Fundamental Analysis of stocks in done at three levels as described
briefly below:
1.
Economic Analysis
: Economic Analysis and forecasting a company’s
performance and returns is necessary for making returns. Availability of money
and flow of information influence the decisions regarding buy and sell orders
in stock market. If the economy is in recession or stagnation performance of
corporate sector will be adversely affected. On the other hand, if the economy
is booming, incomes are arising and aggregate demand is good, then the
industries and the companies in general may be prosperous.
Monetary policy and trends in
money supply have a major impact on industrial growth. Interest rates in free
markets and the degree of inflation do have a major role to the influence of
economy and the performance of industry.
The stock market is the
barometer of the economy and changes in economic policies as well as
politically significant events immediately affect the stock market.
2.
Industry Analysis
: It is basically a study of the
Industry environment. The key factors to be looked into are :
ü
Industry characteristics
ü
Competitive forces
ü
Past sales and earnings performance
ü
Industry share prices
ü
Relative EPS
The
industry financials to be looked into in industry analysis are :
ü
Operating Margins (OPBIT/ Operating
Income)
ü
Return on Capital Employed
ü
Earnings Growth – Also susceptibility
of earnings to various sources
ü
Analysis of Fixed Assets
ü
Industry peculiarities – seasonality,
stocking, requirements, debtors, etc.
ü
P/E ratios – Trends
ü
Industry trends
Each
industry has a life cycle of its own, viz, pioneering stage, expansion stage
and stagnation stage. Industries in pioneering stage generate super profits and
beat the market average. Industries in expansion stage diversify their business
and offer stable returns. For industries in stagnation stage, growth prospects
and capital appreciation may be poor. Some units in these category may become
sick due to changes in tastes, technology, high labour costs and stagnant
demand.
Most
investors would choose to invest in companies at pioneering stage/ expansion
stage.
3.
Company Analysis :
Share prices
depend partly on the company’s intrinsic worth for which financial analysis of
a company is necessary for the investor to make buy or sell decisions.
Financial analysis is the analysis of the financial statements of a company to
assess its financial health. The overall objective of all business is to secure
funds at low cost and their effective utilization in the business for profit.
The funds so utilized must generate an income higher than the cost of procuring
them.
