UNIT 2 FUNDAMENTAL ANALYSIS

INTRODUCTION

Fundamental analysis is a method used by investors to evaluate securities by examining the

intrinsic value of a company; it focuses on analyzing various factors such as financial
Statements, economic indicators, industry trends, and management quality to determine the
true worth of a stock or security. The primary goal of fundamental analysis is to identify
undervalued or overvalued assets in the market,

MEANING

Fundamental analysis includes examining a company's revenue, earnings, cash flow, and debt
levels. Analysts also assess the competitive landscape, market demand, and macroeconomic
factors that may impact the company's future prospects.

WHAT IS FUNDAMENTAL ANALYSIS?

Fundamental analysis is a study of certain factors, such as financial statements, external

factors, news, events and trends in the industry to determine the true value of a stock. usually
it takes some time for the true stock value to change, depending on these factors. This method
can help you determine the value of a company and its potential in the future.

OBJECTIVES OF FUNDAMENTAL ANALYSIS

 To conduct a company's stock valuation and predict its probable price evolution.
 To make a projection on its business performance.
 To evaluate its management and make internal business decisions.
 To calculate its risk.

USES/APPLICATIONS OF FUNDAMENTAL ANALYSIS

 Fundamental Analysis is used to evaluate a lot of information about the past

performance and the expected future performance of companies, industries and the
economy
 Fundamental analysis is really a logical and systematic approach to estimating the
future dividends and share price
 Fundamental analysis is performed on historical and present data, but with the goal of
making financial forecasts.
 Fundamental analysis is a method used for evaluating a security or asset by
attempting to measure its intrinsic value by examining related economic, financial and
other qualitative and quantitative factors.
  Fundamental analysts attempt to study everything that can affect the security's value,
including macroeconomic factors (like the overall economy and industry conditions)
and individually specific factors.
 The fundamental approach is based on an in-depth and all around study of the
underlying forces s of the economy, conducted and market developments) to provide
data that can be used to forecast future prices.

STEPS INVOLVED IN FUNDAMENTAL ANALYSIS

1. Get familiar with the company: If are considering a certain company for long-term
investment, first try to study it in as much detail as possible. Go through the website; learn
about its product, market, how it has been performing, its future goals and past decisions.

2. Read the financial reports: After gaining a full understanding of the company, may look
into the financial reports, such as the balance sheets, profit-and-loss statements, operating
costs, cash flow, revenue and expenses. Check whether the net profit has been on the rise in
the past five years.

3. Check the debt: Debt can impact the growth potential and performance of a company
negatively. It is advisable to refrain from investing in companies that have high debt, as this
can affect the returns. The ideal debt-equity ratio is less than one.

4. Study the competitors: Competition is an important factor in determining whether a

company can scale and grow as effectively as it aims to. If the competitors have a better
reputation in the market and produce better quality products, the chances of the company
succeeding can be less.

5. Analyze the future prospects: Some products are seasonal and may even lose their
significance with time. Others can be evergreen products or they may have a use for
customers regularly in the foreseeable future.

6. Review all aspects periodically: Micro-and macroeconomic changes can affect the prices
and valuation of companies. The occurrence of new events and the innovation of technology
can make certain products obsolete or enhance their existing value.

TYPES OF FUNDAMENTAL ANALYSIS

1. Qualitative approach: Qualitative fundamental analysis focuses more on the subjective

and unquantifiable aspects of an entity to determine its stock value. Rather than analyzing the
quantifiable data, it studies factors like the brand value, employee satisfaction, how efficient
or experienced the management is, customer feedback and other details.

2. Quantitative analysis: A quantitative analysis considers the quantitative or numerical

factors to estimate the value of a stock. It is primarily based on statistics and mathematical
calculations. Quantitative analysis is useful in almost any field that comprises any kind of
quantitative data, statistics or figures that analysts can study to draw conclusions or make
behavioral predictions.
3. Top-down approach or analysis:

Meaning ; is an investment analysis approach that focuses on the macro factors of the
economy, such as GDP, employment, taxation, interest rates, etc. top down analysis focuses
on the industry and economy.

The top-down approach begins by looking at the broader economic variables that may
influence the prices or values of stocks. These may include the current gross domestic
product (GDP), environmental or geopolitical events. These variables can affect the monetary
conditions of the entire economy of a country at large, rather than just a particular sector,
company or business.

Top-down analysis starts with the big picture and works its way down to individual . It begins
by analyzing global economic Indicators and trends to identify which economies are currently
strong or showing signs of growth.

