Fundamental analysis is one of the analysis used in Security Analysis which includes Industry, Economy & company analysis

1. Fundamental Analysis
By:
Prof. Kumar Dhanwani
DMS, KDKCE

2. Fundamental Analysis
Fundamental Analysis is to evaluate a lot information
about the past performance and the expected future
performance of companies, industries and the
economy as a whole before taking the investment
decision. Such evaluation or analysis is called
fundamental analysis.

3. Fundamental analysis includes:
 Economic analysis
 Industry analysis
 Company analysis

4. Fundamental Analysis
The Analysis of economy, industry and company constitute
the main activity in the fundamental approach to security
analysis. And can be viewed as different stages in
investment decision making process.

5. Fundamental Analysis

6. Economy Analysis

7. Economic Analysis
The performance of a company depends much on the
performance of the economy if the economy is BOOM, the
industries and companies in general said to be prosperous.
On the other hand, if the economy is in RECESSION, the
performance of companies will be generally poor.
 Investors are interested in studying those economic
varieties, which affect the performance of the company in
which they proposed to invest. An analyzed of those
economic variable would give an idea about future
corporate earnings and the payment of dividends and
interest to investors.

8. Techniques for Economic forecasting
(1) GNP
(2) SAVINGS AND INVESTMENT
(3) INFLATION
(4) AGRICULTURE
(5) RATES OF INTEREST
(6) GOVT. REVENUE, EXPENDITURE & DEFICITS
(7) INFRASTRUCTURE
(8) MONSOON
(9) POLITICAL STABILITY
(10) NATURAL CALAMITIES

9. GNP/GDP
GNP represents the aggregate value of goods and
services produced in the economy. It reflects the over
all performance of the economy. The growth rate of
GNP indicates the growth rate of the economy the
higher the rate of growth of GNP, the more favorable
is it for the stock market and vice versa
GDP
a measure of all of the goods and services produced in
the economy during a specified time period

10. INFLATION
Inflation prevailing significant impact on company
performance. High inflation upset company plan.
Demand goes down because purchasing power fall,
high inflation impact company performance adversely.
Inflation is measured both in:
WPI (Wholesale price index)
CPI (Consumer price index)

11. INTEREST RATE
Interest rates determine the cost and availability of credit
for companies operating in an economy.
Low interest rate=> easily and cheaply available credit.
=> lower cost of finance
=> high profitability
High interest rate => higher cost of production
=>lower profitability
=>Lower demand

12. GOVERNMENT REVENUE, EXPENDITURE AND
DEFICIT
Government is the largest investor in economy of any
country thus revenue, expenditure and deficit have
significance impact on the performance of industries
and companies.
Expenditure stimulate demand and creates job.
The excess of expenditure over revenue is deficit,
(budget deficit), most expenditure are spent on
infrastructure, and deficit financing fuel inflation.

13. MONSOON/SEASONAL IMPACT
The Indian economy is essentially an agrarian economy
and agriculture forms a very important sector of the
Indian economy. But the performance of agriculture to
a very great extent depends upon the monsoon. The
adequacy of the monsoon ensures the success of the
agricultural activities in India and vice versa. Hence the
progress and adequacy of the monsoon becomes a
matter of great concern for an investor in India.
Weather forecasting becomes a matter of great concern
for investor in the economy of agricultural country.

14. EXCHANGE RATE
The balance of trade in import and export determine the
rate of exchange rate.
Depreciation of local currency improve the competitive
position in foreign market the performance of exported
product but it would also make the imported product
more expensive.
A foreign Exchange reserves is needed to meet several
commitments such as payment for import and servicing
of foreign depts.

15. INFRASTRUCTURE
Development of a economy depends very much on the
infrastructure available. Industry needs electricity for
its manufacturing activities road and railways to
transport raw material and finished good.
Communication channels help supplier and
customers.
Good infrastructure is symptoms of development.
Bad infrastructure lead to inefficiencies, low
productivity wastages and delay.
Investors should analysis the infrastructure of any
economy.

