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Investment is the employment of funds with the aim of achieving additional income or growth in value. There is a commitment of present funds. There is an expectation of some return or benefits from such commitment in future, and There is always some risk involved in respect of return and the principal amount invested.
fundamental analysis
Fundamental analysis involves a detailed study of a companys financial position, often in the form of financial ratios and is used to provide general support for a long term, which would help in taking an investment decision. there are two basic approaches one can use: bottom up analysis top down analysis
INDUSTRY
COMPANY
Benjamin Graham (May 8,1894- September 21,1976) is popularly known as the father of financial analysis . He revolutionized the investment theory by introducing the concept of security analysis, fundamental analysis and value investing theories. He has converted speculating into investing by devising sound principles for analyzing a companys fundamentals and its future prospects
Fundamental analysis is based on the premise that any security (and the market as a whole) has an intrinsic value, or the true value as estimated by an investor. By assessing these fundamental determinants of the value of a security, an estimate of its intrinsic value can be determined. This estimated intrinsic value can then be compared to the current market price of the security
MARGIN OF SAFETY
Intrinsic value
Value investors typically calculate intrinsic value by focusing on earnings, cash flow and other indicators of the companys wealth creation potential. (Graham).
V = Intrinsic Value EPS = Trailing Twelve Months Earnings Per Share 8.5 = P/E base for a no-growth company g = reasonably expected 7 to 10 year growth rate The term intrinsic value means the discounted value of the cash that can be taken out of a business during its remaining life. In other words, a companys intrinsic value is equal to the value today of all the money it will deliver in the future. (Buffet, 1996).
Important variables
Dividend Yield Price-Earnings Ratio - P/E Ratio Debt equity ratio Book value Net current assets Current ratio
price-to-earnings (P/E) ratios, debt-to-equity ratios, dividend records, net current assets, book values, and earnings growth.
Case study
Rolta india (as on 1-04-2009)
Borrowings Current liabilities Current assets Debt equity ratio Closing prices Price earnings ratio Book value 693 cr 200 cr 778 cr 0.53 61.25 2.59 97 cr
Rolta India
Market return
Case study
Allahabad bank (as on 1-04-2009)
Borrowings Current liabilities Current assets Debt equity ratio Closing prices Price earnings ratio Book value 3848 cr 2962 cr 8085 cr 0.77 39.5 2.3 111 cr
Allahabad Bank
1990
1991
1.7
70.6
-16.1
45.6
1992
1993
32.4
17.2
11.4
15.9
1994
1995 1996 1997 1998 1999 2001 2002 2003 2004
22
34 17.3 40.4 25.5 53 69.6 -4 79.9 19.3 22.9%
-4.5
29.1 14.9 16.8 -2 36.1 11.5 -24.2 68.8 17.8 11.7%
Growth investing
Growth stocks have been defined as having relatively high prices in relation to fundamental factors like earnings per share, cash flow per share, book value per share and dividends per share..growth investors are more apt to subscribe to the efficient market hypothesis which maintains that the current market price of the stock reflects all the currently knowable information about a company and, so, is the most reasonable price for that stock at that given point in time.
Industry analysis
It is a type of business research that focuses on the status of the industry or an industrial sector which involves a review of an industrys recent performance, its current status and outlook for the future, its relative strength and weakness within an economic environment. determining which industries are likely to fare best in the anticipated economic environment.
Porters model
ECONOMIC ANALYSIS
Aims at determining if the economic environment is conducive and is capable of encouraging the growth of business sector, especially the capital market. When the economy expands, most industry groups and companies are expected to benefit and grow. When the economy declines, most sectors and companies usually face survival problems.
Monetary policy and liquidity: tight monetary policy of the central banks leads to availability of lesser excess funds with banks to lend, the sources of capital become scarce with business houses and the economic activity may slow down or decline Inflation: it can be defined as trend of rising prices caused by demand exceeding supply. if prices rise steadily, after a number of years, the consumers will be able to buy only fewer goods and services assuming income level does not change with inflation. It also results in extra costs to businesses (they are generally unable to pass all the cost increases through to the consumer), thereby squeezing their profit margins and leading to real declines in profitability.
Interest rates: it is the price of credit. It is the percentage fee received or paid by individuals or organizations when they lend or borrow money. the increase in interest rates lead to reduced borrowing and an economic slowdown, which leads to fall in share prices. Fiscal policy: policy of the government which involves the collection and spending of revenue. International influences: it includes: exchange rate balance of payments trade barriers quotas currency restrictions
Behaviour of economic indicators and their suggestive impact on the share market
s.n o. 1. 2. 3. Economic indicator Gross domestic product Inflation Unemployment situation Growth decline Constant prices inflationary/ deflationary Increase decline Impact on share market Positive Negative Positive negative Negative Positive
4.
5. 6.
Individual savings
Interest rate Exchange rate
Increase decline
High Low Favorable(strong against foreign currency) unfavorable High Low Positive negative
Positive Negative
Negative Positive Positive negative Negative Positive Positive Negative
7. 8.