Steps in Top-Down Analysis:

 Global Economy Analysis Evaluates global economic conditions, including growth

rates, Inflation, interest rates, and geopolitical factors
 Country Analysis Focuses on economic conditions, monetary policies, and political
stability within specific countries.
 Sector/Industry Analysis. Identifies sectors and industries expected to benefit from
current economic conditions.
 Company Analysis: Selects companies within those sectors that have strong
fundamentals

4. Bottom-Up Analysis

Meaning is an investment approach that focuses on analyzing individual stocks and

significance of macro economics and market cycles. It focuses on a specific company and its
fundamentals.

In contrast to the top-down approach, bottom-up analysis ignores macroeconomic factors and
focuses solely on the analysis of individual companies. Analysts using this method look for
companies with strong fundamentals regardless of their industry or the overall economy.

Steps in Bottom-Up Analysis:

 Company Financial Health: Examination of financial statements, revenue, profit

margins, return on equity, and other financial ratios.
 Management Quality Assessment of the company's leadership effectiveness and
corporate governance practices.
 Competitive Position: Analysis of the company's market share, competitive
advantages, and industry position.
 Growth Potential: Evaluation of the company's future growth prospects in terms of
revenue, earnings, and expansion opportunities.
TOOLS OF FUNDAMENTAL ANALYSIS

Earnings per share: Earnings per share (EPS) refers to a company's earnings and the total
number of shares they own. By dividing the net income of an investment by the total number
of outstanding shares, an investor can learn about the company's overall performance.

Price to sales ratio: Price to sales ratio refers to the price of products in correlation with the
number of sales. This helps investors better understand how much the share price increase In
revenue.

Price to earnings ratio: The price to earnings ratio is the value of a company using
measurements from current share prices and earnings per share. By dividing the current sales
prices of shares with the earnings per share, investors can learn more about intrinsic value of
an investment.

Price to book ratio: The price to book ratio is the comparison of a company's market value
to its book value, which is the amount of equity that's available to shareholders. You can
calculate this by dividing the last closing price of an investment by its book value.

Return on equity: Return on equity refers to a measurement of financial performance. As

investor can calculate the return on equity by dividing the company's net income by
shareholder equity.

Dividend payout ratio: The dividend payout ratio refers to the total value of dividends that a
company pays to its shareholders in relation to the net income of the company. The
calculation provides an investor with valuable information, including the company's ne
income and how much they pay their investors.

Trend analysis: Trend analysis is the consideration of business trends. This may include the
trend of growth or profits over a specific period.

Future projections: A fundamental analysis may also include future projections. Predicting
future revenue includes an evaluation of the previous performance of investments over a two
to five-year span.

Corporate governance: Corporate governance refers to business and federal policies that
may affect the success of the business. It includes an evaluation of compliance requirements
and transparency in new policies.

Ratio analysis: Ratio analysis is the consideration of the liquidity of a business. By

comparing the balance sheet and income statements, analysts can predict a business equity.

COMPONENTS OF FUNDAMENTAL ANALYSIS

1. Economic Analysis The process begins with a macroeconomic analysis, examining overall
economic indicators like GDP growth rates, unemployment levels, inflation, interest rates,
and monetary policies. These factors offer insights into the economic environment in which
businesses operate, affecting consumer spending, borrowing costs, and investment returns.

2. Industry Analysis The next step involves analyzing the specific industry in which the
company operates. This includes understanding the industry's growth potential, competitive
landscape, regulatory environment, and technological advancements.

3. Company Analysis This is the crux of fundamental analysis, focusing on a thorough

examination of the company itself. It involves:

Financial Statement Analysis: Reviewing the company's balance sheet, income statement,
and cash flow statement to assess its financial health, profitability, liquidity, and operational
efficiency.

Ratio Analysis: Using key financial ratios like the price-to-earnings (P/E) ratio, debt-to-
equity ratio, return on equity (ROE), and others to compare a company's performance against
its peers and industry averages.

Management and Governance: Evaluating the company's leadership, strategic direction,

corporate governance practices, and any competitive advantages.

4. Valuation Finally, various valuation models are applied to estimate the intrinsic value of
the security. Common models include the Discounted Cash Flow (DCF) analysis, Dividend
Discount Model (DDM), and relative valuation techniques like comparable company
analysis.

COMPONENTS / TECNIQUES OF ECONOMICS ANALYSIS

Economic analysis is one of the studies that form part of the fundamental analysis. This
relates to study about the economy in detail and analyses whether economic conditions are
favorable for the companies to prosper or not.

Gross Domestic Product (GDP) -GDP indicates the rate of growth of the economy. GDP
represents the aggregate value of the goods and services produced in the economy. GDP
consists of personal consumption expenditure, gross private domestic investment and
government expenditure on goods and services and net export of goods and services.

