funamental anlaysis

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There are two major concepts of analysis

• Fundamental analysis:

Fundamental analysis is a way of scientific analysis as it try to estimate the intrinsicworth 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, capitalmarket conditions and the output for national economy and also the economies of tradingpartner countries. One of the most important factor of affecting price of a corporatesecurity is the actual / expected profitability of the issuing company. Fundamental analysispays attention to a company's debt-equity ratio, profit margins, dividend payout, earningper share, growth in sales turnover, market share, interest, asset and dividend coverage,product and market innovation and the promoters track record. Fundamental analysisconservative, non-speculative approach of evaluating equity shares on value based

method.

• Technical Analysis

The technical analysis is the market based method. There is a bye word "You cannot beat the market. The market will beat you. the market has its own way of correction.The bull market rally ignores fundamentals which fuelled by emotional investors take thestocks to unprecedented level and lead the market to overbought. Especially in aspeculative zone prices zoom to dizzy high. On the other hand in a bear cycle the due to

panic and fear fuelled by heavy selling pressure ignores even strong fundamentals andpushes down the prices lower and lower. This situation is called oversold market. thefundamental analysis have wide rage of studies in various levels say economic analysis,industry level analysis and company level analysis. Even then there is no condition that thecompany's profit or growth may continue to the same previous level. The stock marketalways discounts the future. If so it never mind the past. The predictive knowledge of thefuture is more important than analysing the past.

The stock market always discounts the future

The super timing of market is nothing but a pure technical analysis.

• Fundamental analysis say what to buy



• Technical analysis say when to buy

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 com

criteria of the company like sales, profits, balance sheet studies. It involves assessing short and long termcompanies. It may also involve studying interest levels, capital market conditions and the out for nationa

trading partner countries. One of the most important factor of affecting price of a corporate security is th

issuing company. Fundamental analysis pays attention to a company's debt-equity ratio, profit margins, dipenetration, market share, interest, asset and dividend coverage, product and market innovation and the

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

Economic Analysis

Economic Analysis:- The stock market does not operate in a vacuum. It is the integral part of the eco

economy like USA and to some extent in a mixed economy like India. After the new liberalized economic India is also emerging as a free economy. To get an insight into the complexities of the stock market , o

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 dedomestic savings and capital output ratio, infrastructure. government policy, interest rates, taxation policy, b

situation and international developments are some of the important economic indicators. a favorable mo

markets. In a good monsoon there is growth in agro base industries, fertilisers, seeds, edible oils, textdemand also goes up considerably.

Industry AnalysisIndustry Analysis:- The second face of fundamental analysis consists of a detailed analysis of a specific indu

its future prospects. The purpose of industry analysis is to identify those industries which are likely grow in

of companies selected from such industries.Industry level analysis will help investors to select the industr



blues, FERA or FMCG companies of consumer goods producers and all high demand oriented group of indu

All industries have various stages of growth: -

1. Innovation, technological development, initial phase and cyclic phase. (pioneering stage)

2. Growth Phase. (expansion stage)

3. Competitive or Maturity Phase. (stagnation stage) 4. Declining Phase. (declining stage) Industry analysis can be of immense help to an investor. When a particular industry is booming, not only

benefit. For example consider the cement industry of India in 1990-91. Similarly when a particular indu

become extinct and the leaders suffer as well. For example consider a picture tube industry of India in 1990has to make a detailed industry analysis before he decides to buy or sell shares of any company in that indus

INDUSTRY GROUP COMPANIES

Textlies • Arvind Mills

• Abhisheik Industries

• Century Enka

• Garden Silk

• Mahavi Spinning

• Nahar Spinning

•

Construction

• Hindustan Construction

• Nagarjuna construction

Steel

• Tata Steel

• Kalyani Steel

• Steel Authority

Company Analysis

Company Analysis:- Investors many times find that though a particular industry may be doing very well,



not be in good shape. On the other hand it is quite likely that one or two companies would do well in a slum

companies for investment in a given industry is equally important. There are two major components of indu

a) Non financial aspects:- The scope of the non financial aspects covers the study about the history and technology, brand image of products, industrial relations, industry reputation in the market, infrastructure, m

b) Financial Analysis:- Important fundamental criteria are covered in this column. There are some impknow in this analysis. Equity , sales, book vale, operating profit, gross profit, net profit, earning per share, of the above factors to study. In the financial aspects an investor identify an stock whether overpriced or un

per share is 5 and the market price of the stock is 90 rupees then the stock is (90 / 5) eighteen times over pr

stock is mentioned as 18. Financial ratios are only tools. The utility of a tool largely depends on the manner



ECONOMIC ANALYSIS

A Three-Phase Analysis: -

A fundamental analyst looks the general economic situation, makes an evaluation an industry and fin

Economic Analysis: -

a) The stock market is an integral part of the total economy of a country more so in a free economy

some extend in a mixed economy like India. After 1990 India is marching forward with its new liberalis

policy shape is as below.

