FUNDAMENTAL ANALYSISEe MNCS « Fundamental analysis is the method of finding out the future price of a stock which an investor wishes to buy. e It relates to the examination of the intrinsic worth of a company to find out whether the current market price is fair or not, whether it is overpriced or underpriced, in the background of the company’s performance and industry to which the company belongs and also the general socio political scenario of the countryPLOTAREA AUST CUNT The goal is to produce a value that investors can compare with the current price. If it is undervalued you should buy; sell if it is overvalued. One of the most famous users of fundamental analysis, Warren Buffett, has successfully used this method to turn himself into a billionaire.TASKS INVOLVED IN SECURITY ANALYSIS The prospective benefits from holding a security given these forecasted conditions Forecasting future conditions ‘What ought to be price of security’ given these benefits after adjusting for riskThe current market price of a security may vary due to temporary market disequilibrium from its intrinsic value but in the long run it will be equal to the intrinsic value Beating the market - Buying an underpriced security & getting abnormal return Intrinsic value changes from year to year the factors determining change Fundamentalists - Buy a security for long term and get normal return & believe that stock market could be beatenDiscrepancies in intrinsic \value & current \\ market value can be realized Estimates See) by are made of (eu fundamentalists stream of q 29 who will get benefits & profit required rate of return ¢ EIC framework ¢ CIE Use of dividend discount model to find intrinsic value frameworkEIC FRAMEWORK Economic Industry Company Analysis Analysis * Study of «Implication of ¢ Market share, economic projected cost structure, trends, study of growth in GNP, ratio analysis, govt. policies, plan priorities, funds flow analysis of the govt. analysis, relationship regulation, growth in between industrial & dividend per economic fiscal policies, share, dividend trends & effect of yield, P/E, economic business cycle, quality of policies, study life cycle management of world position, economic trend competitive & impact on conditions IndiaTop Down \) Approach Bottom Up ApproachBeets ete UO Ue ae EUR bol fa) fA\ The Economy & the Market The Industry The CompanyJohn Burr Williams - Present value of all future cash flows Graham & Dodd - “That value which is justified by the facts e.g. assets, earnings, prospects, mgt. of the company etc” Fundamental analysts seek to establish quantitative relationship between economic, industrial, & company indicators to forecast earnings & dividends & calculates a range of intrinsic values.\ Intrinsic value > Market price = | Underpriced Problem with intrinsic value OMe Cree bmi taite om Torts ihey OA Ebagbel-M bret tlent Meta My abi Ctece ld pieNird dose) \\@ Market price is consensus intrinsic | JA \W value SMARKET ANALYSIS + Knowing the status of market through security market indicators + Expected stream of benefits + Required rate of return or P/E Ratio * There is an impact of change in corporate earnings on prices of stock * Economic policies « Fiscal policies influenced by * MonsoonsPerformance of Agriculture Technological development Natural Resources Role of Govt. Business conditions Political StabilityECONOMIC ANALYSIS ¢ Gross Domestic Product ¢ Savings and Investment ¢ Inflation ¢ Interest Rates Cae sib ek-cr ¢ Tax Structure ¢ Balance of Payment ¢ Monsoon and agriculture ¢ Infrastructure facilities Demographic factorsECONOMIC FORECASTING An investor Economic forecasting must Economic fechaique aeeacoe : Leading Indicator Coincident Indicator Lagging IndicatorBarometric/ Lead Indicator Approach Identifying the economic indicator which turn ahead of the change in level of economic activity (business cycle) Leading indicators provide advance signals of turning point in economic activity Should move smoothly from one period to another Should always lead turning point Should not be too short or too long oa fit logically with business cycle Does not conve’ . duration of change ot magnitude & Different lead indi, alae indicators convey mixedLIMITATIONS ¢ It is not an exact method of finding out the economic activity ¢ This method suggests the direction of changes in economic activity, it does not convey the information on the magnitude and duration of the changeLead indicators Coincident indicator indicator * Utilization of manufacturing capacity * Average weekly hours of manufacturing workers + No. of new building permits issued * Money supply * Corporate profits « Employees on payroll * Personal income less transfer payments « Industrial production * Avg duration of employment + Loans outstanding + Ratio of inventories to sales + Change in consumer price index for servicesA diffusion