UNIT 3

FUNDAMENTAL ANALYSIS
 Unit 3 Syllabus
• Fundamental Analysis:
• Economic analysis,
• Industry analysis,
• Company analysis,
• Forecasting company earnings,
• Valuation of companies
 INTRODUCTION
• Fundamental analysis is the examination of the
underlying forces that affect the well being of
the economy, industry groups and
companies.
• As with most analysis, the goal is to develop a
forecast of future price movement and profit from
it.
• At the company level, fundamental analysis may
involve examination of financial data,
management, business concept and competition.
 INTRODUCTION
• At the industry level, there might be an
examination of supply and demand forces
of the products.
• For the national economy, fundamental
analysis might focus on economic data to
assess the present and future growth of
the economy.
 Fundamental Analysis

• For estimating the price of a stock, the security

analyst must forecast the earnings and cash
flows that can be expected from the firm.
• This is primarily known as fundamental analysis.
The performance of a particular stock or
company is affected – rather determined – by
numerous factors associated with economy,
industry and the company itself.
• That is why fundamental analysis is also known
as economy-industry-company [EIC] analysis.
 Fundamental Analysis
• Fundamental Analysis is to evaluate a lot
information about the past performance
and the expected future performance of
companies, industries and the economy as
a whole before taking the investment
decision.
• Such evaluation or analysis is called
fundamental analysis.
 Fundamental Analysis (con’t)
• Fundamental analysis is really a logical and
systematic approach to estimating the future dividends
and share price.
• Fundamental analysis is performed on historical and
present data, but with the goal of making financial
forecasts. There are several possible objectives:
• To conduct a company stock valuation and predict its
probable price evolution, to make a projection on its
business performance, to evaluate its management
and make internal business decisions, to calculate its
risk.
 Definition
• Fundamental Analysis is a method of
evaluating a security by attempting to
measure its intrinsic value by examining
related economic, financial and other
qualitative and quantitative factors.
 Definition
• Fundamental analysts attempt to study
everything that can affect the security’s
value, including macroeconomic factors
(like the overall economy and industry
conditions) and individual specific factors
(like the financial condition and
management of companies).
 OBJECTIVES OF
FUNDAMENTAL ANALYSIS
 To predict the direction of national economy
because economic activity affects the corporate
profit, investor attitudes and expectation and
ultimately security prices.
 To estimate the stock price changes by studying
the forces operating in the overall economy, as
well as influences peculiar to industries and
companies.
 To select the right time and right securities for
the investment
 Fundamental analysis
Fundamental analysis includes:
• Economic analysis
• Industry analysis
• Company analysis
 Fundamental Analysis
Company Analysis
The Analysis of
economy, industry and
Industry analysis
company constitute the
main activity in the
Economy Analysis
fundamental approach
to security analysis.
And can be viewed as
different stages in
investment decision
making process. Three tier analysis depict
that company
performance dependent
not only on its own effort
but also on the general
industry and economy
factor.
• To forecast future stock prices,
fundamental analysis combines economic,
industry, and company analysis to derive a
stock’s fair value called intrinsic value.
• If fair value is not equal to the current stock
price, fundamental analysts believe that
the stock is either over or under valued.
• As the current market price will ultimately
gravitate towards fair value, the fair value
should be estimated to decide whether to
buy the security or not.
• By believing that prices do not accurately
reflect all available information,
fundamental analysts look to capitalize on
perceived price discrepancies