1. Liberalization.2. Modernization.

3. Globalization.

4. Extension of Privatizing.

5. Structural Reforms.6. Financial Reforms.

b) We can simply point out the growth before and after the liberalization. Before 1990 there was a licensingissue license for starting industries based on demand in the country. At that time an average of 200 compan

economic policy every year around 1000 companies started in first 5 years. In 1990 Bombay Stock Exchan

But in 1996 total-listing companies of the exchange raised more than 6000 companies for trading. What a tIt is a historical record of the century and one cannot forget even in the next century.

c) Even though a closed economy will suit to an under developed country, we can get the real growth in

d) Free market economies go through a continuous cyclical process of change; boom, recession,

movement is an inevitable self-correcting mechanism of any free-market economy. As India moves aw

economic system called as socialism to a more promising market oriented economic system called as capcycles will be more pronounced in the years to come.

e) The economic cycles affect the new companies, turnaround companies and very small companiturnaround is in progress when the economy is also recovering and booming, the corporate revival will b

hand, if the economy is in the grip of severe recession when the co-operate turnaround is launched, the en

and in some cases even reversed.

Many industry watchers observe that one of the major reasons which helped the ailing Chrysler C

the dynamic leadership of Lee Lacocca during 1980, was the unprecedented economic boom in the U S

(1980-88).

f) In our country the L C V (Light Commercial Vehicles) industry, which showed clear signals of

during 1990-91. But the economic down turn which followed two years of credit squeeze, high inte



compression, reduced government spending severely adversely affected the recovery process of the three m

Toyota, Swaraj Mazda, Eicher Motor and Alwyn Nissan (Mahindra Nissan).

g) The fortunes of the shipping industry are linked with international trade, which in turn go hand iExport-oriented companies are also affected when global economy slumps. Agro based industries like solv

monsoon.

h) Every one analyses whether the stock market is going through a bull phase or a bear phase. At thclosed companies are likely to attract the attention of the investors. The bull market ignores fundamentals

bear cycles discount the strong fundamentals. Even blue chips are neglected in bear market. The stoc

economic situation.

The super timing of buying and selling shares is nothing but a pure technical and cyclical ana

important economic factors.

(1) Monsoon: -

Early favourable monsoon is good for stock market. In good monsoon the country’s G D P (Grosspeoples purchasing power goes up the aggregate demands will go up companies do well; their profits go u

The impact of monsoon is more pronounced on agro industries, fertilisers, pesticides, seeds, and edible oil.

manufacturers goods also go up.

(2) War: -

A war between two countries will have a negative impact in money value, profits, and stock marketwill have negative impact on both countries. If a war occurred between India and China then it is a total d

one and economically wasteful. In the year 1999 Kargil border dispute, India lost some thousand crores

high. Taxes will go high to make up government expenditure. The purchasing power of people will com

declines so company profits will become low. Investor’s losses will be heavy. The recent Gulf War towathat such external conflicts could also have disastrous economic consequences for India, even though we h

petroleum prices eroded our money.

(3) Inflation: -

We have discussed about inflation in a separate chapter. Inflation erodes the purchasing power of myear price rise calculated as a comparison of previous year price. In advanced countries like U S A, U

inflation rate are below 4%. In India before 1990 inflation was 10% to 12%. Now the inflation in 2000 is b

realisation in full may take further 5 years because still the prices are higher due to withdrawal of subsi

accommodated in inflation. The stock market will march steadily with low levels of inflation.

(4) Foreign Exchange Reserves: -

A developing economy like India needs foreign exchange for meeting balance of payments defic

capital inflows and loans. Unfortunately our foreign exchange reserves declined low after the Iraq – Kuw

helped as to improve the reserves by timely loans.

In 1991, the New Economic Policy borned in India. A lot of foreign investments were invited

interest burdens. After the new economic policy to country’s foreign reserves to enormous level and we are



before 1991 year. The Indian Stock Market improved and the number of Bombay stock exchange listing

after 1991.

5. Public Debts and Foreign Debt: -

Public debt seems high in India Company to advanced countries. In India money market develo

market seems well stabilized even better then U S A. Money market seems well stabilized even better than U

The Lombard Street in London is tops than New York money market. In India there is no liquidi

Indian government introduced D F I (Development Finance Institutions) like I C I C I, I D B I, and I F C I

Ministry of Finance. The above debt instruments are easily saleable in stock exchanges and also one can enF I bonds. There are also many other Company Fixed Deposits.

Now our stock market is well improved. With the liberalization policy, Indian Companies colle

markets, which are also having good liquidity.