Savings And Investment It is obvious that growth requires investment which in turn requires
substantial amount of domestic savings. Stock market is a channel through which the savings
of the investors are made available to the corporate bodies. Savings are distributed over
various assets like equity shares, deposits, mutual fund units, real estate and bullion.
Inflation - Along with the growth of GDP, if the inflation rate also increases, then the real
rate of growth would be very little. The demand in the consumer product industry is
significantly affected.

Interest Rates The interest rate affects the cost of financing to the firms. A decrease in
interest rate implies lower cost of finance for firms and more profitability. More money is
available at a lower interest rate for the brokers who are doing business with borrowed
money.

Budget-The budget draft provides an elaborate account of the government revenues and
expenditures. A deficit budget may lead to high rate of inflation and adversely affect the cost
of production. Surplus budget may result in deflation. Hence, balanced budget is highly
favorable to the stock market.

The Tax Structure Every year in March, the business community eagerly awaits the
Government's announcement regarding the tax policy. Concessions and incentives given to a
certain industry encourage investment in that particular industry. Tax reliefs given to savings
encourage savings.

The Balance of Payment The balance of payment is the record of a country's money receipts
from and payments abroad. The difference bt6ween receipts and payments may be surplus or
deficit. Balance of payment is a measure of the strength of rupee on external account. If the
deficit increases, the rupee may depreciate against other currencies, thereby, affecting the
cost of imports.

Monsoon And Agriculture - Agriculture is directly and indirectly linked with the industries.
For example, Sugar, Cotton, Textile and Food processing industries depend upon agriculture
for raw-material. Fertilizer and insecticide industries are supplying inputs to the agriculture.
A good monsoon leads to higher demand for input and results in bumper crop.

Government Revenue, Expenditure and Deficits As the government is the largest investor
and spender of money, the trends in government revenue, expenditure and deficits have a
significant impact on the performance of industries and companies. Expenditure by the
government stimulates the economy by creating jobs and generating demand.

Exchange Rates The performance and profitability of industries and companies that are
major importers or exporters are considerably affected by the exchange rates of the rupee
against major currencies of the world. A depreciation of the rupee improves the competitive
position of Indian products in foreign markets, thereby stimulating exports.

Infrastructure The development of an economy depends very much on the infrastructure

available. Industry needs electricity for its manufacturing activities, roads and railways to
transport raw materials and finished goods, communication channels to keep in touch with
suppliers and customers.

Economic analysis factors influenced investment management

• Demand of security from the investor. It has created a heavy demand for security. If
demand; the price value of the securities is increased in the market.

• Demand and supply is also influenced by investment; for example, if supply of securities is
greater, the result is the price of securities is reduced.
• If demand for security, there is no supply, in this circumstance, the price of such company’s
shares is high.

• Economic factors have help to creation of savings.

• Economy tells something about the effective way to earn income and then how to convert a
successful saving avenue to the common people.

• Economical factors are in favor with investment decisions. If there is inflation, the result is
price increased for commodities. At the same time, business earns more profit that will be
converting as saving. If there is deflation, the commodities price is reduced. At the same
time, common people save money and then will investment companies.

GLOBAL ECONOMY

Meaning The global economy refers to the interconnected worldwide economic activities
that take place between multiple countries. These economic activities can have either a
positive or negative impact on the countries involved.

Other words The global economy refers to the interconnected network of economic
activities that spans across countries, transcending national borders. This intricate web of
trade, investment, and financial transactions forms the foundation of international economic
relations.

CHARACTERISTICS OF GLOBAL ECONOMY

a) Globalization

Globalization describes a process by which national and regional economies, societies, and
cultures have become integrated through the global network of trade, communication,
immigration, and transportation.

b) International trade

International trade is considered to be an impact of globalization. It refers to the exchange of

goods and services between different countries, and it has also helped countries to specialize
in products which they have a comparative advantage in.

c) International finance

Money can be transferred at a faster rate between countries compared to goods, services, and
people; making international finance one of the primary features of a global economy.

d) Global investment

This refers to an investment strategy that is not constrained by geographical boundaries.

Global investment mainly takes place via foreign direct investment (FDI).

BENEFITS OF GLOBAL ECONOMY

1. Increased Trade Opportunities: The global economy fosters trade between nations,
providing access to a wider range of goods and services. This allows countries to specialize in
producing what they are most efficient at, leading to greater efficiency and productivity
overall.

2. Economic Growth: Globalization encourages competition and innovation, driving

economic growth. As companies expand internationally, they create jobs, invest in new
technologies. And stimulate economic development both domestically and abroad.

