Stock Market Analysis

Analysis

Fundamental Technical

WHAT IS FUNDAMENTAL ANALYSIS?

• This method aims to evaluate the value of the underlying Security/ Company

Value

Overvalued Undervalued

• Market share price < EPS (As per calculation)

• Market share price > EPS (As per calculation)

Market share price < EPS (As per calculation) • then the stock is said to be undervalued. This means the

stock is selling at a much lower price than what it is actually worth.

Market share price > EPS (As per calculation)• then the stock is said to be overvalued. This means the

stock is selling at a much higher price than what it is actually worth.

Intrinsic value

Company condition

Industry condition

Management condition

Economic condition

• The basic belief is that as the company grows so will the value of the share increase. This in turn will benefit the investor in the long run

Fundamental share market analysis is about using real data to evaluate a stock's value. The method uses,• revenues• earnings• future growth• return on equity,• profit margins • Other data to determine a company's underlying value and potential for future growth.

Following data can be used to predict the future of a company.

• Balance sheet• Profit and loss statement• Cash flow• Financial ratios • Other data

WHAT IS TECHNICAL ANALYSIS?

• Nothing to do with the financial performance of the underlying company, analyst simply studies the trend in the share prices.

• Market prices are a function of the supply and demand for the stock, which, in turn, reflects the value of the company.

• Historical price trends are an indication of the future performance.

• It relies upon market trends to predict how a security will perform.

FUNDAMENTAL ANALYSIS

• Ratios can be divided into five major categories:

• Profitability Sustainability• Operational Efficiency• Liquidity• Leverage (Funding – Debt, Equity, Grants)• Market

Profitability Sustainability Ratios

• How well is business performing over a specific period?

• Do enterprise have the financial resources to continue tomorrow as well as today?

Ratio What does it tell you?Sales Growth

(Current Period –Previous Period Sales)/ Previous Period Sales

Percentage increase (decrease) in sales between two time periods

Operating Self-Sufficiency

(Total Expenses / sales)* 100 Higher operating percentage is indication of inefficiency

Gross Profit Margin

(Gross Profit/ Total Sales) *100 How much profit is earned on your products without considering indirect costs

Net Profit Margin

(Net Profit/ Total Sales )*100 Measures your ability to cover all operating costs including indirect costs

Ratio What does it tell you?SGA to Sales

Indirect Costs (sales, general, admin) / Sales

A steady or decreasing ratio which means you are controlling overhead

Return on Assets

(Net Profit / Total Assets)*100 Measures your ability to turn assets into profit

A low ratio compared to industry may mean that your competitors have found a way to operate more efficiently

Return on Equity

(Net Profit / Shareholder Equity)*100 Rate of return on investment by shareholders

Are you making enough profit to compensate for the risk of being in business?How does this return compare to less risky investments like bonds?

Operational Efficiency Ratios

• How efficiently are business utilizing assets and liabilities?

Ratio What does it tell you?Accounts Receivable Turnover

Net Sales/ Average Accounts Receivable

The higher the turnover, the shorter the time between sales and collecting cash

Inventory Turnover

Cost of Sales/Average Inventory The number of times you turn inventory over into salesIf the ratio is low, it suggests overstocking, obsolete inventory or selling issues.

Accounts Payable Turnover

Cost of Sales/ Average Accounts Payable

The higher the turnover, the shorter the period between purchases and payment.

Ratio What does it tell you?Total Asset Turnover

Revenue/ Total Assets How efficiently your business generates sales on each rupee of assets.Higher ratio indicates over trading of total assets while a lower ratio indicates idle capacity.

Fixed Asset Turnover

Revenue/ Fixed Assets An increasing ratio indicates you are using your assets more productively.

Liquidity Ratios

• Does enterprise have enough cash on an ongoing basis to meet its operational obligations?

Ratio What does it tell you?Current Ratio

Current Assets / Current Liabilities Measures your ability to meet short term obligations with short term assets.A ratio less that 1 may indicate liquidity issues. A very high current ratio may mean there is excess cash that should possibly be invested elsewhere in the business or that there is too much inventory. Most believe that a ratio between 1.2 and 2.0 is sufficient.

Quick Ratio This is often referred to as the “acid test” because it only looks at the company’s most liquid assets only (excludes inventory and Bank overdraft) that can be quickly converted to cash).A ratio of 1:1 means that a social enterprise can pay its bills without having to sell inventory.

Leverage Ratios

• To what degree does an enterprise utilize borrowed money and what is its level of risk? Lenders often use this information to determine a business’s ability to repay debt.

Ratio What does it tell you?Debt to Equity

(Short Term Debt + Long Term Debt)/ Total Equity

Too much debt can put your business at risk, but too little debt may limit your potential. Owners want to get some leverage on their investment to boost profits. This has to be balanced with the ability to service debt.

Interest Coverage

EBIT/Interest payment It is a measure of a company's ability to honor its debt paymentsWhen the interest coverage ratio is smaller than one, the company is not generating enough cash from its operations EBIT to meet its interest obligations.

Market ratios

• Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.

• These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares.

Ratio What does it tell you?Earnings per share

Net Earning/ No of Shares It is the monetary value of earnings per outstanding share

P/E Ratio

Market price per share/ EPS It is used for determining whether shares are “correctly” valued in relation to one another.

Dividend yield

Dividend per share/ Market price per share