(6) Budget: -

Generally it is better to go for a deficit budget option for all developing nations like India. But th

our stock market. We are discussing about budget in a separate chapter. Generally, a zero budget is suitab

deficit budget will be helpful for the economic growth of the developing nations like India. Howeve

controllable level.

(7) Savings and Capital Output Ratio: -

The domestic saving rate plays an important role in the country’s economic development. If peopthe banking system, the economic growth will march forward. If all the people have balance money only i

will become low. It is the responsibilities of the government to attract are the savings in an organised

productive way. In India we are getting higher interest rate comparing to the advanced countries. In a libercome down say 4% to 5%.

The staggering economic success of post war Japan is partly attributed to the high savings rate frugal. But while Japan is fast emerging as richest nation in the world, India is down in dumps. The ma

Japanese are productively utilised in profitable private enterprise, we Indians have been literally swindled

which have swallowed an average of 3000 crores every year in forty years after independence.

(8) Infrastructure: -

The infrastructure decides the fat of the economy. If the infrastructure is maintained cheap/low the

example in India it is difficult to sell one kilogram of apple for 15 rupees in Kashmir. At the same time it apple below 60 rupees in Madras. Due to poor factor mobility there is much price discrimination maintain

our government is providing low train fare for such seasonal fruits and sundries these fruits will easy mouseful for Kashmir farmer and Madras consumer. The productivity of public infrastructure enterprises li

power, recently computers, interest and information technology oriented things, plays a crucial role in dec

productivity in these sectors is harmful because all companies depend upon these for survival. With the

has allowed private telecom, private Internet Service Providers (I S P), and even in Indian Airlines governmto 30% to boost a fast growth.



(9) Government Policy: -

A liberalised economic policy by government helps encourage industry and improves employmen

world including China, U S S R and Vietnam are trying to woo multinationals to invest in their countries.

remains unfriendly towards them and kept all the doors closed. But after new economic policy our gcompanies to increase their holding up to 50% and the FERA act is modified as FEMA act. (FERA –

(FEMA – Foreign Exchange Management Act). Companies which involves foreign investment / manageme

Some FERA Companies: -

1. Colgate Palmolive India Limited

2. Henkel Spic India Ltd.,

3. Nestle India Limited

4. Procter & Gamble India Limited

5. Glaxo India limited

6. Rossel Industries Ltd. And

7. Hindustan Lever limited.

(10) Interest Rates: -

A low interest rate is a must for economic development. Bank lending in Tokyo (8.5%) Ne

much lower than in India 16%. For industrial development and to complete multinational companies

is necessary for healthy economic development efficient competition. (11). Taxation: -

With a liberal taxation policy, the economy booms as people will get more income in hands.

Companies will build heavy plough pack reserves more profits and create more assets. When the governm

boom.

But there is an important concept we have to understand. The theory of consumption plays as impor

expenditure is another man’s income. But all the income is not expensed. Every man keeps some part oreduction income to some people. If low-income people can save 10% of their income, high-income p

income. To avoid a huge lock of money the government has to follow a progressive taxation (high tax people of 1 lakh income and 15% for 2 lakh income, 25% for 5 lakh income. The government also encoubalance-unutilised money to some organised channels like bank deposits and divert to productive resources.

consumer goods along with capital goods. India stands still one of the highest taxing countries.

(12) Balance of Trade: -

When exports and imports are in balanced manner equal then we can have a balance of trade.



suffering from balance of trade. The advanced countries exports technology goods like Computer, Satellite

Engineering machineries and the cost of these goods are very high.

Developing nations are exporting agricultural goods, coffee, Tea, Textiles which have low money vgoods.

Now after 1990 India entered in liberal economic policy and starts producing various technology ginvestments and India will become a super power in coming years.

(13) Employment: -

A sufficient level of employment is necessary for achieving a good growth rate in national income. industrial development India is moving in a difficult zone.

But after 1990, with the new economic policy our country has boosted up to high level of industria

foreign investment, with a simultaneous level of development in various type of industries, and with new

like Computers, Software, Internet, Multimedia, Telecom India has a bright chance to take off and get a big

It is difficult to get 100% employment in India. But immediately we have to try to get a full emp

employment means giving employments by exploiting the available resources at the maximum level)

Then we have to find out the new potentials say for example there are not industries for manufhelicopter, oil exploration etc. By finding new potentials economic growth will march forward.

In India we need some important things: -

(a). Organised money market to help all the citizens at a fair / lower interest rate. We have to learn a

K.

(b) Indigenous production of technological and value goods (high cost goods) to save our country’s reserves

(c ) 100% Literacy needed at a minimum level.

(d) Social Justice in reasonable time.

(e) Liquidity for all type of assets of Indian Citizens. Organised poor or market developments are ne

14) Political Situation: -

A stable government at the centre can take policy decisions with a long-term view. Stock markets

steadily in a stable government. But in India due to a long delayed social justice political corruptions increit spreads in all levels and it is a challenge to Indian government and people to check corruptions and get a g

(15) International Developments: -

All the countries in the world are interdependent. The countries signed in GATT are in better positicountries like Cuba, Albania is economically insulated from the rest of the world.

