Energy (-
30.1), Reliance Power (-30), Sterling Biotech (-43)
 Both TA and FA: TA- short term trading bets, FA- long term returns, should coexist; Satellite
portfolio (10-12%) for active returns+ long term core investment portfolio (12-15%)
 Tools of FA: Basic annual report, Industry related data, Access to news, MS Excel
 Speculator, trader and Investor: 1. Guess work 2. Past trends/Back testing 3. Long term in
mind
 Investible grade attributes: Distinguished characteristics of Investible grade companies, two
types- Qualitative and Quantitative
 Qualitative aspects- 1. Management Background (Experience, Education, Merit, Criminal
Cases) 2. Business Ethics 3. Corporate Governance (Appointment of directors, organizational
structure, transparency) 4. Minority Shareholders (Inclusion of their interest or not) 5. Share
Transactions (Management buying or not) 6. Related party transactions (favors to knowns or
not) 7. Salaries paid to promoters 8. Operator activity in stocks (Unusual price behavior of
stocks especially when promoter is transacting in shares or? Not?) 8. Shareholders (Who
own above 1% of the outstanding shares of the company) 9. Political Affiliation 10. Promoter
Lifestyle
 Quantitative Aspects- 1. Profitability and its growth 2. Margins and its growth 3. Earnings
and its growth 4. Matters related to expenses 5. Operating efficiency 6. Pricing power 7.
Matters related to taxes 8. Dividends payout 9. Cash flow from various activities 10. Debt –
both short term and long term 11. Working capital management 12. Asset growth 13.
Investments 14. Financial Ratios
 Annual Report- Yearly publication by the company, sent to shareholders and interested
parties, published at the end of financial year; dated 31 st march, available on company’s
website under investors section, considered official
 Sections of Annual Report-๏ Financial Highlights ๏ The Management Statement ๏
Management Discussion & Analysis ๏ 10-year Financial highlights ๏ Corporate Information ๏
Director’s Report ๏ Report on Corporate ๏ Financial Section, and ๏ Notice
 Financial Highlights- Bird’s eye view on how the financials of the company look for the year
gone by, multiyear comparison of operating and business metrics, includes a few financial
ratios
 Management Statement- Qualitative Aspects can be judged through this, check for
transparency offered by management, their thought process
 Management Discussion and Analysis- Macro trends of the economy, overall economy of the
country, business sentiments across the corporate world, global economic and business
sentiments (if company is into exports), trends in the industry, expectations for the next
year, performance of business across various divisions, performance with respect to last
year, strategies for the year ahead across various verticals
 The financial statements- 1. Profit and Loss Statement 2. Balance Sheet Statement 3. Cash
Flow Statement
 Financial Statements come in two forms- 1. Standalone financial statement or simply
standalone numbers 2. Consolidated financial statement or simply consolidated numbers
 Schedules of financial statements- Main statement gives summary; Schedules give details
Fundamental Analysis Part 1

 P&L Statement- 1. Revenue 2. Expenses 3. Tax and Depreciation 4. Earnings per share
number
 Revenue- The top line of the company, 1. Sales (+) 2. Excise Duty (-) 3. Net Sales (=) 4.
Revenue from services (+) 5. Total Operating revenue (Sales of Products+ Sales of services+
Other Operating revenues (interest on bank deposits, dividends, insurance claims, royalty
income etc.))
 Cost of sales method classification of expenses: According to their function or based on the
nature of expense
 Expense: Cost of materials consumed(Cost of raw materials)+ Purchases of Stock in
trade(Finished goods that company buys)+ Change in inventories of finished goods+ work-in-
progress and stock in trade+ Employee benefit expense(Salaries, PF, other employee welfare
expenses)+ Finance Cost/Finance charges/Borrowing Cost(Interest over borrowed funds)+
Depreciation/Amortization+ Other Expenses(include manufacturing, selling, administrative
and other expenses)
(Doubt2- How does amortization work in monetary terms)
 Profit Before Tax: Revenue- Operating Expenses= Operating Income, tax and interest not yet
deducted
 Exceptional items/ extraordinary items: Expenses occurring at one odd time, not recurring,
treated separately on the P&L statement.
 Profit after tax: Minus tax liability, bottom line of the statement. Includes Current Tax
(Corporate tax available) (wtf) , Deferred Tax, earlier year’s (excess)/short provision, last
line-EPS (Doubt: What the fuck are all of these?)
 1. Assets in a balance sheet- Tangible/Intangible, controlled by company, generate future
cash flows, types- Current, Non-current 2. Liabilities in a balance sheet- Company’s
obligation, types- Current, Non-current; Examples- Short term borrowings, long term
borrowings, payments due etc.; Assets=Liabilities+ Owner’s Equity
 Liabilities Side- a) Shareholder’s Equity- 1. Share Capital- Face Value*Number of Shares + 2.
Reserves and Surpluses
 Liabilities Side- b) Reserves and Surpluses- Money earmarked by company for specific
purposes, basically profits earned
 Reserves - 1. Capital Reserve- Earmarked for long term projects 2. Securities premium
reserve/account- Premium over and above the par/face value 3. General reserve-
Accumulated profits of the company not yet distributed, Surplus- profits made during the
year
 Non-current Liabilities- Long term obligations, 1. Long term borrowings (Deferred payment
liabilities, Interest free sales tax deferment) 2. Deferred tax liabilities (Provision for future tax
payments, arise due to difference in treatment of depreciation) 3. Long term provisions
(Money set aside for employee benefits such as gratuity, leave encashment, provident fund
etc)
 Current Liabilities- to be settled within 365 days, 1. Short term borrowings (to meet day to
day cash requirements/Working capital requirements 2. Trade/account payables (to be paid
to vendors) 3. Other current liabilities (Statutory requirements and obligations) 4. Short term
provisions (Employee and related benefits)
 Assets- Resources held by companies, generates future revenues, 1. Non-Current Assets 2.
Current Assets
Fundamental Analysis Part 1

 Non-current assets- 1. Fixed Assets 2. Non-current investments 3. Long term loans and
advances (given out to other group companies, employees, suppliers, vendors etc.) 4. Other
Non-current Assets
 Fixed Assets- 1. Tangible 2. Intangible (patents, copyrights, trademarks, designs) 3. Capital
Work-in progress (Work not completed but capital expenditure incurred) 4. Intangible assets
under development
 Gross Block- Value at which an asset is acquired, Net Block- Value of an asset after
depreciation, Net Block= Gross Block- Accumulated Depreciation
 Current Assets- Easily converted to cash, within 365 days, for day to day operations and
ongoing expenses, 1. Inventories 2. Trade/accounts receivables 3. Cash and bank balances 4.
Short term loan and advances (advance tax payment is also an example) 5. Other current
assets
 P&L Vs BS- 1. Sales Revenue-> Receivables and Cash balance 2. Operating Expenses-> Trade
receivables and Inventory 3. Depreciation and Amortization-> Accumulated Depreciation 4.
Other Income-> Investments 5. Finance Cost-> Debt 6. Profit after tax-> Shareholder’s equity
 Activities of a company- 1. Operational Activities 2. Investment Activities (to reap benefits at
a later stage) 3. Financing Activities (Financial Transactions basically)
 Cash Flow of the company= Net cash from operational activities (being + is a good sign)+ Net
Cash from Investment Activities+ Net Cash from Financial Activities
 Net cash in the end of the cash flow statement represents the bank balance of the company
and is represented under cash and cash equivalents on the asset side of the balance sheet.