3. Reduced Poverty: Access to global markets can lift people out of poverty by creating
employment opportunities, increasing incomes, and improving living standards. Developing
countries can benefit from foreign investment and trade partnerships, which can help them
develop their economies and improve infrastructure.

4. Cultural Exchange and Understanding: Globalization promotes cultural exchange and

understanding between nations. As people and goods move across borders, they bring with
them their cultures, ideas, and perspectives, fostering greater cultural diversity and
appreciation.

5. Access to Capital and Resources: Globalization enables businesses to access capital,

technology, and resources from around the world. This allows for greater efficiency in
production processes and facilitates innovation, ultimately driving economic growth and
development.

6. Enhanced Access to Information and Technology: The interconnectedness of the global

economy facilitates the exchange of information and technology across borders. This enables
countries to adopt best practices, improve efficiency, and stay competitive in a rapidly
evolving global marketplace.

7. Improved Standards of Living: As countries participate in the global economy, they can
benefit from economies of scale, increased competition, and access to a wider variety of
goods and services at lower prices. This can lead to improvements in the standard of living
for consumers around the world.

8. Environmental Benefits: Globalization can promote environmental sustainability through

the sharing of knowledge, technologies, and resources aimed at addressing global challenges
such as climate change and pollution.

DISADVANATGES OF GLOBAL ECONOMY

1. Increased Economic Inequality: While the global economy can create wealth and
opportunity, it can also exacerbate economic inequality. Certain regions and groups may
benefit disproportionately, leading to widening income and wealth gaps both within and
between countries.

2. Vulnerability to Economic Shocks: The interconnectedness of the global economy means

that economic shocks in one part of the world can quickly spread to others. Financial crises,
natural disasters, or geopolitical conflicts in one region can have ripple effects, causing
instability and uncertainty globally.

3. Loss of Jobs and Wage Pressures: Globalization can lead to the outsourcing of jobs to
countries with lower labor costs, resulting in job losses and wage pressures in high-cost
regions. Workers in industries vulnerable to international competition may face challenges in
finding employment or may be forced to accept lower wages.

4. Dependency on Global Supply Chains: Reliance on global supply chains can make
economies vulnerable to disruptions. Events such as trade disputes, transportation
bottlenecks, or pandemics can disrupt the flow of goods and services, leading to shortages,
price fluctuations, and economic dislocation.

5. Environmental Degradation: The pursuit of economic growth in a globalized world can

put pressure on natural resources and ecosystems. Increased production and consumption can
lead to environmental degradation, including deforestation, pollution, and climate change,
with consequences that extend beyond national borders.

6. Risk of Social Unrest and Political Instability: Economic disparities and perceives
injustices associated with globalization can fuel social unrest and political instability
Inequality, job insecurity, and disenchantment with the political establishment can contribute
to populist movements, protectionism, and anti-globalization sentiments.

DOMESTIC ECONOMY

Meaning The domestic economy refers to the economic activities that take place within the
borders of a specific country, encapsulating all production, consumption, and exchange of
goods and services occurring internally. The domestic economy is often measured by
indicators such as gross domestic product (GDP), unemployment rates, and inflation,
providing a snapshot of the overall economic well-being of a country.

ADVANATGES OF DOMESTIC ECONOMY

1. Control over Economic Policies: In a domestic economy, policymakers have greater

control over economic policies and regulations tailored to the specific needs and priorities of
the country.

2. Protection of Domestic Industries: A domestic economy can provide protection to

domestic industries through tariffs, subsidies, and other trade barriers, safeguarding them
from foreign competition.

3. Job Creation and Employment Stability: Focusing on domestic production and

consumption can contribute to job creation and employment stability within the country.

4. Promotion of National Identity and Culture: A domestic economy fosters the promotion
and preservation of national identity, culture, and heritage. By supporting local businesses,
artisans, and cultural producers, countries can celebrate and showcase their unique traditions,
customs, and creativity, enriching the cultural fabric of society and enhancing national pride.
5. Strengthening of Supply Chains and Resilience: Investing in domestic supply chains
and production networks enhances the resilience of the economy against external shocks and
disruptions.

6. Support for Small and Medium-sized Enterprises (SMEs): A domestic economy

provides opportunities for the growth and success of small and medium-sized enterprises
(SMEs). Governments can implement policies and programs to support SMEs, such as access
to financing, business development services, and regulatory simplification, fostering
entrepreneurship, innovation, and economic diversification.