The Gulf war severely affected our balance payments even though India has not participated in any w



The collapse of Soviet Union also adversely affected our rupee trade and ties with these countries.

Economic Indication: -

There are some Indicators to access the Indian Economy.

Main Indicators: -

Rainfall, Agricultural production, Money supply, Corporate profits, Savings to Investment ratio, Unemployment rate and Inflation.

Coincidal / Secondary Indicators: -

G N P, Industrial production Index, Money market situation, Interest rates, and Commercial bank fun

There are a lot of other indicators like budget deficits, international crisis, foreign / domestic debt

non-planned expenditure like earthquake, cyclone etc.

It is a tough task to forecast the economic trends. Yet it is an important requirement to study all the

of the



Different Phases of Stocks

Industry level analysis will help investors to select the industries on innovation, technology, cconsumer goods producers and all high demand oriented group of industries.

All industries have various stages of growth: -

1. Innovation, technological development, initial phase and cyclic phase.2. Growth Phase.3. Competitive or Maturity Phase.4. Declining Phase.

1. Innovation Phase: -

a) Whenever a new product is introduced in the market there are a very few manufactudemand. An invention of a product is useful only when innovation takes place. Innovation meanthe invented product. It is the responsibility of the society and the government to encourage althe economic growth to new high.

b) Companies are almost started based on product demand only. Hence in initial phase high. But in later stages the growth of the demand will vary depending on the international devcompanies of the same product and finally there will a lot of promoters start that industrdevelops finally.

c) Cyclical phase means the actual demand increases cyclically again. When the demandproduction loads. No entrepreneur will start new industries in that field. Government also wiphase industries. So in the absence of further increase of production, the annual demand grsucceeding years. This time the market leaders will revive up first. As already they are runincrease production to the maximum and earn high profits. The new companies who try to cooperate full capacity and expand their marketing their network.

Textiles, cement, steel and automobile are some of the cyclical industries group. Grasimexample.

2. Growth Phase: -

In growth phase the product demand will help the industry show high profit and build upplans expansion and related diversification to the same product and some downstream projects

For example a fertiliser industry initially imports ammonia, phosphoric acids to p



Phosphate fertilisers. Later they stop imports and commission ammonia and acid plants.

Similarly a P V C (plastic material) manufacturing company initially produce P V C pomaterial). In later stage they buy Ethylene and produce E D C and from E D C they produce VCMC resin and powder. Reliance Petro products is the largest producer of P V C, L D P E, H D P E has burned imports of P V C, when Reliance Petro started commercial production, as the do

landed price.

In the first stage of growth phase the industry develops it’s downstream projects and starts exports. In a nutshell growth phase is a stage of expansion and diversification in a favoEven loss making industries will revive, in such a boom in general economy or the industry in pa

3. Competitive and Maturity Phase: -

In this stage all the companies in the industry group have grown well and expanded morthe supply exceeds the demand in general. So a competition develops between companies. Initmaximum production, profits and shareholders enjoy with good dividend, bonus etc. In growth every company and there is a scope of increasing production. But in maturity phase there is face difficult to sell. Later there will be a cutthroat competition and weak industries are forced

4. Declining Phase: -

In this phase the industry has excess production or low demand due to global coadvancement the industry increases production to abnormally high level and heavy stock of msilos.

In this stage the industry buy some cheap imports reduce their production to 80% to 50%average cost of production. Strict inventory control, cut in welfare measures, manpower redcredit measures are taken to reduce their expenditure. The companies will also labour strikheavy cut in various measures. Steel Authority is facing stiff competition due to heavy competitU S A.

FUNDAMENTAL ANALYSIS - WHAT TO BUY?

Company Analysis



Fundamental analysis is a scientific way of analysis. It deals the in depth analysisof the company’s fundamental criteria such as sales of the company, promoter record,plough back and reserves, book values per share, breakeven point, operating profit,interest burden, gross profit, net profit, return on net worth and still we can go deep toanalyse at the required level. In general the fundamental analyst tries to evaluate theintrinsic worth of the company. In addition to that the fundamental analyst evaluate the

government policy, industry turnaround situations, company growth situations, productdemand, market capitalisation to find out the under priced company in a stock market.Whenever buying a company we have to see first the promoter, product demand,dynamic management, size of the company, growth prospects, well diversified, freefrom labour problems, competitive and environment friendly. These are the thingswhere can verify easily. The real fundamental analysis of a company depends onevaluation of following important criteria.

01. Equity Size.

02. Sales Turnover.

03. Breakeven Point.

04. Book Value.

05. Reserves.

06. Operating Profit

Margin (O P M).

