Know The Market(Session-10)

-

Fundamental Analysis-

  • Fundamental analysis is one of the most popular method of stock analysis.
  • You can choose and evaluate the company through its earning and balance sheet.
  • Essence of fundamental analysis is to find out as much you can about the company to decide whether it is worthwhile investment compared to other stocks. 
  • It tries to estimate the value of stock through the analysis of various factors such as the management, financials,economy and industry in which the company operates etc.

Approaches to Fundamental Analysis-

There are two approaches of fundamental analysis-

  1. Top Down Approach
  2. Bottom Up Approach

  • In top down approach we must try to understand the economy. Then we make shortlist about the industry, which industry was exactly grow. Then identify the companies based on the industry.
  • In bottom up approach the fundamental analysis is based on the company specific.

Q- What is top down approach?

Ans-

  • Top Down investor looks at macro economic variable like GDP, inflation, Interest rates etc.
  • The investor then identifies the various sectors, that are likely to perform better than others and looks for opportunities in these sectors first.
  • Lastly he picks the best performing stocks in that sector.

Q- What is bottom up approach?

Ans-

  • This strategy focus more on the company.
  • The stocks are chosen based on their valuations and the growth potential rather looking whether the company is in the right sector or not.
  • Investment decision is based upon the factors such as market size, competitive position of the company, sales, earning expected future earnings and balance sheet.
  • Financials such as debt, ratios play an important role rather than the economic or industrial factors in which the company operates.

Analysis of the Economy-

  • Economic Analysis helps in understanding and interpreting the stock markets better.
  • There are a few economic indicators that play a vital role.

Example-

  1. GDP
  2. Inflation
  3. Interest Rates
  4. Forex Reserves
  5. International Trade
  6. Crude Oil Prices
  7. Credit Policies of RBI

Industry Analysis-

  • Purpose of industry is to identify those industries with a potential for future growth.
  • And then investing in equity shares of companies, selected from such industries.
  • Provides statistics about the market potential of the business products and services in that industry.
  • Gives a view about the current state of the industry and the likely future trends.

Parameters for Industry Analysis-

  • Understanding the type of the industry. Ex- Manufacturing, Construction, Service, Genetic etc.
  • Understanding the stage of industry life cycle, like pioneering stage, expansion stage, stagnation stage etc.
  • Understanding strengths, weakness, opportunities and threats to the industry.
  • Competitive forces and industry profitability: Understanding copmetitors, subtitutes, bargaining power of buyers and suppliers etc.

Company Analysis-

  • Company Analysis is also referred to as Fundamental Analysis.
  • It analyses all aspects of the company including finances, profit margins, organisation structure, growth opportunities, management team etc.
  • There are two parts to fundamental analysis:

  1. Financial Analysis
  2. Non Financial Analysis

Understanding company Financials-

  1. Annual report
  2. Balance sheet
  3. Income statement

Analysis of financial statements helps in understanding whether the financial position, operations and financial growth are satisfactory or not.

Annual Report-

  • These reports are generally long and contain important financial documents
  • Annual report gives below details-

  1. Balance Sheet and income statement
  2. Information regarding companies growth strategy
  3. Marketing and advertising plans
  4. Sales strategy

Directors Report - Any potential risk that could affect the company, which talks about how the company has performed, future business strategies and profitability.

Q- How to read and understand the balance sheet ?

Ans-

  • Is report of the financial condition of the business
  • Gives a detailed picture of the companies assets and liabilities on particular day.
  • The logic behind producing a balance sheet is to ensure that all of the companies funds are accounted.
  • Usually created at least once a year.
  • The companies in order to get a better hold on the finances, tend to prepare it on quarterly and half yearly basis.
  • Assets- Land, Machinery, Accounts, Loans and Advances.
  • Liabilities- Reserves and surplus , Debt etc.
  • Share Capital- Equity share capital, preference share capital.

Income Statement-

  • It tell up about companies current year financials.
  • It contains lot of information such as company sales, operating expenses etc.
  • First line of income statement gives the companies sales or revenue referred to as top line.
  • Next section in income statement gives the operating expenses, i.e. cost of doing a business like raw material cost, salaries etc.
  • Third section contains income of the company after paying all the expenses referred to as bottom line.

Q- What are the key ratio's to analyze a company?

Ans-

  • Operating and Net profit margin Ratios- Measure the % of profits earned per rupee of sales made by the company.
  • Operating Profit Margin- Measures the revenue generated from operations.
  • Net profit Margin- Reflects the income that is left for the investors after the deduction of costs such as depreciation, tax, interest etc.
  • Higher the profit margins indicate a company to be more profitable having better control over its costs.

EPS- Earning Per Share

  • It measures the profit available to equity share holders on a per share basis.
  • This ratio is considered important in estimation the market price of the share.
  • Low EPS = Lower possible dividends and so lower market value.
  • High EPS has a favourable effect on the market.
  • However, EPS alone does not reflect the effect of various operations of the business.

Return on Equity(ROE)-

  • It is a tool that helps measure how effectively a company has been managed.
  • It measures efficiency of the firm in generating profits for each unit of share holders equity utilized.
  • % of return each share holder is likely to get for the money invested.
  • In general higher the ROE more  effective with a rising ROE and growing earnings.

