Fundamental analysis

Fundamental analysis is the study of the various factors that affect a company's earnings and

dividends. It is the foundation of solid investing. It helps you determine the underlying health of

a company by examining the business’ core numbers:

Its Income statements,

Its Earnings releases,

Its Balance sheet,

And other quantitative and qualitative indicators of economic health.

Fundamental analysis studies the relationship between a company's share price and the various

elements of its financial position and performance. From these “fundamentals” investors evaluate

if a stock is under- or overvalued.

It explores questions like these: ------------?

Is the company competitive within its industry?

Is that industry growing or shrinking, compared to other sectors?

Is the company’s revenue growing?

Is it actually making a profit?

Is it in a strong-enough position to beat out its competitors in the future?

Is it able to repay its debts?

Notes By---Raghav jha ([email protected]) MOB…+91-8010969972

mailto:[email protected]

PHASE OF FUNDAMENTAL ANALYSIS

There are three phase of fundamental analysis:-

1. Economic analysis ( Understanding of the macro-economic environment and

developments )

2. Industry Analysis (Analyzing the prospects of the industry to which the firm belongs)

3. Company Analysis (Assessing the projected performance of the company)

PHASE NATURE OF ANALYSIS PURPOSE TECHNIQUESFRIST Economic Analysis Understanding of the

macro-economic environment and developments

Economic indicators

SECOUND Industry Analysis Analyzing the prospects of the industry to which the firm belongs

Industry life cycle analysis

THIRD Company Analysis Assessing the projected performance of the company

Ratio Analysis

In today’s (12/08/2016) presentation we will discuss about company analysis. To understand the

fundamental analysis we will discuss over following ratios.

RATIOSDISCRIPTION

Sales Growth (%) =

Current Period sales – Previous Period Sales

Previous Period Sales

Percentage increase (decrease) in sales between two time periods.

Operating Self-Sufficiency =

Business Revenue

Total Expenses

States the degree to which the organization’s expenses are covered by its core business and are able to function independent of grant support.



A ratio of 1:1 states company is self sufficient.

Business Revenue = Total Revenue – Non- operating income

Total Expense = Total expense including operating and Non-operating expense

Price Earnings Ratio (P.E Ratio)

Market Value per Share

Earnings per Share (EPS)

It is the number of times investors must pay for the company's current earnings.

For example,

M.P.S = 80

E.P.S = 5 , then P/E Ratio=80/5 = 16 times

So investors are willing to pay 16 times for every rupee of the company's earnings

Generally it fall between 15 to 25%

Price/Earnings Growth Ratio (PEG Ratio)

PE Ratio

Annual EPS Growth

When PEG Ratio of < 1 means?– The stock is undervalued– We can expect future growth in market price of stock as its EPS will probably increase in times to come.

When PEG Ratio of > 1 means?– The stock is overvalued– We cannot expect future growth in market price of stock as its EPS will probably decrease in time to come.

A standard ratio may fall from 0 to 1.

Interest coverage Ratio

Earnings before interest and tax (EBIT)

How many times interest on long term debt is covered by earning.

A higher coverage ratio is good as it mean organization can easily meet their interest



Interest on long term debt

obligation.

A lower rate indicates excessive usage of debt.

Ideally, a ratio should be over 1.5 :1 or 2:1

Equity dividend coverage Ratio

Earnings available for equity shareholders

Dividend to equity share holders

It denotes the numbers of time DIVIDEND PER SHARE is covered by (E.P.S)

Dividend yield Ratio

Dividend per share *100

Market price per share

This ratio indicates that “how much dividend can be received by an investor if he buy the share from open market”.

*A higher rate is good for investor

Dividend payout Ratio

Dividend per share *100

Market price per share

% of earning distributed as cash dividend

Retention Ratio

Earning retained *100

Earnings available

What % of earning per share has been kept as retained earnings?

A hues retained earnings indicate bright chance of capital appreciation in the price of share.



Debt-Equity Ratio (Financial Leverage Ratio)

Outsider’s Fund (Debt)

Net

worth / shareholder’s fund

*outsider’s fund = debenture, bonds, loan from financial institution

*shareholder’s Fund = equity share capital + preference capital + reserve & surplus – fictitious assets

Indicate the proportions of long-term borrowed fund and shareholder’s fund.

Lower ratio is good for long-term investors .

For capital intensive company an idle ratio is 2:1

For software company it should be less then 0.5:2

Return on equity shareholder’s fund

Net profit after tax and preference dividend*100

equity

shareholder’s fund

How efficiently the fund supplied by the Equity shareholder’s has been used.

Higher the rate more efficient management and utilization of fund.

Return on investment (capital employed)

EBIT *100

Capital

Employed

*CAPITAL EMPLOYED = fixed assets + current assets – current liabilities

OR

Eq. capital + prf. Capital + long term debt

It determines how efficiently the long term funds supplied by debenture holders (creditors) and shareholders have been used.

A project yielding higher return in favorable because it reflect overall efficiency.



Current Ratio =

Current Assetscurrent

liabilities

Measures your ability to meet short term obligations with short term assets. A useful indicator of cash flow in the near future.

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.

Standard Ratio is 2:1Quick Ratio =

Current assets – stock – prepaid expensecurrent

liabilities

A more stringent liquidity test that indicates if a firm has enough short-term assets (without selling inventory) to cover its immediate liabilities. This is often referred to as the “acid test” because it only looks at the company’s most liquid assets only (excludes inventory) that can be quickly converted to cash).

Standard Ratio = 1:1



Fundamental analysis

Leadership & Management

Transcript of Fundamental analysis