07. Interest.

08. Gross Profit Margin (GP M).

09. Net Profit (N P).

10. Earning Per Share (E PS).

11. Dividend to Yield

Ratio.

12. Price Earning Ratio (PE ratio).

13. Market Capitalisation.

14. Return on Net Worth (RO N W)

15. Debt to Equity ratio.

1. Equity Size: -

a. In investment point of view the equity capital plays an important role in theprofit of the investors. When the equity capital is large then the capital required fordividends is large considerably and so companies of large equity capital generally paylower dividends. However there are exceptions of companies like Reliance Industries,Hindustan Lever and some multinational companies. Even in those companies also their

high dividend seems not attractive because of high share price ruling in the market.

b. Dividends are given only for its face value. There are no questions about themarket price of the share.

Example:

Company : Reliance Industries



Face value: 10 rupees and Market price is 200 rupees

Dividend: 50%

Dividend to face value is then 5 rupees.

But dividend to Market value works out to 5 divided by 10 and then multiplied by200 is equal to 2.5% When the company issues 50% dividend it yields only 2.5% for aninvestor who is holding shares at 200 rupees as buying price. In a low equity company itis highly profitable to an investor both for capital gains and dividend. As the number of shareholders, say in other words profit dividers is minimum, the company can give asizable percentage of dividends when it is going good. An equity from 2 to 20 crores willbe attractive for investments. When going higher equity an investor may follow a thumbrule say sales versus equity ratio. A company can be considered good or blue chip statusif it is having sales more than 5 times of its equity holdings.

c. At the same time don’t buy closely held companies which are having low

equity say below 2 crores. It is difficult to follow such companies and rarely one can getinformation in stock market.

Conclusion: Low equity is attractive for growth and high yielding.

2. Sales Turnover: -

Finance is the heart of the company and sales turnover is the blood supplied tothe heart. There are two sides of the company (1) Production (2) Sales. It is easy toproduce but difficult to market and compete to increase the sales. When an investorenters a company first he should know the sales turnover. We can shortlist the

companies in several groups as below based on sales. Generally a company with highersales is a good company. But taking the sales for equity ratio can easily do the exactcomparison. For example take a company is having 50 crore equity and 200 crore sales.Another one company is having 5 crore equity and 100 crore sales. Though the firstcompany is having 200 crore sales the sales to equity ratio seems only 4, whereas forthe latter the sales to equity ratio seems 100 divided by 5 is equal to 20. So it is easilyunderstood that the second mentioned company is having 20 times sales to that itsequity. So sales to equity ratio will give a better picture here. Generally a company,which has sales of 5 times or more to that of its equity, is called as Blue Chip Company.

(1). Blue Chip Company: -

When the sales turnover is 5 to 10 times or more high than its equity capital andconsistent record maintained in sales and profits then it is called a blue chip company.Generally the merit of a blue-chip company is that it is already well-stabilised salesnetwork and marketing infrastructure. Most of the blue chips companies have a sizableplough back reserves and it can withstand the minor depressions of the business cycle.In a nutshell it is white elephant in the market and always the prices rule high in thestock market.



(2) Emerging Blue Chip Company: -

If the company sales turnover is low, but it is showing high operating profit andnet profit then it is an emerging blue chip. It is Likely to come up as a blue chip in nearfuture.

(3) Turnaround Company: -

When a company’s sales turnover is in increasing trend, but yet no profit andcoming out of red by reducing the accumulated losses it is called on ‘TurnaroundCompany’. Example: T V S Suzuki share was quoting around 25 to 30 rupees in 1990. Itssales went more than 200 crores. But there was an accumulated loss of 5 to 10 crores.There was different news floating in newspapers. First news is that the company is inloss; moped sales low. Other news is in Economic Times “T V S Suzuki – A fast come backtrail”. The article was published with more than half a page of stories. It is difficult tounderstand a turnaround company. Later in 3 years the company share prices zoomed.

1. TVS Suzuki

2. Essel Packaging

3. Andhra Cement

4. A C C.

5. Oswal Agro Mills.

Padmini Polymer, Cerelacs Data Recently (in 1999), Rossel Industries have gone morethan 20 times. Some went high and fell then.

Conclusion: Sales turnover is a heartbeat of the company. No sales will result no beat.It is the point where the company’s status is evolved. A better formula is sales/equityratio for easy analysis.

3. Breakeven Point: -

The breakeven point indicates the level of activity where all costs are fully

recovered. It is a no-profit, no-loss situation. If a company’s breakeven point is 40%then it means it will survive with 40% production load in no-loss condition. Thebreakeven is point is the level of survival. A company can be run above the breakevenpoint and it is the responsibility of the management to cross that level shortly aftertheir gestation period. Gestation period is the time required for a new company till thecommercial production starts. The breakeven point is usually expressed in terms of acertain value of sales



Example: Sales – 400 Crores

Shares Contribution (i.e. sales – variable costs) = 80 crores

Fixed Overheads = 60 crores

Breakeven Point = Fixed Costs to Contribution to sales ratio

Say 60 crores divided by 80 crore then multiplied by 400 crores

60 * 400

80 = 300 crores

If breakeven is 40%

Then full capacity = 300 * 100

40 = 750 crores.

