Fundamental Analysis

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MEANING OF
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.
 On the contrary, when
If the market price of the
the market price of a
share is lower than its
share is higher than its
intrinsic value, the
intrinsic value, it is
investor would decide to
perceived to be
buy the share as it is
overpriced. The market
underpriced. The price of
price of such a share is
such a share is expected
expected to come down
to move up in future to
in future and hence, the
match with its intrinsic
investor would decide to
value.
sell such a share.
An investor can anaylse the value of the company on the basis of these 3 levels
ECONOMY ANALYSIS
• Growth Rates of National Income: An economy typically passes through
different phases of prosperity, known as the different stages of the
economic or business cycle. The four stages of an economic cycle are
depression, recovery, boom and recession.
• Inflation : Higher rates of inflation upset business plans, lead to cost
escalation and result in a squeeze on profit margins.
• Interest Rates: A low interest rate stimulates investment by making credit
available easily and cheaply. Moreover, it implies lower cost of finance for
companies and thereby assures higher profitability. On the contrary, higher
interest rates result in higher cost of production which may lead to lower
profitability and lower demand.

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Government Revenue, Expenditure and Deficits: Expenditure by the
government stimulates the economy by creating jobs and generating demand

Exchange Rates: A depreciation of the rupee improves the competitive

position of Indian products in foreign markets, thereby stimulating exports.
But it would also make imports more expensive.

Infrastructure: Bad infrastructure leads to inefficiencies, lower productivity,

wastage and delays. An investor should assess the status of the infrastructural
facilities available in the economy before finalising his investment plans.

Economic and Political Stability: A stable government with clear cut long-term
economic policies will be conducive to good performance of the economy.
ECONOMIC FORECASTING
Anticipatory Surveys: Anticipatory surveys are the surveys of intentions of people
in government, business, trade and industry regarding their construction activities,
plant and machinery expenditures, level of inventory, etc.

Barometric or Indicator Approach: In this approach to economic forecasting,

various types of indicators are studied to find out how the economy is likely to
perform in the future. These indicators are time series data of certain economic
variables. Leading indicators are considered to point toward future events. Lagging
indicators are seen as confirming a pattern that is in progress. Coincident
indicators occur in real-time and clarify the state of the economy.
INDUSTRY ANALYSIS
• An investor ultimately invests his money in the securities of one or
more specific companies. Each company can be characterized as
belonging to an industry.

• An industry is generally described as a homogenous group of

companies. We may define an industry "as a group of firms producing
reasonably similar products which serve the same needs of a
common set of buyers."
Industry Life Cycle
• Marketing experts believe that each
product has a life cycle. They have
identified four stages in the life of a
product, namely introduction stage,
growth stage, maturity stage and the
decline stage
 Technology as well as the product are
relatively new

Growth in demand for the output of

Pioneering industry.

Stage
As large number of companies attempt to
capture their share of the market, there
arises high business mortality rates
 These companies continue to become
stronger.

Improved products at lower prices.

Expansion
Stage Investors can get high returns at low risk
because demand exceeds supply in this
stage.
Companies will earn increasing amounts of
profits and pay attractive dividends
 The ability of the industry to grow appears to
have been lost

Sales may be increasing but at a slower rate than

Stagnation that experienced by competitive industries or by
the overall economy.
Stage
An investor should dispose of his holdings in an
industry which begins to pass from the
expansion stage to the stagnation stage because
what is to follow is the decay of the industry.
 This occurs when the products of
the industry are no longer in
demand. New products and new
technologies have come to the
Decay market.

Stage
The industry becomes obsolete and
gradually ceases to exist.
COMPANY ANALYSIS
• Company analysis deals with the estimation of return and risk of
individual shares.
• The internal information sources include annual reports to
shareholders, public and private statements of officers of the
company, the company's financial statements, etc. External sources
of information are those generated independently outside the
company.
 • Different ratios measure different aspects of a company's
Analysis of Financial performance or health. Four groups of ratios may be used
for analysing the performance of a company.
Statements
Industry Characteristics
Demand Supply Gap
Competitive Conditions in the Industry
Permanence
Labour Conditions
Attitude of Government
Supply of Raw Materials
Cost Structure