secur|ty ana|ys|s

An exam|nat|on and eva|uat|on of the var|ous factors effect|ng the

va|ue of a secur|ty
conom|c Ana|ys|s
W 1he performance of a company depends much on the performance of
the economy |f the economy is 8OOM the |ndustr|es and compan|es |n
qenero/ soid to be prosperous Cn the other hand |f the economy is in
kc55lON the performance of compan|es w||| be qenero//y poor
W nvestors are |nterested |n study|ng those econom|c var|et|es wh|ch
affect the performance of the company |n wh|ch they proposed to |nvest
An ana|yzed of those econom|c var|ab|e wou|d qive on ideo obout future
corporote eorninqs and the payment of d|v|dends and |nterest to |nvestors
conom|c Ana|ys|s
We shall now dlscuss some of Lhe key
economlc varlables LhaL can lnvesLor musL
monlLor as parL of Lhls fundamenLal analysls
(1) GN
(2) SAVNGS AND NVS1MN1
(3) NILA1CN
(4) AGkDL1Dk
(S) kA1S CI N1kS1
conom|c Ana|ys|s
(6) GCV1 kVND OND1Dk DI1S
(7) NIkAS1kD1Dk
(8) MCNSCCN
(9) CL1AL S1A8L1
(1) GN
-9 represenLs Lhe oqqteqote voloe of qooJs
ooJ setvlces ptoJoceJ lo tbe ecooomy lL reflecLs
Lhe over all performance of Lhe economy Lhe
growLh raLe of -9 lndlcaLes Lhe growLh raLe of
Lhe economy the hiqher the rote of qrowth of
6NP the more fovorob/e is it for the stock
morket ond vice verso
(2) SAVNGS AND NVS1MN1
avlngs and lnvesLmenL denoLe LhaL poslLlon
of -9 whlch ls saved and lnvesLed savlngs
lncreases ln lndla slnce elghLles now Lhe raLe of
savlngs ls 23 from 21 ln 80's whlch lndlcaLes
Lhe growLh of caplLal markeL @he hiqher the /eve/
of sovinqs interest the more fovorob/e is it for
the stock morketed vice verso
(3) NILA1CN
lnflaLlon has conslderaLe lmpacL on Lhe
performance of companles lqbet totes of
loflotloo opset bosloess ploos ooJ etoJe
potcbosloq powet lo tbe booJs of coosomets 1hls
wlll resulL ln lower demand for producLs 1hus
hlgh raLes of lnflaLlon ln an economy are llkely Lo
affecL Lhe performance of companles adversely
Powever lndusLrles and companles prosper durlng
perlods of low lnflaLlon ence on investor hos to
evo/uote the inf/otion rotes prevoi/inq in the
economy current/y os we// os the trend of
inf/otion /ike/y to prevoi/ in the future
(4) AGkDL1Dk
grlculLure forms a ma[or parL of Lhe lndlan
economy 5ome componies ore usinq
oqricu/turo/ row moterio/ os inputs ond some
others ore supp/yinq inputs to oqricu/ture 5uch
componies ore direct/y offected by chonqes in
oqricu/turo/ production Pence Lhe
lncrease/decrease ln agrlculLural producLlon has
a slgnlflcanL bearlng on Lhe lndusLrlal producLlon
and corporaLe performance
(S) kA1S CI N1kS1
1he cosL and avallablllLy of credlL for companles
are deLermlned by Lhe raLes of lnLeresL prevalenL
ln an economy low lotetest tote stlmolotes
lovestmeot by mokloq cteJlt ovolloble eoslly ooJ
cbeoply s o tesolt cost of floooce fot compooles
Jecteoses wblcb ossotes blqbet ptofltoblllty
Cn the other hand h|gher |nterest rates resu|t |n
h|gher cost of product|on whlch may lead Lo
lower proflLablllLy and lower demand Pence an
lnvesLor has Lo conslder Lhe lnLeresL raLes
prevalllng ln Lhe economy and evaluaLe Lhelr
lmpacL on Lhe performance and proflLablllLy of
Lhe companles
(6) GCV1 kVND OND1Dk
DI1S
overnmenL ls Lhe largesL lnvesLor and
spender of money o tbe tteoJs lo
qovetomeot teveooe expeoJltote Jeflclts bove
o slqolflcoot lmpoct oo tbe petfotmooce of
loJosttles ooJ compooles o Lhe lnvesLor has
Lo evaluaLe Lhese carefully Lo assess Lhelr
lmpacL on hls lnvesLmenLs
