Professional Documents
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Book Issue Part 1
Book Issue Part 1
Book Issue Part 1
The resources have been designed by Finance & Economics Club, IIT
Guwahati. External Sale without prior permission of the same will invite legal
action.
The resources are also divided in the order we find perfect to follow. It is
entirely up to you and what order you want to follow. For any queries, feel
free to contact: finneco_club@iitg.ac.in.
FUNDAMENTAL ANALYSIS
It 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 worth,
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 determine a number that an investor can compare with a security's
current price to see whether the security is undervalued or overvalued.
TECHNICAL ANALYSIS
Technical analysis is a trading discipline employed to evaluate investments and identify
trading opportunities by analyzing statistical trends from trading activity, such as price
movement and volume. Unlike fundamental analysis, which attempts to assess a
security's value based on business results such as sales and earnings, technical analysis
focuses on the study of price and volume.
COMPANY ANLALYSIS
Company analysis is the process by which investors evaluate securities, the company’s
profile, profitability, and its products and services for the investment process. Factors
affecting company analysis are qualitative factors and quantitative factors. Qualitative
factors are business models, competitive advantage, Management, and corporate
governance. Quantitative factors deal with company growth and industry growth along
with its peers.
In the top-down approach, the investors start analyzing the macroeconomic factors like
monetary policy, inflation, economic growth, and broader events before digging deep into
the individual stock.
After looking at the big-picture conditions around the world, analysts next examine the
general market conditions to identify high-performing sectors, industries, or regions within
the macroeconomy. The goal is to find particular industrial sectors forecast to outperform
the market. Based on these factors, top-down investors allocate investments to
exceeding economic regions rather than betting on specific companies.
Top-down investing can make more efficient use of an investor's time by looking at large-
scale economic aggregates before choosing regions or sectors and then specific
companies instead of starting with the entire universe of individual companies' stocks.
However, it may also miss out on many potentially profitable opportunities by eliminating
specific companies that outperform the general market.
BOTTOM-UP APPROACH
In this approach, we analyze the individual companies and then build a portfolio based on
the specific attributes.
QUANTITATIVE ANALYSIS
In the quantitative factors, we deal with the industry and the company’s growth along with
its peers. There will be a few times when the company will outperform the industry and
sometimes when it will underperform the sector. Whether the company would be able to
beat its industry or not depends on the growth and size of the company compared to the
industry. The smaller the company, the higher growth is expected out of it and vice versa.
Along with these, the other quantitative factors affecting the analysis are the financial
statements. A company with very good growth but with a weak balance sheet can be
considered to be a risky investment. Companies having a large number of competitors in
their segment will have more pricing pressure and thus lower margins.
FMCG companies cannot just hike or lower the prices as there are too many competitors
which might get affected whereas, in the airline’s industry, only a few players operate
which enables them to hike or reduce their prices whenever they want.
Hence, to summarize, in the airline industry the players have pricing power, on the other
hand, the FMCG players do not enjoy the pricing power.
This pricing power phenomenon affects the margins. In the FMCG industry margins do
not fluctuate much, whereas, in the airline industry the margins do get affected due to the
fluctuations in the prices of the fares.
QUALITATIVE ANALYSIS
This approach depends on the kind of intelligence that machines (currently) lack since
things like positive associations with a brand, management trustworthiness, customer
satisfaction, competitive advantage, and cultural shifts are challenging, arguably
impossible, to capture with numerical inputs. People are central to qualitative analysis.
ANNUAL REPORT
An annual report is a document published by the company for its various stakeholders,
internal and external, to describe its performance, financial information, and disclosures
related to its operations. These reports have become legal and regulatory requirements
over the years.
BENEFITS
Institutional and individual investors use them to analyze and forecast financial
statements to evaluate the company’s prospects.
These reports are, in essence, standardization practices for companies to report their
business performance. Such standardization helps government authorities in taxation
and audit purposes.
LIMITATIONS
Annual reports are comprehensive but are not always fulfilling in terms of
completeness. They are used with other SEC filings, corporate press releases,
management notes, proxy statements, etc.
These are sometimes released to attract investors and supply-chain parties. The
future expenditures and income are projected in a way that makes the business
appealing.
Annual reports contain financial information for the past several years. However, these
economic data are subject to changes in the future. Changes in accounting policies can
lead to prospective as well as retrospective applications. The users should consider this
and perform their analysis accordingly.
Besides these reports, companies also release quarterly reports. It is good to refer to
both reports to gather relevant information. While using these reports to analyze and
forecast financial statements, the best practice is to use data from the most recent years.
BALANCE SHEET
In simple terms, a balance sheet is a sheet that balances two sides – assets and
liabilities.
