FUNDAMENTAL

ANALYSIS
A MODERN APPROACH TO INVESTING
FUNDAMENTAL ANALYSIS -
ELEMENTS

FINANCIAL
MARKET DATA
STATEMENTS

RATIO ANNUAL
ANALYSIS REPORTS
FUNDAMENTAL ANALYSIS -
APPROACH
 EIC MODEL

Industry
Economy

Company
STUDY OF FINANCIAL STATEMENTS
RATIO ANALYSIS

PROFITABILITY RATIOS

EFFICIENCY RATIOS

TEST OF FINANCIAL POSITION

RATIOS FOR EQUITY SHAREHOLDERS

I. PROFITABILITY MEASURES
 I. PROFITABILITY MEASURES
a. Gross profit is the difference between sales value and cost of goods sold.

b. Profitability of operations and efficiency of the management have a bearing on

gross profit
 I. PROFITABILITY MEASURES
Net Profit it refers to the net income for the firm.
 EARNINGS PER SHARE
Earnings per share are the net income available per equity share.

This ratio helps in evaluating the prevailing market price of the share.
III. TESTS OF FINANCIAL POSITION
Tests of financial position include tests of both short-term and long-term solvency of
the business.

Tests of short-term solvency focus on the liquidity position of the company.

Two important ratios used to measure short-term liquidity are Current Ratio and
Quick Ratio. These two ratios are commonly called “Liquidity Ratios”.

Tests of long-term solvency focus on the ability of the company to pay interest and
repay principal of its long-term borrowings. The main ratios in this category are
debt–equity ratio and interest coverage ratio. These ratios are commonly called
“Solvency Ratios”.
 CURRENT RATIO

• Current ratio is the relation of a company’s current assets to its current

liabilities.

• This ratio establishes the ability of the business to meet its short-term
obligations and is therefore of particular significance to short-term creditors.

• Cash and other assets that are expected to be converted into cash or consumed
in the production of goods or rendering of services in the normal course of
business.
 QUICK RATIO
• Quick ratio is a more precise measure of liquidity than the current ratio.

• This ratio is also known as “Acid Test Ratio” or “Liquid Ratio”.

• Quick current assets are those current assets, which are convertible into cash rather
early such as cash, marketable securities, debtors and bills receivables.
 DEBT–EQUITY RATIO

• The debt–equity ratio relates debt to equity or owners’ funds.

• Debt here means long-term liabilities that mature after 1 year and include long-
term loans from financial institutions and banks, public deposits and debentures.

• Accumulated losses and fictitious assets such as preliminary expenses, discount on

issue of shares or debentures, which are yet to be written off, should be deducted
from the equity:
 INTEREST COVERAGE RATIO

The interest coverage ratio relates interest obligations to profits before interest
and tax and indicates the number of times interest obligation is covered by the
profits for the period.
IV. RATIOS INVOLVING SHARE
INFORMATION
Investors in equity shares are more interested in the return from their investment
in the form of dividend and price appreciation.

DIVIDEND PAYOUT RATIO: The dividend payout (D/P) ratio measures the
relationship between the earnings belonging to equity shareholders and the
dividend paid to them. It can be calculated in one of the following two ways:
 RATIOS INVOLVING SHARE INFORMATION
DIVIDEND YIELD
The dividend yield ratio indicates the percentage return provided by the dividend on the
market price of the share

PRICE/EARNINGS RATIO (P/E RATIO)

Market price of the share incorporates everything the market knows about the company.
Earnings are the net profit available to equity shareholders
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