4. Book Value: -

Book value generally indicates the Value of funds used as working capital. Inother words book value indicates what each share of a company is worth according tothe books of accounts of the company. The company’s books of accounts maintain arecord of what the company owns (assets), and what if owes to its creditors.(Liabilities) First we should know the shareholders’ fund. Then we can get the BookValue

Shareholders’ Fund = Equity Capital + Reserves of the Company.

Book Value = Shareholders’ Funds divided by Total number of Equity Shares.

(Example) In a company

Say Equity = 100 crores,

Number of Equity = Equity Value / Face Value say 100 /10 = 10 crores

Face Value 10 rupees.



Reserves = 500 crores

Book Value = (100+500) = 600 /10 = Rs 60.00

If a company Shares’ face value is equal to 10 rupees then book value is equal to60 rupees i.e. Say book value is 6 times greater than the Face Value. It is an easy

evaluation calculated per share basis. Book Value is a historical record based on theoriginal prices at which assets of the company were first purchased. It does not reflectthe current market value of the assets of the company. Therefore book value per sharehas limited usage as a guide for evaluating the market value or price of a company’sshares. It can. At best, give you a rough idea of what your shares should be worth. Themarket prices of shares are generally much higher then what their book values indicate.Therefore, if you come across a share whose market price is around its book value, thechances are that it is under priced. This is one of the way to compare the market priceis over priced or under priced.

5. Reserves: -

The profit of the company is divided for two purposes. The company generallydoes not show interest to distribute all the profits. Instead it will transfer a portion of profit as reserves. Remaining portion shall be distributed in the dividends. These figuresare displayed in the balance sheets every year with accumulated total. Reserves areimportant for a company to utilise in growth, expansion, and diversification activities.The companies will take back the reserves for normal working when the time of depression and loss making occurrences. Reserves also evaluated as a comparison givenbelow.

Reserve ratio = Reserves divided by equity if reserves is 25 crores and equity is 5

crores, and then we can say the reserve ratio is 5. As a rule of thumb, a company thathas 2 or 3 times of free reserves of its equity then it is in a position to make a liberalbonus issue. This retained profits are belong to the shareholders and they are called as‘shareholders’ Funds’. Generally a blue chip company will have a high reserve.

6. Operating Profit Margin: - (O P M):

Operating profit is a value derived by deducting total expenditure (overheadcosts). It is the profit calculated before interest, depreciation, and tax deductions.Operating Profit (O P) is equal to (Sales minus Total Expenditures) (O P M) OperatingProfit Margin is calculated from OP as a percentage of sales. O P M = O P divided by

sales and then multiplied by 100 is equals to O P M expressed as percentage of sales. Acompany should have a high O P M say 40% to 60% otherwise it should be technologicallyadvanced of it may be in the outdated technology. Some industry group has high O P Mand others generally high sales Vs low O P M patterns. Industries like Textile, Fertilisers,and Steel have low O P M and Travel Agencies;

Information technology companies have high O P M. Higher O P is the expression of lowcost production.



7. Gross Profit Margin: - (G P M)

Gross Profit is the derived from sale after deducting overhead charges andinterest. G P is equal to Sales minus (Total expenditure plus interest) G P is equal to O Pminus Interest G P usually refers to profit before depreciation and taxes. G P M (grossprofit margin) is calculated G P as a percentage of sales. G P M = G P divided by sales

then multiplies by 100 is equal to G P M as a percentage of sales

Conclusion: Higher G P M is the better way to growth.

8. Net Profit: -

Net Profit is the distributable profit available as surplus. Net profit is the bottomline for every business the source both of today’s rewards dividends – tomorrows’rewards like bonus shares for its equity holders. Net profit is the profit derived afterdeducting interest depreciation and taxes.

N P = Sales minus (expenditure plus interest plus depreciation plus tax)

N P = G P minus (depreciation plus tax)

The higher net profit is the better and growth oriented..

