ECONOMIC ANALYSIS,INDUSTRY ANALYSIS AND COMPANY ANALYSIS
FUNDAMENTAL OF INVESTMENT
SAPM
MEANING
1. FUNDAMENTAL ANALYSIS ATTEMPT TO MEASURE A SECURITY ‘S INTRINSIC VALUE BY EXAMINING RELATED
ECONOMIC AND FINANCIAL FACTORS WHICH CAN BE BOTH QUALITATIVE AND QUANTITATIVE IN NATURE.
2. FUNDAMENTAL
ANALYSIS IS PRIMARILY CONCERNED WITH DETERMINING THE INTRINSIC VALUE OR THE
VALUE OF THE SECURITY. THE INTRINSIC VALUE IS THEN COMPARED WITH THE SECURITY’S
CURRENT MARKET PRICE TO DETERMINE THE WHETHER THE STOCK IS UNDER PRICED OR OVER
PRICES. A FUNDAMENTAL ANALYSTS CALCULATES A RANGE OF INTRINSIC VALUES RATHER
THAN A SINGLE VALUE.
3. INTRINSIC
VALUE
4. NARROW VIEW:
INVESTMENT VALUE AND INVESTMENT VALUE OF SECURITY IS THE PRESENT VALUE OF ALL
FUTURE CASH PAYMENTS TO BE MADE ON THE SECURITY. CASH PAYMENT MAY BE IN ANY
FORM E.G DIVIDEND.INTEREST,REPAYMENT OF THE PRINCIPAL AMOUNT,LIQUIDATION
PROCESS
5. INTRINSIC
VALUE OF THE SHARE MUST BE DETERMINED USING ALL MAJOR FACTORS:-
•
THE EARNING OF THE COMPANY
•
GROWTH RATE AND RISK EXPOSURE OF THE COMPANY
•
THESE FACTORS DEPEND ON THE ECONOMIC
ENVIRONMENT AND THE INDUSTRY TO WHICH IT BELONG
•
FUNDAMENTAL ANALYSIS
1. ECONOMIC
ANALYSIS
2. INDUSTRY
ANALYSIS
3. COMPANY
ANALYSIS
•
ECONOMIC ANALYSIS
•
THE LEVEL OF ECONOMIC ACTIVITY HAS AN IMPACT ON
INVESTMENT IN MANY WAYS:
1. IF THE
ECONOMY GROWS RAPIDLY,THE INDUSTRY CAN ALSO BE EXPECTED TO SHOW RAPID GROWTH
AND VICE VERSA
2. WHEN THE
LEVEL OF ECONOMIC ACTIVITY IS LOW STOCK PRICES ARE LOW AND WHEN THE LEVEL OF
ECONOMIC ACTIVITY IS HIGH,STOCK PRICES ARE HIGH
3. THE ANALYSIS
OF MACRO ECONOMIC ENVIRONMENT IS ESSENTIAL TO UNDERSTAND THE BEHAVIOR OF STOCK
PRICES
•
ECONOMIC ANALYSIS
•
MACRO ECONOMIC FACTORS:-
1. GROSS
DOMESTIC PRODUCT( GDP): GDP INDICATES THE RATE OF GROWTH OF THE ECONOMY. GDP
CONSISTS OF PERSONAL CONSUMPTION EXPENDITURE,GROSS PRIVATE DOMESTIC INVESTMENT
AND GOVERNMENT ON GOODS AND SERVICES AND NET EXPORT OF GOODS AND SERVICES. THE
ESTIMATES OF GDP ARE AVAILABLE ON ANNUAL BASIS. THE GROWTH RATE OF THE ECONOMY
IS HIGH THEN IT INDICATES THE FUTURE PROSPECTS OF THE ECONOMY
2. SAVING AND
INVESTMENT:- GROWTH REQUIRES INVESTMENT WHICH IN TURN REQUIRES SUBSTANTIAL
AMOUNT OF SAVING. THE SAVING AND INVESTMENT PATTERN OF THE PUBLIC AFFECT THE
STOCK TO A GREAT EXTENT.
3. THE
INFLATION:-ALONG WITH THE GROWTH OF GDP,THE INFLATION RATE ALSO INCREASES THEN
REAL RATE OF GROWTH WOULD BE VERY LITTLE. HIGH RATE OF INFLATION IS HARMFUL
4. INTEREST
RATES:- ALSO AFFECTS THE COST OF FINANCING TO THE FIRMS. A DECREASE IN THE
INTEREST RATE IMPLIES LOWER COST AND VICE VERSA. AVAILABILITY OF CHEAP
FUNDS,ENCOURAGES SPECULATION AND RISE IN THE MARKET PRICE OF THE SHARES.