Return on Capital Employed-

  • Efficiency of the in generating profits for each unit capital invested in the firm.
  • The capital may be a combination of funds raised through equity as well as debt.

Current Ratio-

  • It measures the  companies ability to pay short-term obligations.
  • It indicates the liquidity position of the firm, the ease with which the firm is able to manage its working capital requirements.
  • A ratio greater than 1 indicates the company is more capable in paying off its obligations provided the current assets are majorly composed of liquid assets.

Debt to Equity Ratio-

  • Relation between the borrowed funds and the owner's capital of the firm.
  • It is also know as external -  internal equity ratio.
  • It is used to ascertain the soundness of the long term financial policies of the business.
  • It shows the choice of financial channels of a company. whether the company is dependent more on debt or on equity for raising of funds.
  • Debt refers to long term loans such as long term debentures, loans from financial institutions etc.
  • Equity refers to the share holders funds such as equity share capital, preference share capital, reserves and surplus etc.
  • A higher debt equity ratio compared to the industry may be dangerous, as its indicates higher debt leading to majority of earnings routed for the payment of interest.

Interest Coverage Ratio-

  • Efficiency of the companies EBIT to cover the interest expenses.
  • A higher interest coverage ratio indicates that the company can easily meet the interest expense.
  • An interest ratio less than 2 indicates that more than 50% of the companies EBIT is routed for interest payments.

Price/Book Value Ratio(P/B ratio)-

  • It used to compare the market price of the share to its book value.
  • P/B is commonly used in industries with more liquid assets such as banks and financial institutions.
  • A higher P/B is a better condition for a running company a P/B should never be low.
  • If a good company has a P/B , it may be a buy signal.

Price Earning Ratio(P/E ratio)-

  • This ratio establishes a relationship between the market price of the shares of a company and its earning per share.
  • This ratio helps in predicting the future market value of the shares within reasonable limits.
  • P/E ratio is the most commonly used method of valuing companies.

A high P/E ratio indicates two things-

  1. the investors are expecting the earnings to grow at a faster pace.
  2. the company is fundamentally strong compared to its peers in the industry.

Non Financial Analysis of a company-

  • It is the practice of analysing something based on subjective method, apart form any factual or statistical data.

Limitations of Fundamental Analysis-

  • It is extremely time consuming process.
  • Even though company fundamentals are good, stock price can still go down for a variety of reasons like, supply and demand, fear and hope, price and volume.
  • You need skill and knowledge to do fundamental analysis.
  • It is based on certain assumptions about a companies future prospects, in reality assumptions may not come true.
  • Almost all companies tend to highlight the positive aspects of the business while underplaying the negatives.


---Thank You---

1. Know The Market- Session-1
2. Know The Market- Session-2
3. Know The Market- Session-3
4. Know The Market- Session-4
5. Know The Market- Session-5
6. Know The Market- Session-6
7. Know The Market- Session-7
8. Know The Market- Session-8
9. Know The Market- Session-9


Comments

Post a Comment

Popular posts from this blog

Communication Skills

-
Image
Communication skills allow to understand and be understand by others.Being able to communicate effectively is one of the most important life skills to learn.Communication at its simplest is the act of transferring information from one place to another. Effective communication sounds like it should be instinctive. But all too often, when we try to communicate with other something goes different. We say one thing and the other person hears something else and at this time misunderstandings, frustration and conflicts occur. This can cause problems in your home,school and work relationships. The ability to communicate effectively with superiors,colleagues and staff is essential no matter what industry you work in . Workers in the digital age must know how to effectively convey and receive messages in person as well as via phone, email any social media platform. The communication skills will help you get hired, to achieve promotions and a successful person in your field . ...
Read more

What is C# ?

-
Image
What is C# ? C# is pronounced "C-Sharp". C# is an elegant and type save object oriented language created by microsoft. That enable develops to built a veriety of secure & robust application in the .Net Framework. C# has roots from the C family, and the language is close to other popular languages like C++ and Java. The first version was released in year 2002. The latest version. C# -8 was released in sept 2019. C# used for- Mobile Application Desktop Application Web Application Web Services Websites Games VR Database Application And much more... Why we use C# ? It is one of the most popular programming language in the world. It is easy to learn and simple to use. It has a huge community support. C# is an object oriented language which gives a clear structure to programs and allows code to be reused, lowering development costs. As C# is close to c,c++ and java. It makes it easy for programmers to switch to C# or vice versa.
Read more

Know The Market(Session-11)

-
Image
  Technical Analysis- Technical analysis is done on the basis of historical price movement plotted on a two-dimensional chart. This method believes that historical price trends are an indication of the future performance. Used by short-term investors and traders, and rarely by long-term investors. It is easy to understand as you can look at the chart and see how prices have moved. An investor can understand and analyze the current, previous and possible future trend of the stocks. Q- How does technical analysis work? Ans-  Technical analysis rely on market prices which is a reflection of the supply and demand for the stock. Technical analysis read and make charts of prices. Some common technical analysis tools are the day-moving averages(DMAs), Bollinger bands, Relative strength indices(RSI) and so on. Stock Chart - Basics It is the key to analysis is a stock chart. Charts are not perfect but they provide clues as when people are buying or selling. Charts make statistical assu...
Read more