9. Dividend to Yield Ratio: -

There is no use for having a zero yielding companies in one’s portfolio. A profitmaking company transfers a certain percentage of its net profits to reserves while thebalances are paid out as dividends to shareholders. The payout ratio indicates the

percentage of earnings paid in the form of dividends to shareholders. Many investorsshow a marked preference for a company with an attractive payout ratio. On the otherhand, a company, which does not plough back, enough profits into reserves cannotimpress into growth. A proper balance should be struck between the current need fordividends and future need of funds for growth. A dividend warrant is the most importantpart as equity investor books forward every year. Dividend issued from net profits. Somecompanies prefer to pay interim dividends and final dividends. A higher dividend payingcompany is investor attractive one. Investors are not really interested in dividends butin the relationship that dividends bear to

the market price of the company’s share. The relationship is best expressed by the ratio

called ‘yield’. Yield = Dividend per share multiplied by 100 divided by Market price pershare Yield indicates the percentage of return that one can expect by the way of dividends on the investment made at the prevailing market price. Generally financecompanies’ are yield oriented.

(i.e. Say high dividends paid at low market price.)

9. Price Earning Ratio: -



The Price Earning Ratio expresses to relationship between the market price andits earning per share. P E = Market Price divided by E.P.S. If P E ratio is 10 it means aninvestor pays 10 times price than its annual earnings. If one assumes E P S is constant itwill take 10 years to recover the price by way of earning dividends from the company.But really it is not so. The company’s E P S changes from time to time. P E ratio is thereflection of market opinion of earning capacity and future business prospects of the

company. Generally E P S will vary steadily. But P E ratio will fluctuate 3 to 50 timeshigh, which often creates confusion to investors.

There is an opinion in between investor community that high P E ratio companieshave low risk. We cannot fully rely on that. In fundamental analysis when a company’searning increases then P E ratio come down. A fundamental analyst then says it is underpriced. He compares the same with the industry average P E. Say if an industry(aggregate) P E ratio is 40 and the particular company P E ratio 5 then the analyst saythat the company is 40 divided by 5 is equal to 8 times under priced. But in real sensethere is no condition for 8 times appreciation. Generally P E ratio above 3 and below 15may give a better safe investment opportunity. One may add more for track record

promoters like Tatas, Birlas, and Ambanis.

Conclusion: Generally high PE ratio industry is low risky. PE ratio is the measure of confidence of investors to that particular industry. So select a high PE ratio industry andselect a low PE ratio company in the group so that you can get a under priced companyin that group.

10. Earning Per Share: -

It is the profit calculated per share basis when we see the net profit and growthin profit it will be vague. But one can get a clear idea if we say what is the earning per

equity share. Earning Per Share (E P S) is equal to Profit after Tax divided by the Totalnumber of shares issued. In order to get a clear idea of what this ratio tells, let usassume one possess 100 shares of face value of rupees 10 each in Oswal Agro MillsLimited. Suppose Oswal Agro Mills earns Rs.60 crores as net profit and its equity sharesis say 120 crores (say 12 crore number of shares say 120 crore rupees divided by 10 isequal to 12. Then E P S is equal to 60 divided by 12 is equal to 5 Rupees per share.

Suppose it pay 2 rupees, as dividend then 4 rupees remaining will be transferredto reserves. Even though the dividend is 2 rupees per share, because of E P S 6 rupeesand remaining available with the company as reserves the investor would get benefitdue to market prices of the share go up. Suppose an investor had bought share in

Ganesh Benzo Plast Ltd. At twice the amount their face value, say at 20 rupees pershare. Then an E P S of 6 rupees per share, which would mean a 30%, returns on hisinvestment of which 10% (say 2 rupees per share) is dividend and 20% (Rs.4/- Per share)the plough back. Under ideal conditions, plough back should slash of the prices of shares by 20%, say to 20 rupees from24 rupees per share. Therefore, irrespective of what share price you buy a particular company’s shares at its E P S will provided youwith an invaluable tool for calculating the returns on your investment.

Conclusion: Higher EPS reflects the company’s growth in earnings at net level and



attracts more buyers.

11. Market Capitalisation: -

The market capitalisation means an evaluation derived by multiplying totalvolume of shares by its market price. Number of equity share multiplied by Market price

is equal to Market capitalisation. It is more useful when calculating on industry basis.For we have to take all or active companies of a particular industry and multiply theaggregate volume of shares average market price of shares. Market Capitalisation of anIndustry is equal to Aggregate number of shares multiplied by Industry Average MarketPrice. When buyers rush, then the market capitalisation attracts a particular industrystarts increase. This, we can compare monthly or fortnightly basis. The highest marketcapitalisation industry is really the one, which attracted largest number of investors.There is no necessity to buy, number one Industry. But we can select top 25 out of 400industry groups approximately, mentioned in various business and investmentmagazines.

