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7/21/2019 180198286 Fundamental Analysis Ppt
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Submitted by:Sakshi waliMBA III Sem
Submitted to :Mr. Bhanu Pratap Narania
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Fundamental analysis is a method of evaluating a
security or asset by attempting to measure itsintrinsic value by examining related economic,
financial and other qualitative and quantitative
factors.
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Fundamental analysts attempt to study everything
that can affect the security's value, includingmacroeconomic factors (like the overall economy
and industry conditions) and individually specific
factors.
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Fundamental analysis can be composed of many
different aspects: the analysis of the economy asthe hole, the analysis of an industry or that of
an individual company.
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!hus it is important for an analyst to identify the
factors that are likely to affect the value of the
underlying asset and then resort to the study of
the said factors.
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Fundamental Analysis thus involves 3
steps
Economic analysis
Company analysis
Industry analysis
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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 e prosperous! On
the other hand, if the economy is in "ECE##IO$, the
performance of companies %ill e generally poor!
Investors are interested in studying those economic varieties,
%hich affect the performance of the company in %hich they
proposed to invest! An analy&ed of those economic variale
%ould give an idea aout future corporate earnings and thepayment of dividends and interest to investors!
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Factors afecting economicFactors afecting economic
analysisanalysis '$(
#A)I$' A$* I$)E#TME$T
I$F+ATIO$
I$TE"E#T "ATE
A'"IC+T"E
MO$#OO$ 'O)E"$ME$T E-(E$*IT"E#, "E)E$E# A$*
*EFICIT#
(O+ITICA+ #TABI+IT.
I$F"A#T"CT"E
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GNP/ Geometric ModelGNP/ Geometric Model
'$( represents the aggregate value of goods and services
produced in the economy! It reflects the over all performance
of the economy! The gro%th rate of '$( indicates the gro%th
rate of the economy the higher the rate of gro%th of '$(, themore favorale is it for the stoc/ mar/et and vice versa
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Saving & investmentSaving & investment
#avings and investment denote that position of '$(, %hich issaved and invested savings increases in India since eighties
no% the rate of savings is 012 from 02 in 456s, %hich
indicates the gro%th of capital mar/et! The higher the level ofsavings interest, the more favorale is it for the stoc/ mar/eted
vice versa
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InationInation
Inflation has considerate impact on the performance ofcompanies! 7igher rates of inflation upset usiness plans and
erode purchasing po%er in the hands of consumers! This %ill
result in lo%er demand for products! Thus high rates of inflation
in an economy are li/ely to affect the performance of companiesadversely! 7o%ever industries and companies prosper during
periods of lo% inflation! 7ence an investor has to evaluate the
inflation rates prevailing in the economy currently as %ell as the
trend of inflation li/ely to prevail in the future!
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AgricultureAgriculture
Agriculture forms a ma8or part of the Indian economy! #omecompanies are using agricultural ra% material as inputs and
some others are supplying inputs to agriculture! #uch
companies are directly affected y changes in agriculturalproduction! 7ence, the increase9decrease in agricultural
production has a significant earing on the industrial production
and corporate performance
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Rate o interestRate o interest
The cost and availaility of credit for companies aredetermined y the rates of interest prevalent in an economy! A
lo% interest rate stimulates investment y ma/ing credit
availale easily and cheaply! As a result cost of finance for
companies decreases %hich assures higher profitaility! Onthe other hand, higher interest rates result in higher cost of
production, %hich may lead to lo%er profitaility and lo%er
demand! 7ence an investor has to consider the interest rates
prevailing in the economy and evaluate their impact on the
performance and profitaility of the companies!
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G!"#$ RE"EN%E E'PEN(I#%RE &G!"#$ RE"EN%E E'PEN(I#%RE &
(EFI)I#S(EFI)I#S
'overnment is the largest investor and spender of money! #o
the trends in government revenue e:penditure deficits have
a significant impact on the performance of industries and
companies! #o the investor has to evaluate these carefully toassess their impact on his investments!
