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Framework of Analysis
Fundamental Analysis
Approach to Fundamental Analysis:
Domestic and global 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.
Economy Analysis
Boom Economy:
Income rise and demand for goods will increase the industries
Recession Economy:
Income decline and demand for goods will decrease the industries
and companies in general tend to be bad performance
Researchers have found that stock price changes can be
attributed to the followings factors.
Economy wide factors; 30-35 percent
Industry factors; 15-20 percent
Company factors 30-35 percent
Others factors 15-20 percent
Business Cycles
The Domestic Macro economy
The government changing the levels of spending and tax actions in order to
influence aggregate demand
Decrease in government spending decrease the demand for goods and services
while increase in tax rates decrease the income of consumers (households).
If budget deficit>0 then government spend more than it earns and stimulate the
economy.
Contractionary
It increases the Interest rates.
Tools of Monetary Policy
Buying and selling of government securities by RBI includes open market operations
Bank rate is the rate at which RBI provides long term loan to banks.
Reserve requirements are in the form of CRR (Cash Reserve ratio) and SLR(Statutory
Liquidity ratio)
Direct control by asking banks to lend a certain percentage of funds to priority sectors.
GDP
GDP indicates the rate of growth of the economy. It is
one measure of economic activity.
The growth rate of economy points out the prospects for the industrial sector and the
return investors can expect from investment in shares.
Higher the level of savings and investments, greater the allocation of same to
equities.
Budget Deficit
In India, Government revenues come more from indirect taxes such as excise
duty, custom duty and less from direct taxes such as Income Tax.
Along with the growth of GDP, if the inflation rate also increases, then the real
growth would be very little.
Threat of entry
1. High prices and profit margins will encourage entry by new competitors.
2. Barriers to entry is a key determinant of industry profitability
3. High switching Costs.
4. Brand loyalty
5. Patent protection
6. Experience in the market
Rivalry between existing competitors
1. More price competition and lower profit margin
2. Number of competitors are large
3. Slow industry growth
4. High fixed costs
5. Chronic Over capacity
6. High Exit barriers.
Porter Model
Pressure from substitute products
1. Availability of substitutes limits the prices that can be charged.
Start-up stage:
Characterized by growth that is less rapid but still faster than the general economy
Industry leaders begin to emerge
Survivors from the start-up stage are more stable and the performance of the survivors closely track
the performance of the industry
Industry Life Cycles
Maturity stage
Characterized by the growth less rapidly than the rest of the economy
The product become obsolete
Competition from new low-cost suppliers (or new products).
Generally industries at the high-growth stages are more attractive for investment unless the
stock prices already reflects likelihood for high growth
Figure 17.11 The Industry Life Cycle