Conclusion: Increasing trend and top ranking market capitalisation is the attractiveposition

12. Return on Net Worth: -

Return on net worth is slightly differing in calculating and comparing the netprofit. For example say if a company is having 100 crores equity capital and earned 75crores simply we can say earning per share is equal to 75 divided by100 is equal to 75%.At the same time if the company is having 650 crores reserves actually it will use (650plus 100) 750 crores for its business activities. So we can get more clear idea aboutreturn when comparing with the total capital employed. Say Earning Per Share = 75

divided by 100 = 7.50 or 75% Return on Net Worth = 75 / (100+650) =0.1 = 10% Actuallythe company return one net worth seems very low but to E P S seems attractive. In allcompanies we have to compare both and to find out the real earnings by the company.In old companies with huge reserves R O N W will very normally. But some newcompanies also maintain some debts to project higher E P S. So a better conclusion canbe arrived based on R O N W i.e., profits earned for the total capital deployed orutilised.

Conclusion: - R O N W should be high or compare with E P S.

13. Debt to Equity Ratio: -

Net worth consists of equity capital, reserves and borrowed funds consisting of long term and short-term debt. For a profit making, tax paying company some debt inthe capital structure in advantageous because interest on debt is a tax-deductibleexpense. Generally companies try to maximise their EPS by a suitable mix of debt andnet worth. However too much debt is risky and in recession times it may lead forclosure.



Conclusion: So low debt to equity ratio is better.

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Review Questions: - (Model Assignment questions)

1. How do you define a company’s profitability? Whether E P S, Net profit, returns onnet worth, O P M and or with what?

2. Explain the fundamental criteria of the company for analysis?

3. What is the specialty or distinction of fundamental analysis than technical analysis?

4. Compare the PE ration of the industry and a individual company of the same group

industry. At what condition you prefer to buy a company in the industry group?

Fundamental Analysis

At the economy level, fundamental analysis focus on economic data (such as GDP, Foreign exchange andInflation etc.) to assess the present and future growth of the economy.

At the industry level, fundamental analysis examines the supply and demand forces for the products offered.

At the company level, fundamental analysis examines the financial data (such as balance sheet, incomestatement and cash flow statement etc.), management, business concept and competition.

In order to forecast the future share price, fundamental analysts combines the economic, industry and company analysis. If the intrinsic value is lower than the current value, fundamental analysis recommends to buy the share and the vice versa isalso true.

Economic analysis

Economic analysis occupies the first place in the Financial analysis top down approach. When the economy is havingsustainable growth, then the industry group (Sectors) and companies will get benefit and grow faster. The analysis of macroeconomic environment is essential to understand the behavior of the stock prices. The commonly analysed macro economicfactors are as follows.

Gross domestic product (GDP): GDP indicates the rate of growth of the economy. GDP represents the value of all thegoods and services produced by a country in one year. The higher the growth rate is more favorable to the sharemarket.

Savings and investment: The economic growth results in substantial amount of domestic savings. Stock market is a



Labour and other industrial problems: The industry has to use labour of different categories and expertise. Theproductivity of labour as much as the capital efficiency would determine the progress of the industry. If there is a labour problem that industry should be neglected by the investor. Similarly when the industries have the problems of marketing, investors have to be careful when investing in such companies.

Management: In case of new industries, investors have to carefully assess the project reports and the assessment of financial institutions in this regard. The capabilities of management will depend upon tax planning, innovation of technology, modernisation etc. A good management will also insure that their shares are well distributed and liquidity of

shares is assured.

Future prospects: It is essential to have an overall picture of the industry and to study their problems and prospects.After a study of the past, the future prospects of the industry are to be assessed.

When the economy expands, the performance of the industries will be better. Similarly when the economy contracts reversewill happen in the Industry. Each Industry is different from the other. Cement Industry is entirely different from SoftwareIndustry or Textile Industry in its products and process.

The Industry or Sector analysis is explained in more detail in Chapter 3.

Company or Corporate analysis

Company analysis is a study of variables that influence the future of a firm both qualitatively and quantitatively. It is a methodof assessing the competitive position of a firm, its earning and profitability, the efficiency with which it operates, its financialposition and its future with respect to earning of its shareholders.

The fundamental nature of the analysis is that each share of a company has an intrinsic value which is dependent on thecompany's financial performance. If the market value of a share is lower than intrinsic value as evaluated by fundamentalanalysis, then the share is supposed to be undervalued. The basic approach is analysed through the financial statements of an organisation.

The company or corporate analysis is to be carried out to get answer for the following two questions.

How has the company performed in comparison with the similar company in the same Industry?How has the company performed in comparison to the early years?

Before making investment decision, the business plan of the company, management, annual report, financial statements,

cash flow and ratios are to be examined for better returns. These are explained in more detail in chapter 4.

Conclusion

Fundamental analysis can be used to identify companies that represent good value. Hence it is good for long terminvestments.

Valuation techniques vary depending on the industry group. For this reason, a different techniques or model is required for different industry. This can get quite time consuming and limit the amount of research that can be performed.

In fundamental analysis, companies should be compared against other companies in the same sector. For example, asoftware company (Infosys Technologies) should be compared with a software company (Wipro), not to a bank (ICICI Bank).

funamental anlaysis

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