traditional methods of security analysis - fundamental analysis

Group No. 3

Shyamala Devi

Shreya Pathak

Aseem Kumar

Bhartendu Gautam

P. Brijesha

Avunoori Satish

What is Fundamental Analysis

Examination of future earning potential of the company.

Analysis of the economic well-being of a financial entity as opposed to only its price movements.

Analyses various factors that impact the performance of the company.

It considers economic, financial and other qualitative and quantitative factors.

Objective

Valuation of stock in comparison to its current price.

Decision to buy or sell the stock on the basis of its valuation in

the market.

Underpriced = buy

Overpriced = sell or short

Earnings Per Share

The portion of a company's profit allocated to each outstanding share

Drawback

Price Earning Ratio

A valuation ratio of a company's current share price compared

to its per-share earnings.

= Market Value Per Share

Earnings Per Share(EPS)

Drawback

Dividend Payout Ratio

measures the percentage of a company's net income that is

given to shareholders .

=Total Annual Dividends Per Share

Diluted Earnings Per Share

Present value of all future cash flows in the form of dividends

plus the present value of the sale price expected .

P= [D1/(1+r)] + [P1/ (1+r)]

Where,

P = Current price/ market price of the share today

D1 = Dividend expected at the end of one year

r = discount rate/ required rate of return

P1= market price/ expected price of share at the end of year 1

Presumes that dividend per share is growing at the constant

rate

P= D1/ r-g

Where,

D1 = dividend per share at the end of first year

r = Expected rate of return

g = Constant growth rate

It is important to analyse the economic activity in which all the companies operate.

For economic analysis we can see few economic indicators.

• Global Economy

• Domestic Economy

The top down analysis of company starts with global and domestic economy

Domestic Economy

1. GDP

2. EMPLOYMENT

3. INFLATION

4. INTEREST RATE

5. BUDGET DEFICIT

6. OTHER FACTORS:- Money supply, Fiscal policy, Monetary Policy,

Labour productivity, Stock Price, FII & FDI investment etc.

1. Introduction:

Second phase of fundamental analysis.

Industries selected in the previous stage are scanned individually.

A micro study of each industry is carried out.

Objective is to provide information about the best industry for investment-making.

Steps taken for industry analysis:

Study of industry life cycle

Study of qualitative and quantitative factor.

1. Study of industry life cycle:

Pioneering stage

Rapid growth stage

Maturity and Stabilization

Decline/Diversification

Steps taken for industry analysis:

2. Study of Qualitative and quantitative factors:

Qualitative factors

Quantitative factors

Steps taken for industry analysis contd..:

They rely on historical data

Poor predictors of how share price reacts to economic and

industry level changes

Provides poor estimates of expected returns

Do not offer measures of variability of returns

Do not reflect underlying risk reward relationship

FUNDAMENTAL ANALYSIS

TECHNICAL ANALYSIS

It starts with the study of

Financial Statements

Financial analyst attempts to

measure a company's

intrinsic value

Long term approach,

Historical data is taken

under consideration

Fundamental analysis is

used to make an investment

Technical analyst approaches a

security from the charts.

Technical traders believe there is

no reason to analyze a

company's fundamentals

because these are all accounted

for in the stock's price.

Short term data is considered for

analysis of stocks

Technical analysis is used for a

trade

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