5. BUDGET:-PROVIDES
AN ELABORATE ACCOUNT OF THE GOVERNMENT REVENUE AND EXPENDITURE. A DEFICIT
BUDGET MAY LEADS TO HIGH RATE OF INFLATION AND ADVERSELY AFFECT THE COST OF
PRODUCTION, SURPLUS BUDGET MAY RESULT IN DEFLATION. BALANCED BUDGET IS HIGHLY FAVORABLE TO THE STOCK PRICES
6. THE TAX
7. THE BALANCE
OF PAYMENT:-BALANCE OF PAYMENT IS MEASURE OF THE STRENGTH OF RUPEE ON EXTERNAL
ACCOUNT. IF THE DEFICIT INCREASES THE VALUE OF THE RUPEE WILL DEPRECATE. THE
INDUSTRIES INVOLVED IN IMPORT AND EXPORT WILL BE AFFECTED BY IT.
8. MONSOONS AND
AGRICULTURE:-A GOOD MONSOON LEADS TO HIGHER DEMAND AND IT WILL BRING BOOMNESS
IN THE STOCK MARKET
9. INFRASTRUCTURE FACILITY: A WIDE NET WORK OF INFRASTRUCTURE WILL BRING PROSPERITY IN THE
ECONOMY
10. DEMOGRAPHIC FACTORS: PROVIDE DETAILS ABOUT THE POPULATION
BY AGE,OCCUPATION,LITERACY AND GEOGRAPHIC LOCATION.NEEDED TO FORECAST THE
DEMAND FOR CONSUMER GOODS. THE POPULATION BY AGE INDICATES THE AVAILABILITY OF
ABLE WORK FORCE.
•
ECONOMIC FORECASTING
1. ANALYSE THE
MACRO ECONOMIC ENVIRONMENT AND FACTORS
2. THE ECONOMIC
ACTIVITIES AFFECT THE CORPORATE PROFIT,INVESTOR ATTITUDE AND THE SHARE PRICES
•
TECHNIQUES USED FOR ECONOMIC FORECASTING
1. ECONOMIC
INDICATORS
2. DIFFUSION
INDEX
3. ECONOMETRIC MODEL BUILDING
•
ECONOMIC INDICATORS
FACTORS THAT
INDICATE THE PRESENT STATUS,PROGRESS OR SLOW DOWN OF THE ECONOMY.
THE ECONOMIC
INDICATORS ARE GROUPED INTO
1. LEADING
2. COINCIDENTAL
3. LAGGING INDEX
•
THE INDICATORS ARE SELECTED ON :
1. ECONOMIC
SIGNIFICANCE
2. STATISTICAL
ADEQUACY
3. TIMING
4. CONFORMITY
•
LEADING INDICATORS
•
INDICATE WHAT IS GOING TO HAPPEN IN THE ECONOMY
•
POPULAR LEADING INDICATORS:
1. FISCAL POLICY
2. MONETARY
POLICY
3. PRODUCTIVITY
4. RAINFALL
5. CAPITAL
INVESTMENT AND STOCK INDICES
•
THE COINCIDENTAL AND THE LAGGING INDICATORS
•
INDICATE WHAT THE ECONOMY IS . THESE ARE GROSS
NATIONAL PRODUCT,INDUSTRIAL PRODUCTION ,INTEREST RATE AND RESERVE FUND
•
THE CHANGES THAT ARE OCCURRING IN THE LEADING
AND COINCIDENTAL INDICATORS ARE REFLECTED IN THE LAGGING INDICATOR
•
IDENTIFIED ARE UNEMPLOYMENT RATE,CONSUMER PRICE
INDEX.
•
DIIFUSTION INDEX
1. IS COMPOSITE
OF LEADING,COINCIDENTAL AND LAGGING INDICATORS
2. CONSTRUCTED BY NATIONAL BUREAU OF ECONOMIC RESEARCH
3. REPRESENTS AS
THE PERCENTAGE OF COMPONENTS THAT HAS CHANGED OVER A GIVEN SPAN OF TIME
4. IDENTIFICATION
OF BUSINESS CYCLES AND BUSINESS CYCLES TURNING POINTS
• ECONOMETRIC MODEL BUILDING
1. ASSUMPTIONS
ARE SPECIFIED
2. MATHEMATICAL
MODEL DEVELOP TO MEASURE THE RELATIONSHIP BETWEEN DEPENDENT AND INDEPENDENT
VARIABLES
3. USE
SIMULTANEOUS EQUATION
•
INDUSTRY ANALYSIS
1. AN INDUSTRY
IS GROUP OF FIRMS THAT HAVE SIMILAR TECHNOLOGICAL STRUCTURE OF PRODUCTION AND
PRODUCE SIMILAR PRODUCTS. FOR THE CONVENIENCE OF THE INVESTOR,THE BROAD
CLASSIFICATION OF THE INDUSTRY IS GIVEN IN THE FINANCIAL DAILIES AND MAGAZINES.