(7) NIkAS1kD1Dk
1he developmenL of an economy very much
on Lhe avallablllLy of lnfrasLrucLure lL lncludes
elecLrlclLy roads and rallways communlcaLlon
channels eLc 1he avallablllLy of lnfrasLrucLural
faclllLles affecLs Lhe performance of
companles LCW lnfrasLrucLure leads Lo
lnefflclencles lower producLlvlLy wasLage and
delays and vlce versa 1hus an lnvesLor should
assess Lhe sLaLus of lnfrasLrucLural faclllLles
avallable ln Lhe economy before flnallzlng hls
lnvesLmenL avenues
(8) MCNSCCN
1he lndlan economy ls essenLlally an agrarlan
economy and agrlculLure forms a very lmporLanL
secLor of Lhe lndlan economy ot tbe
petfotmooce of oqtlcoltote to o vety qteot
exteot JepeoJs opoo tbe moosooo 1he
adequacy of Lhe monsoon ensures Lhe success
of Lhe agrlculLural acLlvlLles ln lndla and vlce
versa Pence Lhe progress and adequacy of Lhe
monsoon becomes a maLLer of greaL concern for
an lnvesLor ln lndla
(9) CL1AL S1A8L1
sLable pollLlcal envlronmenL ls necessary for
sLeady and balanced growLh -o lndusLry or
company can grow and prosper ln Lhe mldsL of
pollLlcal Lurmoll uch |ong term econom|c
po||c|es are needed for |ndustr|a| growth uch
sLable pollcles can be framed only by sLable
pollLlcal sysLems
NDDS1k ANALSS
lndusLry analysls lndlcaLes Lo an lnvesLor
wheLher Lhe lndusLry ls a growLh lndusLry or noL
lL glves an lnvesLor a cholce of Lhe lndusLry ln
whlch Lhe lnvesLmenLs should be made
lndusLry analysls refers Lo an evaluaLlon of Lhe
relaLlve sLrengLh and weakness of parLlcular
lndusLrles whlch can be dlvlded ln Lo Lhree parLs
vlz
1 Llfe cycle of an lndusLry
2 CharacLerlsLlcs of an lndusLry
3 9roflL poLenLlal of an lndusLry
1 Llfe cycle of an lndusLry
MarkeLlng experLs belleve LhaL each producL has a llfe cycle ln Lhe
same way lndusLry ls also sald Lo have a llfe cycle 1hey are
(a) |oneer|ng Stage 1echnology and producL are newly lnLroduced
(b) xpans|on stage 1hose companles whlch reached flrsL sLage grow
furLher and becomes sLronger
(c) Stagnat|on Stage ln Lhls sLage Lhe growLh of Lhe lndusLrles
Lablllzes ales lncreases aL slower raLe
(d) Decay stage 1he lndusLry becomes obsoleLe and gradually
ceases Lo exlsL
2 CharacLerlsLlcs of an lndusLry
In an Industry Analysis the analyst should consider a number oI key characteristics
(a) Relationship between Demand & supply: cess supply reduces the proIitability
oI the industry and insuIIicient supply tends to improve the proIitability. Thus an
investor should estimate the demand and supply gap in an industry.
(b) Period of life: LiIe oI the industry depends on the products and the technology used
by the industry. Technological changes leads to product obsolete. No investment
should be made in such industries.
(c) State of labour: When there is labour revolution, industries cannot become bright.
(d) Governments attitude: The Government may encourage the growth and
development oI certain industries by giving much assistance to such industries.
(e) Availability of Raw Material: An industry may depend on internal / eternal
country Ior raw material. Sometimes they depend on import oI raw material.
(I) Cost structure: It reIers to the proportion oI Iied costs to variable costs. (Discuss
about Marginal Cost)
3 9roflL poLenLlal of an lndusLry
It depends on the Iollowing:
(i) %hreat new entrants: New entrants inIlate cost, push down the prices and reduce
proIitability. An industry which is well protected Irom the entry oI new Iirms would
be ideal Ior investment.