DISADVANTAGES OF DOMESTIC ECONOMY

1. Limited Market Access: One of the main drawbacks of a domestic economy is limited
market access compared to participating in the global economy. Domestic businesses may
face constraints in reaching international markets, restricting their growth potential and
limiting opportunities for expansion and diversification.

2. Vulnerability to Economic Volatility: Relying solely on domestic markets can make an

economy more vulnerable to economic volatility and fluctuations. Domestic industries may
be heavily affected by changes in consumer demand, economic downturns, or shifts in
government policies.

3. Risk of Protectionism and Trade Wars: A focus on domestic production and

consumption can increase the risk of protectionism and trade conflicts with other countries.
Trade barriers and retaliatory measures imposed by trading partners can disrupt supply
chains, increase costs for domestic businesses, and reduce access to essential goods and
services.

4. Limited Access to Resources and Expertise: Domestic economies may face limitations
in accessing critical resources, technologies, and expertise available on the global market
without exposure to international trade and collaboration, businesses may struggle to adopt
innovative technologies, improve productivity, or achieve economies of scale.

5. Reduced Economic Diversity and Specialization: A domestic economy may lack the
diversity and specialization offered by participation in the global economy. Limited access to
international markets and inputs may lead to a narrower range of industries and products,
reducing overall economic resilience and flexibility.

6. Inefficiencies and Higher Costs: Protectionist measures aimed at supporting domestic

industries can lead to inefficiencies and higher costs for consumers. Domestic producers may
face less competition, leading to lower quality products, higher prices, and reduced consumer
choice.

INDUSTRY ANALYSIS

Industry analysis is a market evaluation tool companies use to assess the level and intensity
of competition in a specific industry. Businesses use this tool to understand their market
position and evaluate how internal and external factors such as technological changes,
demand and supply dynamics, access to finance and the entry of new rivals can affect their
competitive advantage.

WHAT IS INDUSTRY ANALYSIS?

Industry analysis refers to an evaluation of the relative strengths and weaknesses of particular
industries. Industry Analysis is a market assessment tool designed to provide a business with
an idea of the complexity of a particular industry. Industry analysis involves reviewing the
economic, political and market factors that influence the way the industry develops.

OBJECTIVES OF INDUSTRY ANALYSIS

Following are the objectives of industry analysis:

 To understand how industry structure drives competition, this determines the level of
industry profitability.
 To assess industry attractiveness.
 To use evidence on changes in industry structure to forecast future profitability.
 To formulate strategies to change industry structure to improve industry profitability.
 To identify key success factors.

TYPES OF INDUSTRY ANALYSIS

There are three commonly used and important methods of performing industry analysis. The
three methods are:

Competitive Forces Model (Porter's 5 Forces)

Broad Factors Analysis (PEST Analysis)

SWOT Analysis

1. Competitive Forces Model (Porter's 5 Forces)

One of the most famous models ever developed for industry analysis, famously known as
Porter's 5 Forces. According to Porter, analysis of the five forces gives an accurate
impression of the industry and makes analysis easier

 Intensity of industry rivalry The number of participants in the industry and their
respective market shares are a direct representation of the competitiveness of the
industry. These are directly affected by all the factors mentioned above. Lack of
differentiation in products tends to add to the intensity of competition.
 Threat of potential entrants This indicates the ease with which new firms can enter
the market of a particular industry. If it is easy to enter an industry, companies face
 the constant risk of new competitors. If the entry is difficult, whichever company
enjoys little competitive advantage reaps the benefits for a longer period.
 Bargaining power of suppliers This refers to the bargaining power of suppliers. If
the industry relies on a small number of suppliers, they enjoy a considerable amount
of bargaining power. This can particularly affect small businesses because it directly
influences the quality and the price of the final product.
 Bargaining power of buyers The complete opposite happens when the bargaining
power lies with the customers. If consumers/buyers enjoy market power, they are in a
position to negotiate lower prices, better quality, or additional services and discounts.
 Threat of substitute goods/services The industry is always competing with another
industry producing a similar substitute product. Hence, all firms in an industry have
potential competitors from other industries. This takes a toll on their profitability
because they are unable to charge exorbitant prices.

2. PESTLE analysis

PESTLE analysis evaluates the political, economic, social, technological, legal and
environmental factors that can affect a business. Here are some considerations of the analysis:

a) Political Factors: The analysis assesses political factors such as government policies,
trade regulations, tariffs and the overall political climate of the region a company is operating
or intends to operate.

b) Economic Factors: This aspect of the analysis examines factors such as Gross Domestic
Product (GDP), net income, imports and exports, unemployment rate, interest rates, access to
credit and taxation.

c) Social Factors: Social factors the analysis evaluates include the local cultures and
customs, demography, customer buying behavior and attitudes of the local population.

d) Technological Factors: The analysis also evaluates how technological factors such as
research and development efforts, industry trends and the Internet can affect a business.

e) Legal Factors: The analysis also checks how labour laws, employment contracts, industry
regulations and other legal requirements can influence a company.

f) Environmental Factors: The analysis also studies the potential impacts of environmental
issues, such as climate change, on the business.