2. UNDERSTANDING
THE INDUSTRY IN WHICH A COMPANY OPERATES PROVIDES AN ESSENTIAL FRAMEWORK FOR
THE ANALYSIS OF THE INDIVIDUAL COMPANY.
3. AN INDUSTRY
ANALYSIS CONSISTS OF THREE MAJOR ELEMENTS:-
1. THE
UNDERLYING FORCES AT WORK IN THE INDUSTRY
2. THE OVERALL ATTRACTIVENESS OF THE INDUSTRY
3. THE CRITICAL
FACTORS THAT DETERMINE A COMPANY’S SUCCESS WITH IN THE INDUSTRY
•
NEED OF INDUSTRY ANALYSIS
1. MARKET SHARE
2. INDUSTRY
GROWTH POTENTIAL
3. REGULATION
4. COMPETITIVE FORCES
5. LABOUR
6. GOVERNMENT
ATTITUDE
7. COMPARISON OF
INDUSTRY
•
CLASSIFICATION OF INDUSTRY ON THE BUSINESS
CYCLE
•
GROWTH INDUSTRY:-
1. HIGH RATE OF
EARNING
2. GROWTH IN
EXPANSION
3. INDEPENDENT
OF BUSINESS CYCLE
4. DEPENDS
ON TECHNOLOGICAL CHANGE
§ CYCLICAL INDUSTRY:-THE GROWTH AND PROFITABILITY OF THE INDUSTRY
MOVE ALONG WITH THE BUSINESS CYCLE. DURING BOOM PERIOD THEY ENJOY GROWTH AND
DURING DEPRESSION THEY SUFFER A SET BACK
•
DEFENSIVE INDUSTRY:-DEFIES THE
MOVEMENT OF THE BUSINESS CYCLE. FOOD INDUSTRY WITHSTAND RECESSION AND
DEPRESSION, THE STOCK OF THE DEFENSIVE INDUSTRIES CAN BE HELD BY THE INVESTOR
FOR INCOME EARNING PURPOSE. THEY EXPAND AND EARN INCOME IN THE DEPRESSION PERIOD
TOO.
•
CYCLICAL GROWTH INDUSTRY:- NEW TYPE
OF INDUSTRY THAT IS CYCLICAL AND AT THE SAME TIME GROWING
•
INDUSTRY LIFE CYCLE
•
ATTRIBUTED TO JUILUS GRODENSKY
1. PIONEERING
STAGE
2. RAPID GROWTH
STAGE
3. MATURITY AND STABILIZATION STAGE
4. DECLINING
STAGE
•
INDUSTRY LIFE CYCLE
•
PIONEERING
STAGE
1. DEMAND IS
PROMISING BUT TECHNOLOGY IS LOW
2. DEMAND ATTRACTS MANY PRODUCERS
3. INTENSE
COMPETITION
4. TRY TO
DEVELOP BRAND NAME,DIFFERENTIATION OF THE PRODUCT,PRODUCT IMAGE
5. NON PRICE
•
RAPID GROWTH STAGE
1. APPEARANCE OF
SURVIVING FIRMS
2. IMPROVEMENT
IN TECHNOLOGY
3. STABLE GROWTH
RATE AND DECLARATION OF DIVIDEND
•
MATURITY AND STABILIZATION STAGE
1. MODERATE
GROWTH RATE
2. SYMPTOMS OF
3. INNOVATION
4. CLOSE MONITOR
OF THE INVESTOR
•
DECLINING STAGE
1. DEMAND AND
EARNING DECLINE
2. GROWTH WILL
BE LOW BETTER TO AVOID INVESTING
•
FACTORS
1. GROWTH OF THE
INDUSTRY: ANALYSIS OF HISTORICAL PERFORMANCE
2. COST
STRUCTURE AND PROFITABILITY:FIXED AND VARIABLE COST
3. NATURE OF THE
PRODUCT: CONSUMER GOODS,INTERMEDIATE GOODS AND PRODUCER GOODS
4. GOVERNMENT
POLICY
5. LABOUR
6. RESEARCH AND
DEVELOPMENT
7. NATURE OF THE
COMPETITION
8. SWOT ANALYSIS
•
COMPANY ANALYSIS
1. COMPANY
ANALYSIS IS A STUDY OF THE VARIABLES THAT INFLUENCE THE FUTURE OF FIRM BOTH
QUALITATIVELY AND QUANTITATIVELY
2. METHOD OF
ASSESSING THE COMPETITIVE POSITION OF A FIRM ITS EARNING AND PROFITABILITY
3. THE
EFFICIENCY WITH WHICH IT OPERATES,ITS FINANCIAL POSITION AND ITS FUTURE WITH
RESPECT TO THE EARNING OF THE SHAREHOLDERS.
