UNDERSTANDING FUNDAMENTAL ANALYSIS

 Fundamental Analysis:

Fundamental Analysis is a method of measuring the intrinsic value of the stock. It includes study of macroeconomics, microeconomics, competition in the market, particular company health such as study of assets, liabilities, earnings etc.

Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. It primarily relies on public data, such as a company’s historical earnings and profit margins, to project future growth.

in accounting and finance, Fundamental analysis is the analysis of a business's financial statements , competitors and markets. It also considers the overall state of the economy and factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management. There are two basic approaches that can be used: bottom-up analysis and top-down analysis.

Top-Down Approach:

Top down approach starts investment analysis from larger scale such as study of “Economy” than Particular “Sector” than Particular “Industry” and Finally Particular “Company”

 

Bottom-Up Approach:

Opposite of top-down approach there is bottom up approach. It starts with "Company", "Industry", "Sector" and "Economy"

Fundamental Analysis Elements:

EPS

P/E Ratio

ROE

P/B Ratio

Dividend Payout Ratio

 

·         EPS is Earning Per Share. It is calculated by:

Net Income after tax/ total number of outstanding shares

      P/E is Price to Earning Ratio. It is calculated by:

Share Price/ EPS

     ROE is Return on Equity. It is Calculated by:

Net earning after tax / Shareholder equity.

     P/B is Price to Book Ratio. It is calculated by:

Last Closing Price / Previous Quarter Book Value Per Share

     Dividend Payout Ratio, a dividend payout ratio tells us how much the company has earned and what portion of it is being given out as a dividend. It can be calculated by:

dividing the total amount of dividend by the net income of the company. 

Layers of Fundamental Analysis: 3 Layers of Fundamental Analysis are the analysis of:

Ø  Economic

Ø  Industry

Ø  Company

Types of Fundamental Analysis:

Ø  Qualitative: Qualitative is inclined towards goodwill, brand value, market condition and company performance. SWOT analysis (Strength of the Company, Weakness of the Company, Opportunities and Threat of the Company.)

Ø  Quantitative: Quantitative is a study of statistically driven, ratio analysis.

Objective of Fundamental Analysis:

Ø  To make a projection on its business performance.

Ø  To evaluate the management of the property and make internal financial decisions.

Ø  To calculate credit risk of the asset; To find the intrinsic value of the property.

Fundamental Analysis Process: Fundamental Analysis is done by examining the:

Ø  financial ratio

Ø  Company analysis.

Ø  financial reports of the company.

Ø  debt of the company.

Ø  Competitors analysis.

Ø  future prospects of the company.

Important Thing in Fundamental Analysis:

Ø  critically examining a business

Ø  investors who want to invest for a long-term perspective uses investment analysis.

Limitations of Fundamental Analysis:

Ø  tedious and time consuming.

Ø  Hold for a long term

Ø  Does not provide trade signals

Ø  Manipulated numbers

Ø  Accounting method

Father of Fundamental Analysis.

Benjamin Graham.