At any given point of time due to temporary

market disequilibrium, the CMP of a stock

can differ from its IV. An investor can take
benefit of this market disequilibrium & benefit
from the price mismatch by buying under-
valued securities & selling over-valued
securities.
Each stock has an intrinsic value which is measured
by finding the present value of all future cash
flows from the security(dividend, rights, bonus,
capital appreciation).
Thus, IV can be determined by discounting the
prospective cash flows using the rate of return
required by the investor as the discount rate.
The future cash flows are affected by various factors
in the business environment, specifically, the
economy, the industry & the company factors.
 Thus, FA studies the economic, industry &
company factors to find out the intrinsic
worth of securities. It helps the investors in
taking investment decisions.
• Step 1: Economic Analysis
– State of overall economy
• Step 2: Industry Analysis
– Outlook for specific industry
– Level of competition in industry
• Step 3: Company Analysis
– Financial condition of specific company
– Historical behavior of specific company’s stock
– Qualitative analysis like type & track record of
management,etc.
 Gross Domestic Product (GDP): market value
of all goods and services produced in a country
over the period of a year

 Industrial Production: measure of the

activity/output in the industrial or productive
segment of the economy
 Government Fiscal Policy
› Taxes
› Government spending
› Debt management
 Monetary Policy
› Money supply
› Interest rates
 Other Factors
› Inflation
› Consumer spending
› Business investments
› Foreign trade
› Currency exchange rates
 Evaluate the competitive position of a
particular industry in relation to
other industries
› Looking for new opportunities &
growth potential
 Identifycompanies within the industry that
look promising
› Looking for strong market positions, pricing
leadership, economies of scale, etc.
• What is the nature of the industry?
• Is the industry regulated?
• What role does labor play in the industry?
• How important are technological
developments?
• Which economic forces have the most impact
on the industry (e.g., interest rates, foreign
trade)?
• What are the important financial and
operating considerations (e.g., access to
capital)?
 Growth Cycle reflects the vitality of an industry or
a company over time.
 Initial Development: industry is new and risks are
very high
 Rapid Expansion: product acceptance is growing
and investors become very interested
 Mature Growth: expansion comes from growth in
the economy and returns are more predictable
 Stability or Decline: demand for product is
diminishing and investors avoid this stage
 Evaluate the financial condition and operating
results of a specific company
› Competitive position, Composition and growth in sales
› Profit margins and dynamics of earnings
› Asset mix (i.e. cash balance, inventory, accounts
receivable, fixed assets)
› Financing mix ( i.e. debt, stock)
 Summary of a company’s assets, liabilities, and
shareholders’ equity at a point in time
› Assets: what the company owns (i.e. cash, inventory,
accounts receivable, equipment, buildings, land)
› Liabilities: what the company owes (i.e. bills, debt)
› Equity: capital the stockholders have invested in
the company
 Summary of a company’s operating results over a
specific period of time, usually one year
› Revenues: funds received for providing products
and/or services
› Expenses: funds used to pay for materials, labor, and
other business costs
› Profit/Loss: revenues less expenses
 Summary of a company’s cash flows and other
events that caused changes in company’s cash
› Sources of Cash: proceeds from sale of products/
services, sales of equipment, borrowing money, sale of
stock
› Use of Cash: payment of wages and/or materials,
payment of operating expenses, purchases of
equipment, payment of debt, payment of dividends
 Comparative Analysis : in order to compare
financial performance of a firm with the industry
averages and other peers in the industry.
 Trend Analysis : to identify the trends in the
working of the company over the past years
 Common-size Statement Analysis : in order to
compare performance of a firm or two firms over
time.
 Ratio analysis : finding the ratios between
different items of the balance sheet, revenue
statements & their combinations.
 Liquidity Ratios: the company’s ability to meet
day-to-day operating expenses and satisfy short-
term obligations as they become due
 Activity Ratios: how well the company is
managing its assets
 Leverage Ratios: amount of debt used by the
company
 Profitability Ratios: measures how successful
the company is at creating profits
 Common Stock Ratios: converts key financial
information into per-share basis to simplify
financial analysis
 Current Ratio: how many rupees of short-
term assets are available for every rupee of
short-term liabilities owed
 Quick ratio : how many quick assets are
available for paying off quick liabilities. Quick
assets are ones which can be easily
convertible to cash.
 Gross profit ratio
 Net Profit ratio
 Operating profit ratio
 Return on assets
 Return on Net Worth
 Return on equity
 Return on cap emp
 Stock turnover ratio
 Debtors turnover ratio / Average Collection
period
 Creditors turnover ratio / Average Payment
period
 Total Assets Turnover ratio
 Fixed assets turnover ratio
 Interest coverage raatio
 Net working capital turnover ratio
 Debt – equity ratio
 Interest coverage ratio
 Capital gearing ratio
 Debt service coverage ratio
 Earning per share
 Price earnings ratio
 Price earnings growth ratio
 Dividend per share
 Dividend payout ratio
 Dividend yield ratio
 Book value per share
 Price to book value raatio
 Net Profit s Net Profit s Sales Total Assets
ROE    
Equity Sales Total Assets Equity
Ratio 1 Ratio 2 Ratio 3
 Fundamental analysis helps to identify which
shares to buy based on the facts, figures &
findings about economy, industry &
company.
 Technical analysis helps to determine the
right time to buy or sell securities in the
market, based on historical stock prices,
charts, patterns & indicators.
THANK YOU