index takes the leading, coincidental together to summarize them and then to draw out and find a particular composite answer. This index is statedina percentage form. Rise means stronger confirmation of a period of economic advance. If five out of ten indicators month, the diffusion index for that month will be 50%. If in the next month eight rise, the index for the month will be 80%. DIFFUSION INDEXES/ widespread «To measure how diffused thephenomenonis | : i for icator iffusi « Diffusion index for leading indic Diffusion |) -Ditmperefinakatore that be aa during a particular period X 100/ tot: number of lead indicators * The quality of forecast is dependent on . quality of input, validity of assumptions Econometric & model builder’s understanding of Model economic theory Building *Can be meaningful if estimated co — erica are found to be stable over imeECONOMIC MODEL BUILDIN This approach applies mathematical and Can be used only by statistical techniques to trained technicians economic theory This model takes one independent variable and one dependent variable and then specifies in a formal mathematical manner the precise relation between these variables Used to draw out relationships between two or more variables| This model has the following problems in developing countries like India The overall forecast is more reliable than the individual components of the forecast because errors compensate each other in overall forecast Latest computer facilities and programmes and clerical and technical support are needed to }| maintain and update the So system Since large amt of data is to be collected, processed and analysed for inclusion in this model, there are delays in making the results available to the public This model is useful only for short term forecastOPPORTUNISTIC MODEL BUILDING/ GNP MODEL BUILDING * Most widely used economic forecasting seein atoyel ¢ Also called sectoral analysis of the Gross National Product Model Building ¢ Makes use of the national accounting data to be able to forecast for a future short term periodSTEPS INVOLVED IN GNP MODEL v7) BUILDING The forecaster must hypothesize d total demand and thus, total u income during the forecast period. The forecaster begins building forecast of the GNP figure by estimating the magnitudes of the various components constituting GNP \ Once the forecaster estimates the \ major components he adds them ‘ together to come up with his p estimate of the GNPGNP Model Building GNP=C+I1+G+X-M Based on budget estimates of central & state governments, socio — economic surveys & field data Testing the forecast for internal consistency because of interrelatedness of the GNP accounts Testing for external consistency by comparing the forecast with forecast obtained from other approachesINDUSTRY ANALYSIS ¢ Classification of Industries — Growth Industries — Cyclical Industries — Defensive Industries — Cyclical-Growth Industries¢ Growth Industries — High rate of earnings and growth in expansion. * Cyclical Industries — The growth and the profitability of an industry moves along with the business cycle ¢ Defensive Industries — The movement of the business cycle. ¢ Cyclical-Growth IndustriesINDUSTRY ANALYSIS Consider those industries + Which promise most opportunities + Considering performance of other industries + Continuous analysis to surface the inconsistencie sin the performance Industry position in relation Impact ofCOMPANY ANALYSIS ¢ The economic and industrial analysis enable us to shortlist industries for the purpose of LoL bbEniaplenyoloineeKosoumm ¢ In company analysis, all the factors affecting the earnings of a particular company are considered— Quick Ratio —Debt to — ROE ebb —ROA -—EPS —~PEG — Revenues —Alpha = YD) —Net Profit —Beta WW EVaeatelREVENUES ¢ Money that a company collects from customers for the sale of a product or service. When you subtract out all costs from revenues, you get profits or earnings.MARKET CAPITALIZATION ‘i The total rupee value of all outstanding ~Wshares, calculated by multiplying the ---\price of a single share by the total Se oleverl alc moMclet-teccMoLhaciecverelvet=aNET PROFIT MARGIN Net income FETS) a percentage of sales. You get this by dividing net income by sales. Since it's a percentage, it tells you how many cents on each dollar of sales is pure joyqesauen The higher a company’s profit margin compared to its competitors, Hats: LXiaKooan ieEARNINGS PER SHARE (EPS) ¢ A very important fundamental, calculated: ends on Preferred Stock _ Net Income Average Outstanding Shares ¢ Basically, this will tell you if and how profitable the company is. Cacti Molcalagece miele ) “ye EPS from the last four quarters is called trailing Ibo) * EPS taken from the estimates of earnings expected in the next four quarters is called forward P/E O Bie is referred to as the "multiple," because it shows how much investors are