(ii) Competitions among existing firms: The Iirm competes with each other on the
basis oI price, quality, promotion, service, warranties and so on. II the rivalry
between the Iirms in an industry is strong average proIitability oI the industry may
be discouraged. The rivalry in an industry is high when the Iollowing conditions
prevail in the market:
(a) There is a sustained competitive battle
(b) The industry growth is dull
(c) The level oI Iied cost is high
(d) There is over capacity in the industry continuing Ior a long time.
(e) The industry product is considered as a commodity, which
stimulates strong competition.
(I) The industry struggles much to withstand.
(lll) ressure from subst|tute products Lach flrm ln
an lndusLry face compeLlLlon from oLher flrms ln
Lhe same lndusLry produclng subsLlLuLe producLs
ubsLlLuLe producLs may affecL Lhe proflL
poLenLlal of Lhe lndusLry badly 1he pressure from
Lhe subsLlLuLe producLs ls found Lo be hlgh under
Lhe followlng clrcumsLances
(a) When Lhe prlce of Lhe producLs ls aLLracLlve
(b) When Lhe cosL for Lhe prospecLlve buyers Lo
swlLch over Lo a subsLlLuLe producL ls mlnlmum
(c) When Lhe subsLlLuLe producLs are earnlng
greaLer proflLs
(lv) 8arga|n|ng power of buyers 8uyers can
bargaln for prlce reducLlon asks for beLLer
quallLy and beLLer servlce 1he bargalnlng
power of a buyer group ls sald Lo be hlgh
under Lhe followlng condlLlons
(a) lf lLs capaclLy Lo buy ls more Lhan Lhe
capaclLy of Lhe seller Lo sell
(b) lf Lhe cosL of Lhe swlLch over Lo a
subsLlLuLe producL ls low
(c) lf lL poses a LhreaL of backward lnLegraLlon
sLrongly
(v) 8arga|n|ng power of se||ers ellers also can
exerL a compeLlLlve force ln an lndusLry and
bargaln for rlse ln prlces lower quallLy curLall
some of Lhe free servlces Lhey offer eLc 9owerful
suppllers can affecL Lhe proflLablllLy of Lhe buyer
lndusLry badly uppllers are sald Lo be powerful
under Lhe followlng clrcumsLances
(a) lew suppllers domlnaLe Lhe enLlre markeL
(b) 1here ls no vlable subsLlLuLe for Lhe producLs
supplled
(c) 1he swlLchlng poses a sLrong LhreaL of
forward lnLegraLlon
(d) uppllers also pose a sLrong LhreaL of forward
lnLegraLlon
ompany Ana|ys|s
lL lnvolves a close lnvesLlgaLlve scruLlny of Lhe
companles flnanclal and non flnanclal aspecLs
wlLh a vlew Lo ldenLlfylng lLs sLrengLh
weaknesses and fuLure buslness prospecLs
1he flnanclal and non flnanclal aspecLs are
as follows
MarkeLlng success
ccounLlng 9ollcles
9roflLablllLy
MarkeLlng success
1he success of Lhe markeL of Lhe flrm depends
on (a) 1he share of Lhe company ln Lhe
lndusLry (b) rowLh of lLs sales and sLablllLy of
sales (c) ales
ccounLlng 9ollcles
lnvenLory 9rlclng
W CosL/markeL value meLhod
W lllC
W LllC
8 uepreclaLlon meLhods
W LralghL llne meLhod
W um of Lhe years dlglL meLhod
C -on operaLlng lncome
W ulvldend
W lnLeresL
u 1ax Carry over
W 9rovlslon for LaxaLlon
9roflLablllLy
A(a) ross proflL Margln
(b) -eL proflL Margln
(c) Larnlng power
(d) 8eLurn on equlLy
(e) Larnlng per share
(f) Cash L9
8llnanclal LaLemenL
nalysls
1radlng 9 L /C
nalysls
8alance heeL nalysls
8aLlo nalysls
LlquldlLy 8aLlos
Leverage 8aLlos
9roflLablllLy 8aLlos
cLlvlLy / Lfflclency
8aLlo
lu-uML-1L -L?l
SCURITY ANALYSIS
It provides the bases Ior selecting
individual issues to buy or sell Irom among
available choices.
Approaches to security analysis
There are various approaches to security
analysis which are as Iollows:
1. Fundamental analysis
a. conomic analysis
b. Company analysis
2. Technical analysis