3. SWOT Analysis

SWOT analysis evaluates the strengths, weaknesses, opportunities and threats that can
influence a business.

SWOT Analysis stands for Strengths, Weaknesses, Opportunities, and Threats. It can be a
great way of summarizing various industry forces and determining their implications for the
business.
Strengths: Factors that give the industry an edge over the others

Weaknesses: Factors that keep businesses at a disadvantage

Opportunities: Factors present in the economy and external environment that positively
impact the performance and profitability

Threats: Factors present in the economy and external environment that negatively impact the
performance and profitability

When performing this analysis, managers focus on two parts:

a) Internal factors: The analysis assesses a company's strengths and weaknesses, which are
the internal factors that can affect its operations and success in an industry. Strengths can be
talent, proprietary technology, a larger market share or a successful product or service,

b) External factors: External factors SWOT analysis considers are the opportunities and
weaknesses. Weaknesses can be competitors with more innovative technology or better-
performing marketing and sales departments

INDUSTRY LIFE CYCLE

Meaning The industry life cycle refers to the evolution of an industry or business through
four stages based on the business characteristics commonly displayed in each phase. The four
phases of an industry life cycle are the introduction, growth, maturity, and decline stages.
 1. Introduction Stage

The introduction stage signifies the infancy of an industry, where a new product or service
enters the market.
Key Characteristics of Introduction Stage
 Low Market Awareness: Limited consumer awareness about the new product or service.
 Innovation: Focus on product development and technological advancements.
 High Uncertainty: Market conditions are uncertain, and companies are gauging consumer
response.
2. Growth Stage
Dynamic changes and significant developments characterize the growth stage of the industry
life cycle.
Characteristics of the Growth Stage
Some of the key characteristics of the growth stage of the industry life cycle are mentioned
below.
 Rapid Market Expansion: During this phase, the market experiences substantial growth
as more consumers adopt the product or service. At this time, companies witness a surge
in sales and market share.
 Increased Competition: The expanding market attracts new players, which further
intensifies competition. Companies strive to differentiate themselves and gain a
competitive edge to capture a larger market share.
 Rising Consumer Demand: There is a noticeable increase in consumer demand for the
product or service. This surge in demand encourages companies to meet evolving
consumer preferences and expectations.
3. Maturity Stage
In the maturity stage, industries experience stable market conditions and heightened
competition, but the growth is slower. This phase signifies a period of market saturation
where products or services have achieved widespread adoption.
4. Decline Stage
The decline phase signals a downturn in the industry life cycle. There comes a diminishing
market demand, outdated technologies, and a decrease in overall industry activity. This stage
follows the maturity phase and indicates a waning interest from consumers.
COMPANY ANALYSIS

Meaning Company analysis deals with return and risk of individual share and security. The
analyst tries to forecast the future earnings which has direct effect on share price.

In the company analysis the investors assimilates the several bits of information related to the
company and evaluates the present and future value of the stock.

Company analysis focuses on evaluating an individual company's strengths, weaknesses,

opportunities, and threats (SWOT analysis). It involves a deep dive into a company's
financial health, business model, competitive position, management quality, and growth
prospects.

There are two types of company analysis namely qualitative and quantitative

1. Qualitative Fundamentals

The qualitative analysis captures the company's aspects or risks difficult to measure in
numbers- such as management competencies and credibility, competitive strategies, R&D
capabilities, brand recall, and others.

 Business Model. A business model describes the company's plans for earning
revenues. Its products and services, the target market so as to maintain its
profitability.
 Competitive Advantage. Investors should usually prefer to invest in those companies
that have been able to develop competitive advantages for themselves in terms of cost
advantage, quality, brand, distribution network, etc.
 Management: Sound management with strong credibility always works for the
betterment of the company and its employees and also generates wealth for the
shareholders.
 Corporate Governance: This is the framework of rules, practices, and processes
which direct and control the firms as well as involves balancing the interests between
management, directors, and stakeholders.

II. Quantitative Fundamentals:

These are the measurable factors that influence the value of a firm. The biggest source of
quantitative data is Financial Statements, analyzing which helps investors to make better
investment decisions.