willing to pay per dollar of earnings. ¢ High P/E means high projected earnings in the sibtaetcemPRICE-TO-SALES ee “al: Price to sales is calculated by ‘Wdividing a stock's current price by its substantially across industries; therefore, it's useful mainly when comparing similar companies. Also, it does not account for DEBT!PRICE-TO-BOOK ¢ Price to book is calculated by \ dividing the current closing price of \ the stock by the latest quarter's ‘| book value (book value is simply total assets minus intangible assets and liabilities). ¥ °A low P/B ratio could mean the Sele is undervalued, or something very wrong with the company.DEBT-TO-EQUITY aK ¢ A relative measure of how much debt a [oleseyer-vonmek saa Total Liabilities Shareholders Equity Essentially: long-term funds provided by creditors divided by funds provided by shareholders. eA higher debt/equity ratio generally means that a company has_ been aggressive in financing its growth with debt. This can result in volatile earnings.CURRENT RATIO eg bm 4 ¢ A good measure of liquidity of a company, or how easily it can ‘cough up’ cash. AKA - Indicator of company's ability to pay short-term obligations; calculated by dividing current assets by current SUEY os ebta Kn ¢ The higher the ratio, the more liquid the company! ¢« What types of companies might this ratio eS be VERY important?QUICK RATIO ¢ Like current ratio, this gives a measure of a company’s financial strength: It is a measure of how quickly a company's assets can be turned in cash. ¢ You subtract inventories so you can check and see if a company has sufficient liquid assets to meet short-term operating needs. (Note that current ratio did not subtract inventories.)RETURN ON ASSETS (ROA) Also sometimes called “Return on Investment” or ROI, this is a measure what earnings were generated from capital investment back into the ompany. PERE _ _Net Income ~ Total Assets hink of it as “How much petodet ang (income) was Mild! generated from a company’s investment into / itself (capital investment or company assets)?”RETURN ON EQUITY (ROE) It is a measure of how much in earnings a company generates in four quarters compared to “its shareholders' equity and is a good measure of CSCS a Net Income os Shareholder's Equity tis also measured as a percentage. For instance, if XYZ Corp. made st million i in the million, then the ROE is oa ert use ROE as a screen to find companies that can generate large profits with little shareholder preA rae Cehab bem Comes yeh aBETA (6) e A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole. (usually calculated with S&P 500 Index) “le Think of beta as the tendency of a -.| security's returns to respond to swings in the market. A beta of 1 indicates that the {Jel b bela ya ms osama y snl mn eelo homey C.OSN PMR siael the market. A beta less than 1 means that the security will be LESS volatile than the market. A beta greater than 1 indicates that the security's price will be volatile than the market.PRICE/EARNINGS TO GROWTH (PEG) stk E Price/Earnings Ratio Annual EPS Growth an give you an idea of a stock potential prowth, since it divides by Earnings Per Share (EPS) annual growth rate - but is .. based on analysts ESTIMATES! ‘2. If a company has a P/E of 20 and analysts »me expect its earnings will grow 15% annually over the next few years, you'd say it has a PEG of 1.33. Anything above 1 is suspect since that means the company is trading at a premium to its growth rate.OTHERS ¢ There are many other ratios out there to help you get an idea of what the financial health of a company is. ¢ What do you do if you don’t know what they mean?esr aneRenoe i? sacrum pean Mag am onrsses Or ren ncaa oy Reena ron on nase ory eaming roe To ces csr oa ee at re iwi roid D9AR nt: a AMD SechPase arson szneekchnie s2mekLow cts05% 20mg ee soe une maa? it tna ses Son roe Foner ons vt “Ter eva Onsen yenimage bend intel Prstainy Revenue Earoare parsing cae Flow om Lee ee Cn Fo 103% tects Sep? Fw Pe 31-00" PEO Rato Sy oes Erte aver snchPnce ey save chro? saves tinea. 0e005? avis on 130007 wane une mot wa one 040? nas ss ewan eal ted Yi ‘vesrarae ses vad 008INDUSTRY COMPARISON statste Industy Leader INTE 112018 9282 1.09 On e770% 52670% 21.5% 25.57% gz 210% suo, FoRu Long-Term DebyEquy rea) Dividend veld annuat) 1 HRT NO Rank 5121 a 221 ano 13.008 29.08 161 9.50% 15/21 10a 150% 16/21 11.56% 9/21 0143 6921 NA NA up 13.088 9.960 350% 5918 10.95% 15538 22,700 2.50% 6058 91% 1608 1.508 11.10% 1946% 444.96 221.006 0928 1.986 2001960 PEG Gy emecieg) 161 NA es ct): 225283 cs (ieately held) Market Cap. Employees: (tty Rev Growth Go) Revenue tm) {Gross Margin ir: EBITDA ttm) (oper Margins ct: 'Netincome cm) EPS cm) FE etm): Indie = Sericondicine - Bros tine pat Na Na Na Na Na Na mc 12018 99.900 13.20% are 52.26% 14708 2517% 6608 4413 4745 169 308 3258 510K 10.00% 1.308 a1 32030m 2.40% 462M 80 aust 125 263