For example, if ABC Company takes a loan of $10,000 from the bank, in the balance
sheet, ABC Company will put it in the following manner –
First, on the “asset” side, there will be the inclusion of “Cash” of $10,000.
Second, on the “liability” side, there will be a “Debt” of $10,000.
So, you can see that one transaction has two-fold consequences which balance each
other. And that’s what the balance sheet does.
Though this is the most surface-level understanding of the balance sheet, once you
understand it, we can develop this understanding.
Let’s say that you have a full-fledged company, MNC Company. Now you saw a small
business, BCA Company, which may help you produce goods for your business. So you
decide to buy the company as a subsidiary of MNC Company.
MNC Company now has three options.
MNC Company can let BCA Company run its operation autonomously.
MNC Company can absorb BCA Company completely.
Finally, MNC Company does something between the first and second options.
However, generally accepted accounting principles (GAAP) don’t give you an option.
According to GAAP, MNC Company must treat BCA Company as a single enterprise.
Here you need to realize the value of consolidation. Consolidation means you would put
together all the assets. For example, an MNC Company has total assets of $2 million.
MNC Company’s subsidiary BCA Company has assets of $500,000. So in the
consolidated balance sheet, MNC Company will put the total assets of $2.5 million.
This is similar to all sorts of items that will take place on each company's balance sheet.
RULE OF THUMB
If a company owns more than 50% of another company’s share, then the former
company should prepare consolidated financial statement for both of these companies as
a single enterprise.
There are a few key differences between a balance sheet and a consolidated balance
sheet –
A balance sheet is a statement that balances assets and liabilities. On the other hand,
a consolidated balance sheet is an extension of a balance sheet. In the consolidated
balance sheet, the assets and liabilities of subsidiary companies are also included in
the assets and liabilities of a parent company.
The Balance Sheet is the most straightforward statement of all four statements in
financial accounting. The consolidated balance sheet, on the other hand, is the most
complex. To prepare a balance sheet, one needs to look at the trial balance, income
statement, and cash flow statement, and then can quickly sum up two sides of the
sheet to balance assets and liabilities. The consolidated balance sheet takes much
time because it involves the parent company’s balance sheet and the items in
the subsidiary company’s balance sheet. The consolidated balance sheet is made
depending on the percentage of the stake. If the stake is 100%, the parent company
prepares a complete, consolidated balance sheet. If it’s less than 100% but more than
50%, the parent company prepares the balance sheet differently by including
“minority interest.”
Learning a consolidated balance sheet wouldn’t take much time if you can
understand the balance sheet concept. The consolidated balance sheet is just an
extension of a balance sheet.
A person or organization that has been given the official job of ensuring that banks,
financial businesses, etc., act responsibly and do not break the law is called a regulator.
REGULATORS-
Every regulator is instrumental in making sure that the interests of the investors and all
other parties are not compromised and that there is fairness in the financial system of
India.
SEBI: The market regulator in the Indian capital market is the Securities and Exchange
Board of India (SEBI).
IRDA: The Insurance Regulatory and Development Authority (IRDA) does the same for
the insurance sector.
RBI: The Reserve Bank of India (RBI) conducts the country’s monetary policies.
Protection: Protect investors by preventing insider trading, price rigging, and other
malfeasance.
Regulation: To implement codes of conduct and guidelines for the various market
participants; different audit exchanges, registering brokers and investment bankers;
deciding on the various fees and fines.
It has complete access to the exchanges’ financial records and the companies listed.
It oversees companies' listing and delisting processes from any exchange in the
country.
It can take disciplinary action, including fines and penalties against malpractices.
It undertakes inspections and conducts audits and inquiries when it spots any
wrongdoing.
Set up in 1999, the IRDA regulates the insurance industry and protects the interests of
insurance policyholders. Since the insurance sector is constantly changing, IRDA
advisories are critical for insurance companies to keep up with changes in rules and
regulations.
The IRDA has strict control over insurance rates, beyond which no insurer can go.
The IRDA specifies the qualifications and training required for the insurance agents and
other intermediaries, which then have to be followed by the insurer. It can also n levy fees
and modify them, per the IRDA Act. It regulates and controls premium rates and terms
and conditions that insurers are allowed to provide.
Any benefit provided by an insurer has to be ratified by the IRDA. This regulator also
provides the critical function of grievance redressal in an industry where claims can be
disputed endlessly.
RBI
The RBI’s primary responsibility is to ensure price stability in the economy and control
credit flow in the various sectors of the economy. Commercial banks and the non-banking
financial sector are most affected by the RBI’s pronouncements since they are at the
forefront of lending credit. The RBI is the money market and the banking regulator in
India.
Inspecting bank financial statements to keep an eye on any stresses in the financial
sector.
Instrumental in deciding interest rates and maintaining inflation rates in the country.
Public holdings.
