Learning Goals

• Fundamental
• Technical analysis
 How to decide where and how to invest?

• For this purpose we need a careful assessment of all the

investment avenues
• There are two ways for this evaluation:
– Fundamental analysis
• Balance sheet ratios
• Profit and loss ratios
• Profitability ratios
• Liquidity ratios
• Operation efficiency
• Solvency
• Bankruptcy

– Technical analysis
 How to decide where and how to invest?

• Fundamental Analysis: determining value of a company by

analyzing the fundamental financial statements of a company
(e.g., balance sheet, cash flow statement, profit and loss
statement)

• Technical Analysis: is a process of security analysis discipline

for forecasting the direction of prices through the study of past
market data, primarily price and volume.
• Technical analysts say that you should take decision only when
there is trend or pattern
• Analysts use various tools and techniques to identify trends and
patterns which can aid in predictions of future market movements
 Fundamental Analysis
Q1. Why financial reports are prepared?
Ans: To facilitate users in making economic decisions.

Q2. Who are the users?

Ans: Users include
• Shareholders and prospective shareholders
• Lenders
• Creditors
• Employee
• Management
• Government
• Global community
 Fundamental Analysis
Q3. What type of economic decision is each user going
to make?
Ans: Economic decisions are about allocation of
resources.

Q4. For allocation of resources there is a need for some

information. What kind of information would be of
interest to each user?
Ans: Each user will need information mostly presented
in the form of ratios.
 Ratios
 Ratio means one with relation to other

 Ratio discusses the average relationship of one variable

with the other

 A ratio alone is nothing. It tells us nothing alone. It is

always used in comparison

 For example, a company’s current ratio is 1.5, Is it good

or bad?
 Ratios
Q5. How can we compare a ratio?

Ans: There are 4 basis for comparison:

1. Benchmark

2. Industry

3. Direct competition

4. Previous performance
 Types of Ratios
o Liquidity ratios
o Current ratio
o Quick ratio
o Cash ratio
o Net working capital

o Profitability ratios
o Gross profit margin
o Net profit margin
o ROA
o ROE
o ROCE
 Types of Ratios
o Operating efficiency
o Inventory turnover in times
o Stock days
o A/R turnover in times
o Collection period
o A/P turnover in times
o Payment period
o Operating cycle
o Cash cycle
o Fixed asset utilization ratio
 Types of Ratios
o Leverage/Gearing ratios
o LTD/Equity
o LTD/ Assets
o TD/Equity
o TD/Assets
o Self financing ratio
o Cash flow ratio

o Coverage ratios
o Interest coverage ration
o Dividend coverage ratio
 Types of Ratios
o Bankruptcy ratio
o Z-score model
o O-score
o D-score
o Moral Hazard
o M-score

o Growth ratio
o Sales growth
o Assets growth
o EPS growth
 Types of Ratios
o Market perspective
o P/E ratio
o MBR
o DPO
o Tobin Q
o Dividend Yield
o Interest rate yield