The Balance Sheet This statement records a company's assets, liabilities, and equity at a
particular point in time. It shows investors the financial structure of a company, listing down
what a company owns and owes, thus helping to determine a company's real worth.

Income Statement It reports the financial performance of a company over a period of time.
Publicly listed companies present their Income Statements quarterly or annually. It provides
investors with an insight into how the net revenues realized by a company are transformed
into net earnings (profit or loss).
Cash Flow Statement This is a very important financial statement, as it shows the true cash
or liquidity position of a company. It provides information on the cash inflows and outflows
over a period of time. It is difficult to manipulate the cash position of a company; therefore it
is used as a concrete measure of a company's performance.

Key Components of Company Analysis

Financial Analysis: Involves examining financial statements, ratios, and metrics to assess
profitability, liquidity, solvency, and operational efficiency. Common metrics include return
on equity (ROE), debt-to-equity ratio, and profit margins.

Business Model and Competitive Advantage Evaluates how a company makes money and
its unique value proposition. It also assesses the company's sustainable competitive
advantages or moats, such as brand strength, proprietary technology, or network effects.

Management Quality: Considers the experience, track record, and leadership skills of the
company's management team. Effective leadership can significantly influence a company's
strategic direction and operational success.

Market Position and Share Looks at the company's position within the industry and its
market share. A leading position can indicate stronger competitive advantages and bargaining
power.

Growth Prospects: Assesses future growth opportunities, based on factors like market
expansion, product development, and potential for market share gains. This includes
evaluating the company's strategy for capitalizing on these opportunities.

Risks: Identifies potential risks that could affect the company's performance, including
operational, financial, regulatory, and market risks.

VALUATION OF BONDS

Meaning; a bond is a long-term debt instrument or security. It is issued by business

enterprises or government agencies to raise long-term capital.

A bond usually carries a fixed rate of interest is called as coupon payment and the interest
rate is called as the coupon rate. The coupon payment can be either annually or semi-
annually.

Other words Valuation of bond refers to a technique for determining the fair value of a
particular bond. Bond valuation includes calculating the present value of the bond's future
interest payments, also known as its cash flow and the bond's value upon maturity also
known as its face value or par value.

Bonds are of two types, viz.,

a) Redeemable bonds.

b) Irredeemable bonds.
A bond can be irredeemable or redeemable. Redeemable bonds have a fixed maturity date
and irredeemable bonds have perpetual life with only interest payments periodically.
VALUATION OF SECURITIES
DEBENTURES
The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means to borrow
or loan. Debentures are written instruments of debt that companies issue under their common
seal. They are similar to a loan certificate.
A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since
debentures have no collateral backing, they must rely on the creditworthiness and reputation
of the issuer for support.
The important features of debentures are as follows:
 Debenture holders are the creditors of the company carrying a fixed rate of interest.
 Debenture is redeemed after a fixed period of time.
 Debentures may be either secured or unsecured.
 Interest payable on a debenture is a charge against profit and hence it is a tax-deductible
expenditure.
 Debenture holders do not enjoy any voting right.
 Interest on debenture is payable even if there is a loss.
Advantages
 Issue of debenture does not result in dilution of interest of equity shareholders as they do
not have right either to vote or take part in the management of the company.
 Interest on debenture is a tax deductible expenditure and thus it saves income tax.
 Cost of debenture is relatively lower than preference shares and equity shares.
 Issue of debentures is advantageous during times of inflation.
 Interest on debenture is payable even if there is a loss, so debenture holders bear no risk.
Disadvantages
 Payment of interest on debenture is obligatory and hence it becomes burden if the company
incurs loss.
 Debentures are issued to trade on equity but too much dependence on debentures increases
the financial risk of the company.
 Redemption of debenture involves a larger amount of cash outflow.
 During depression, the profit of the company goes on declining and it becomes difficult for
the company to pay interest.
Different Types of Debentures:
 Secured Debentures: Secured debentures are that kind of debentures where a charge is
being established on the properties or assets of the enterprise for the purpose of any payment.
The charge might be either floating or fixed. The fixed charge is established against those
assets which come under the enterprise’s possession for the purpose to use in activities not
meant for sale whereas floating charge comprises of all assets excluding those accredited to
the secured creditors. A fixed charge is established on a particular asset whereas a floating
charge is on the general assets of the enterprise.
 Unsecured Debentures: They do not have a particular charge on the assets of the enterprise.
However, a floating charge may be established on these debentures by default. Usually, these
types of debentures are not circulated.
 Redeemable Debentures: These debentures are those debentures that are due on the
cessation of the time frame either in a lump-sum or in installments during the lifetime of the
enterprise. Debentures can be reclaimed either at a premium or at par.
 Irredeemable Debentures: These debentures are also called as Perpetual Debentures as the
company doesn’t give any attempt for the repayment of money acquired or borrowed by
circulating such debentures. These debentures are repayable on the closing up of an enterprise
or on the expiry (end) of a long period.
 Convertible Debentures: Debentures which are changeable to equity shares or in any other
security either at the choice of the enterprise or the debenture holders are called convertible
debentures. These debentures are either entirely convertible or partly changeable.
 Non-Convertible Debentures: The debentures which can’t be changed into shares or in
other securities are called Non-Convertible Debentures. Most debentures circulated by
enterprises fall in this class
 Specific Coupon Rate Debentures: Such debentures are circulated with a mentioned rate of
interest, and it is known as the coupon rate.
 Zero-Coupon Rate Debentures: These debentures don’t normally carry a particular rate of
interest. In order to restore the investors, such type of debentures is circulated at a
considerable discount and the difference between the nominal value and the circulated price
is treated as the amount of interest associated to the duration of the debentures.
 Registered Debentures: These debentures are such debentures within which all details
comprising addresses, names and particulars of holding of the debenture holders are filed in a
register kept by the enterprise. Such debentures can be moved only by performing a normal
transfer deed.
 Bearer Debentures: These debentures are debentures which can be transferred by way of
delivery and the company does not keep any record of the debenture holders Interest on
debentures are paid to a person who produces the interest coupon attached to such
debentures.