All listed Indian companies must disclose their shareholding pattern to the
concerned stock exchanges. As per the rules, a company must also disclose the
identity of all the shareholders who hold more than 1% of its shares. Such
disclosure must be made within the last 21 days of each quarter.
The following table emphasizes the primary, public, and promoter category
distribution, which can further be subdivided depending on the company’s capital
structure.
Domestic- Foreign-
Government Institutions
Corporate Corporates
Promoter Shareholding
Banks Qualified
Financial Investors
Institutions (Foreign)NRIs or
Individuals other foreign
individuals
Institutional- Non-Institutional-
Government Individuals
Banks Corporate
Financial investors
institutions Other investing
Venture capital bodies such as
Public Shareholding
funding FIIs trusts, NRIs.
Other qualified Clearing
foreign members
investors. Foreign
Insurance/Mutu Depository
al Fund Receipt
companies custodians
The following thumb rules help efficient shareholding pattern analysis of any given
company. These rules provide in-depth insight into the beneficial possibilities and risk
factors that accompany an entity’s shareholding structure. It also indicates the impacts of
such changes on investor interest from one quarter to another.
For any change in promoter shareholding, individuals should look for the method and
purpose of such a changing pattern. It can lend valuable insight into the company’s
efficiency and future goals regarding debt management.
A rise in promoter stake may also result from share buyback initiated by the company
and may not prove valuable for investors.
Offloading promoter holdings in the open market can be a warning and an unwelcome
sign for investors.
Significant holdings from insurance and mutual fund companies indicate the favor that
such a company’s stock receives in the market and its perceived potential for growth.
One must also compare the changes in holding from one quarter to another for a
more detailed observation instead of shifts over a financial year.
Also, check for any pledge on promoter shareholding that a company is required to
disclose if such shares have been utilized as debt collateral to raise funds. It can be a
critical indicator of the risk factor associated with a company’s stock and promoter
trust.
DAY - 5
AUDITOR’S REPORT
SHAREHOLDER’S FUNDS
A shareholder Fund is the money owners, and shareholders can claim on the dissolution
of a firm after all dues are cleared. Therefore, it is also referred to as owners’ equity. It
appears under the Equity & Liabilities section of a company’s balance sheet and provides
valuable insight into its overall financial condition.
On the contrary, with a negative SF, shareholders would be left with nothing after settling
liabilities with the available assets. Therefore, investors analyze the balance sheet to
ascertain the SF amount to make investment decisions. They favor businesses with
optimistic SF to relish low-risk financial transactions.
KEY TAKEAWAY
A shareholder Fund is the residual value of a company’s asset after all its liabilities
are met. It is used with other metrics to determine the company’s financial health.
It is calculated by subtracting the total liabilities from total assets. Both long-term and
short-term investments and weaknesses are considered while computing it.
Shareholder Fund is of two types, i.e., optimistic (assets surpass liabilities) and
negative (liabilities exceed assets).
Profits generated from the business which are retained with the company is known as
reserves and surplus. General reserves, retained earnings and Securities premium are
the most important factors under reserves and surplus. The term Reserves & Surplus is
also often called as Other Equity.
With the help of reserves, the company can maintain its working capital requirements
as the reserves can be used to contribute towards working capital at the time of
insufficient funds in the company's working capital.
One of the main advantages of having reserves and surplus are overcoming the
company's future losses at the time of failure. Reserves can be used to pay off the
existing liabilities.
Reserves are the main source of the amount required for dividend distribution
available. It helps maintain uniformity in the dividend distribution rate by providing the
amount required for maintaining the uniform rate of the dividend when there is a
shortage of amount available for distribution.
DISADVANTAGES
If the company incurs the losses, and the same is adjusted/set-off with the reserves of
the company, then this will somehow lead to the manipulation of accounts as the
correct picture of the company’s profitability will not be shown to the users of the
financial statements.
The general reserves that constitute the major part of reserves and surplus are not
created for any specific purpose. Still, the general use so there are chances that there
can be a misappropriation of funds accumulated in general reserves by the
management of the company, and there is a possibility that the funds will not be used
properly for business expansion.
The Creation of more reserves may lead to a reduction in the distribution of dividends
to the shareholders.
IMPORTANT POINTS ABOUT RESERVES AND SURPLUS
The utilization of the reserves and surplus includes purposes such as dividend
distribution, meeting future obligations, overcoming losses, managing working capital
requirements, fulfilling funds requirements for business expansion, etc.
Heads Contact
Saptarshi Das - Funds Head, Finance & Economics Club, IIT Guwahati
Mail - saptarshi.das@iitg.ac.in
Contact - 7718981297
Ayushmaan Singh - Funds Head, Finance & Economics Club, IIT Guwahati
Mail - s.ayushmaan@iitg.ac.in
Contact - 8840579697