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InrastructureInrastructure
The development of an economy very much on theavailaility of infrastructure! It includes electricity, roads and
rail%ays, communication channels etc! The availaility of
infrastructural facilities affects the performance of
companies! Bas infrastructure leads to inefficiencies, lo%erproductivity, %astage and delays and vice versa! Thus an
investor should assess the status of infrastructural facilities
availale in the economy efore finali&ing his investment
avenues!
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MonsoonMonsoon
The Indian economy is essentially an agrarian economy andagriculture forms a very important sector of the Indian
economy! But the performance of agriculture to a very great
e:tent depends upon the monsoon! The ade;uacy of the
monsoon ensures the success of the agricultural activities in
India and vice versa! 7ence the progress and ade;uacy of
the monsoon ecomes a matter of great concern for an
investor in India!
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Political Sta*ilityPolitical Sta*ility
A stale political environment is necessary for steady andalanced gro%th! $o industry or company can gro% and
prosper in the midst of political turmoil! #uch long term
economic policies are needed for industrial gro%th! #uchstale policies can e framed only y stale political
systems!
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Industry AnalysisIndustry Analysis
Industry analysis indicates to an investor %hether the
industry is a gro%th industry or not! It gives an investor a
choice of the industry in %hich the investments should e
made!
Industry analysis refers to an evaluation of the relativestrength and %ea/ness of particular industries %hich can e
divided in to three parts, vi&!,
! +ife cycle of an industry
0! Characteristics of an industry
3! (rofit potential of an industry
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+ie )ycle+ie )ycle
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industryindustry
(a) Relationship between Demand & supply: "xcess supply reduces the profitabilityof the industry and insufficient supply tends to improve the profitability. !hus an
investor should estimate the demand and supply gap in an industry.
(b) Period of life: #ife of the industry depends on the products and the technology
used by the industry. !echnological changes leads to product obsolete. $o
investment should be made in such industries.
(c) State of labour: %hen there is labour revolution, industries cannot become bright.
(d) Governments attitude: !he &overnment may encourage the groth and
development of certain industries by giving much assistance to such industries.
(e) Availability of Raw Material: n industry may depend on internal external
country for ra material. ometimes they depend on import of ra material.
(f) Cost structure: *t refers to the proportion of fixed costs to variable costs. (+iscuss
about arginal -ost)
P -t t ti l P -t t ti l
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Pro-t .otential oPro-t .otential o
industryindustry
(i) hreat new entrants: $e entrants inflate cost, push don theprices and reduce profitability. n industry hich is ell protectedfrom the entry of ne firms ould be ideal for investment.
(ii) Competitions amon! e"istin! firms: !he firm competes ith eachother on the basis of price, quality, promotion, service, arranties andso on. *f the rivalry beteen the firms in an industry is strong average
profitability of the industry may be discouraged. !he rivalry in anindustry is high hen the folloing conditions prevail in the market:
(a) !here is a sustained competitive battle
(b) !he industry groth is dull
(c) !he level of fixed cost is high
(d) !here is over capacity in the industry continuing for a long time.(e) !he industry product is considered as a commodity, hich
stimulates strong competition.
(f) !he industry struggles much to ithstand.
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)om.any Analysis)om.any Analysis
It involves a close investigative scrutiny of the companiesfinancial and non financial aspects %ith a vie% to identifying itsstrength, %ea/nesses and future usiness prospects!
The financial and non financial aspects are as follo%s>
Mar/eting success Accounting (olicies
(rofitaility
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! Mareting success: The success of the mar/et of the firm depends on
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Profitability: "!
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Benefits of fundamental analysisBenefits of fundamental analysis
Finding the value of the company! *etermining %hat thecompany is %orth at today6s price %ill enale you to ma/e a
decision to either uy or sell the company
Enales to read the pulse of the company! One can
understand the financial dynamics %ithin the company anddetermine %hether is it in a good state or are there some
prolems!
7elps to identify potential companies efore the general
mar/et!
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