16. Saving & investment
Savings and investment denote that position of GNP,
which is saved and invested savings increases in India
since eighties now the rate of savings is 25% from 21%
in 80’s, which indicates the growth of capital market.
The higher the level of savings interest, the more
favorable is it for the stock marketed vice versa

17. Industry Analysis
Industry analysis indicates to an investor whether the
industry is a growth industry or not. It gives an investor
a choice of the industry in which the investments
should be made.
Industry analysis refers to an evaluation of the
relative strength and weakness of particular industries
which can be divided in to three parts, viz.,
1. Life cycle of an industry
2. Characteristics of an industry
3. Profit potential of an industry

18. Industry
Sales
Life-Cycle Stages
Introductory
Expansion (Growth)
Mature
Industry Life Cycle

19. Life Cycle
a) Pioneering Stage: Technology and product are newly
introduced.
(b) Expansion stage: Those companies which reached first
stage grow further and becomes stronger.
(c) Stagnation Stage: In this stage the growth of the industries
Stabilizes. Sales increases at slower rate.
(d) Decay stage: The industry becomes obsolete and gradually
ceases to exist.

20. INDUSTRY ANALYSIS
Cyclical industries:
Industries that tend to be directly related to business
cycles such that they perform best during expansions
and worst during contractions.
Nature of the product
Products produced by the industries are demanded by
consumers or other industries. if industrial goods
like iron, iron sheet& iron coils are produced, the
demand for them depends on the construction
industries.

21. Defensive, or countercyclical, industries:
Industries that tend to perform best when the economy is
in a contraction or recession, but are generally the poorest
performers in expanding economies.
Industry life cycle:
The various phases of an industry with respect to its
growth in sales and its competitive conditions

22. Competition:
The investor before investing in a scrip of an company,
should analyze the market share of the company's
product & should compare it with the top 5 companies.
Growth of the industry :
The historical performance of the industry in the terms
of growth and profitability should be analysed. Industry
wise growth is published periodically by the Centre for
Monitoring Indian Economy.
Labour:
The analysis of labour industry scenario in a particular
industry is of great importance. The number of trade
unions and their operating mode have impact on the
labour productivity and modernization of the industry.

23. Company Analysis
In the company analysis the investors assimilates the
several bits of information related to the company and
evaluates the present & future value of the stock.
It involves a close investigative scrutiny of the companies
financial and non financial aspects with a view to
identifying its strength, weaknesses and future business
prospects.
Company Analysis includes financial and
non financial aspects which are as follows:

24. The financial statement analysis is the study of a company’s financial
statement from various viewpoints. The statement gives the historical
and current information about the company’s operation.
Some statements & parameters used in the analysis are:
 Balance sheet
 Profit and loss account
 Comparative financial statements
 Trend analysis
 Common size statements
 Fund flow analysis
 Cash flow analysis
 Ratio analysis.
Financial analysis

25. Financial Parameters
A.(a) Gross profit Margin
(b) Net profit Margin
(c) Earning power
(d) Return on equity
(e) Earning per share
(f) Cash EPS
B.Financial Statement Analysis
 Trading, P& L A/C Analysis
 Balance Sheet Analysis
C. Ratio Analysis
 Liquidity Ratios
 Leverage Ratios
 Profitability Ratios

26. Non Financial parameters
Business of the company
The investor should know weather the company is a well
established one, weather it has a good product range.
Management
The quality of top management team, the competence and
the commitment of CEO matters a lot in shaping the
destiny of the company.
Product range
Progressive co. like ITL & HUL creates competition for their
existing products by launching new products with regular
frequency. Hence investor must examine the company.

27. Foreign collaboration
Where a company has entered into technical
collaboration with a foreign company, the investor
must find out more about the nature of the
collaboration agreement.
R & D
Progressive companies spent substantial sums of
money on R & D to upgrade their existing product.
Govt. regulations
The investor must asses the implications of governmental
regulations such as licensing entry barriers, patent
registrations.

28. Analysis is must because