4. THE
FUNDAMENTAL NATURE OF THIS ANALYSIS IS THAT EACH SHARE OF COMPANY HAS AN
INTRINSIC VALUE WHICH IS DEPENDENT ON COMPANY’S FINANCIAL PERFORMANCE,QUALITY
OF THE MGMT AND RECORD OF ITS EARNING AND DIVIDEND.
•
FINANCIAL INDICATORS
•
THE BASIC APPROACH IS ANALYSED THROUGH THE
FINANCIAL STATEMENTS OF THE ORGANIZATION
1. INCOME
STATEMENTS
2. BALANCE SHEET
3. STATEMENT OF
CHANGES IN THE FINANCIAL POSITION
§ USEFUL FOR
INVESTORS,CREDITORS, AS WELL AS INTERNAL MGMT OF THE COMPANY
§ STATEMENT
MUST BE CLEARLY JUDGED TO JUDGE TO KNOW THEY ARE CORRECT,COMPLETE,CONSISTENT
AND COMPARABLE
§ ACCURACY OF
THE FINANCIAL STATEMENTS SHOULD BE JUDGED IF IT IS CERTIFIED BY CA IN PRACTICE
•
FINANCIAL INDICATORS
•
INCOME STATEMENT:-KEY FINANCIAL STATEMENT FOR
JUDGING MANAGEMENT’S PERFORMANCE
•
BEST METHOD OF FINDING OUT THE FUTURE OF THE
FIRM
•
PAST RECORD BECOMES A BASE FOR MAKING
PREDICTION
1. EARNING FROM
REGULAR OPERATION
2. INVENTORY
COST METHOD: FOR EVALUATING INVENTORY
3. DEPRECIATION:
THE RATE AND METHOD USED FOR DEPRECIATION
4. MATCHING
PRINCIPLES:-EXPENSES SHOULD BE SHOWN IN THE SAME YEAR AS THE REVENUE TO WHICH
THEY ARE RELATED.
5.
FINANCIAL INDICATORS
6. EARNING PER
SHARES : EARNING AVAILABLE TO EQUITY SHAREHOLDER/NUMBER OF EQUITY SHARES
7. BALANCE
SHEET:-SHOWS THE ASSETS,LIABILITIES AND OWNER’S EQUITY IN A COMPANY, IT ALSO
PROVIDES INFORMATION IN THE FOOTNOTE:
1. TAXES,DIVIDEND
AND OTHER CONTINGENT
2. THE BASIS OF
VALUATION OF ASSETS
3. DEPRECIATION
METHODS
4. CHANGES IN
ACCOUNTING PRINCIPLES AND TECHNIQUES
5. CHANGES IN
•
FINANCIAL INDICATORS
•
STATEMENT OF CHANGES IN FINANCIAL POSITION:
MOVEMENT OF FUNDS.SOURCES AND APPLICATION OF THE FUNDS
•
RATIO ANALYSIS:-
1. RETURN ON
INVESTMENT
2. PRICE EARNING
RATIO
3. EARNING PER
SHARE
4. DEBT EQUITY
RATIO
•
NON FINANCIAL INDICATORS
1. BUSINESS OF
THE COMPANY: WELL ESTABLISHED OR NOT
2. MANAGEMENT:
3. MARKET SHARE
OF THE COMPANY
4. PRODUCT RANGE
5. DIVERSIFICATION
AND EXPANSION POLICY
6. FOREIGN
COLLABORATION
7. RESEARCH AND
DEVELOPMENT
8. GOVERNMENT
POLICY
9. TOOLS FOR
COMPANY ANALYSIS
•
THE CHOICE OF INVESTMENT DEPENDS:
1. EXPECTATION
ABOUT THE COMPANY’S FUTURE PERFORMANCE
2. THE STAGE OF
BUSINESS CYCLE THAT IS COMPANY IS UNDERGOING
3. DEMAND FOR
COMPANY’S PRODUCTS
4. LEVEL OF
COMPETITION
5. UNDERSTANDING THE COMPETITIVE
•
MICHAEL PORTER ‘S FIVE FORCES MODEL
1. THREAT OF NEW
ENTRANT
2. RIVALRY AMONG
EXISTING FIRMS
3. PRESSURE FROM
SUBSTITUTE PRODUCTS
4. BARGAINING
POWER OF BUYERS
5. BARGAINING
POWER OF SELLERS
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