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Fundamental Analysis of
Stocks
There are two type of analysis mainly carried out in the stock market.
1. Fundamental Analysis 2. Technical Analysis
Fundamental Analysis:
Fundamental analysis is a way of scientific
analysis as it try to estimate the intrinsic worth of the company. It analyses
the basic fundamental criteria of the company like sales, profits, balance sheet
studies. It involves assessing short and long term prospects of different
industries and companies. It may also involve studying interest levels, capital
market conditions and the out for national economy and also the economies of
trading partner countries. One of the most important factor of affecting price
of a corporate security is the actual / expected profitability of the issuing
company. Fundamental analysis pays attention to a company's debt-equity ratio,
profit margins, dividend payout, earning per share, sales penetration, market
share, interest, asset and dividend coverage, product and market innovation and
the promoters track record. Fundamental analysis conservative, non-speculative
approach of evaluating equity shares on value based method.
Fundamental analysis consists of three three
phases: economic analysis, industry analysis and company analysis.
Economic Analysis
Economic Analysis:- The stock market does
not operate in a vacuum. It is the integral part of the economy of a country,
more so in a free economy like USA and to some extent in a mixed economy like
India. After the new liberalized economic policy implementation say
after 1991 India is also emerging as a free economy. To get an insight
into the complexities of the stock market , one need to develop a sound economic
understanding and be able to interpret the impact of important economic
indicators on stock markets.
Important economic analysis indicators:-
Monsoon, War, inflation, foreign exchange reserves, public debt and foreign
debt, budgetary deficit, domestic savings and capital output ratio,
infrastructure. government policy, interest rates, taxation policy, balance of
trade, employment, political situation and international developments are some
of the important economic indicators. a favorable monsoon has a positive
impact on stock markets. In a good monsoon there is growth in agro base
industries, fertilisers, seeds, edible oils, textiles and GDP goes up. The
aggregate demand also goes up considerably.
Industry Analysis
Industry
Analysis:- The second face of fundamental analysis consists of a detailed
analysis of a specific industry; its characteristics, its past record, its
future prospects. The purpose of industry analysis is to identify those
industries which are likely grow in the future and to invest in equity share of
companies selected from such industries.Industry level
analysis will help investors to select the industries on innovation, technology,
cyclical blues, FERA or FMCG companies of consumer
goods producers and all high demand oriented group of industries.
All industries
have various stages of growth: -
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Innovation, technological development, initial phase and cyclic phase.
(pioneering stage)
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Growth Phase.
(expansion stage)
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Competitive or Maturity Phase.
(stagnation stage)
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Declining Phase.
(declining stage)
Industry
analysis can be of immense help to an investor. When a particular industry is
booming, not only the leaders but even the laggards also benefit. For example
consider the cement industry of India in 1990-91. Similarly when a particular
industry is in doldrums the marginal firms become extinct and the leaders suffer
as well. For example consider a picture tube industry of India in 1990-91. An
intelligent investor, therefore, has to make a detailed industry analysis
before he decides to buy or sell shares of any company in that industry.
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INDUSTRY
GROUP |
COMPANIES |
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Textlies |
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Arvind
Mills
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Abhisheik
Industries
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Century
Enka
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Garden
Silk
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Mahavi
Spinning
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Nahar
Spinning
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Construction |
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Hindustan
Construction
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Nagarjuna
construction
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Steel |
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Tata Steel
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Kalyani
Steel
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Steel
Authority
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Company Analysis
Company Analysis:- Investors many times
find that though a particular industry may be doing very well, certain companies
in that industry may not be in good shape. On the other hand it is quite likely
that one or two companies would do well in a slump industry. Hence selecting
individual companies for investment in a given industry is equally important.
There are two major components of industry analysis.
a) Non financial aspects:- The scope of
the non financial aspects covers the study about the history and track record of
the promoters, relevant technology, brand image of products, industrial
relations, industry reputation in the market, infrastructure, market share
of the company likewise.
b) Financial Analysis:- Important
fundamental criteria are covered in this column. There are some important
fundamental factors one has to know in this analysis. Equity , sales, book
vale, operating profit, gross profit, net profit, earning per share, price
earning ratio, dividend, are some of the above factors to study. In the
financial aspects an investor identify an stock whether overpriced or under
priced. say if a company's earning per share is 5 and the market price of the
stock is 90 rupees then the stock is (90 / 5) eighteen times over priced in the
market. The PE ratio of the stock is mentioned as 18. Financial ratios are only
tools. The utility of a tool largely depends on the manner and skill with in
which it is used.
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