PREFERENCE SHARES
Preference shares, more commonly referred to as preferred stock, are shares of a company’s
stock with dividends that are paid out to shareholders before common stock dividends are
issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from
company assets before common stockholders.
Features of Preference Shares
The following are the features of preference shares:
1. Preferential dividend option for shareholders.
2. Preference shareholders do not have the right to vote.
3. Shareholders have a right to claim the assets in case of a wind up of the company.
4. Fixed dividend payout for shareholders, irrespective of profit earned.
5. Acts as a source of hybrid financing.
Types of preference shares
Cumulative Preference Shares: When unpaid dividends on preference shares are treated as
arrears and are carried forward to subsequent years, then such preference shares are known as
cumulative preference shares. It means unpaid dividend on such shares is accumulated till it
is paid off in full.
Non-cumulative Preference Shares: Non-cumulative preference shares are those type of
preference shares, which have right to get fixed rate of dividend out of the profits of current
year only. They do not carry the right to receive arrears of dividend. If a company fails to pay
dividend in a particular year then that need not to be paid out of future profits.
Redeemable Preference Shares: Those preference shares, which can be redeemed or repaid
after the expiry of a fixed period or after giving the prescribed notice as desired by the
company, are known as redeemable preference shares. Terms of redemption are announced at
the time of issue of such shares.
Non-redeemable Preference Shares: Those preference shares, which cannot be redeemed
during the life time of the company, are known as non-redeemable preference shares. The
amount of such shares is paid at the time of liquidation of the company.
Participating Preference Shares: Those preference shares, which have right to participate in
any surplus profit of the company after paying the equity shareholders, in addition to the
fixed rate of their dividend, are called participating preference shares.
Non-participating Preference Shares: Preference shares, which have no right to participate
on the surplus profit or in any surplus on liquidation of the company, are called non-
participating preference shares.
Convertible Preference Shares: Those preference shares, which can be converted into
equity shares at the option of the holders after a fixed period according to the terms and
conditions of their issue, are known as convertible preference shares.
Non-convertible Preference Shares: Preference shares, which are not convertible into
equity shares, are called non-convertible preference shares.

EQUITY SHARES
Equity shares also known as ordinary shares or common shares represents ownership in a
company and confer a proportional claim on its assets and earnings. When investor purchases
equity shares, they become shareholders and in essence partial owners of the company. These
shares are considered as vital component of a company’s capital structure, alongside debt and
preference shares.
Features of Equity Shares
1. Permanent Shares: Equity shares are permanent in nature. The shares are permanent assets
of a company. And are returned only when the company winds up.
2. Significant Returns: Equity shares have the potential to generate significant returns to the
shareholders. However, these are risky investment options. In other words, equity shares are
highly volatile. The price movements can be drastic and are dependent on multiple internal
and external factors. Therefore, investors with suitable risk tolerance levels should only
consider investing in these.
3. Dividends: Equity shareholders share the profits of a company. In other words, a company
may distribute dividends to its shareholders from its annual profits. However, a company is
under no obligation to distribute dividends. In case a company doesn’t make good profits and
doesn’t have surplus cash flow, it can choose not to give dividends to its shareholders.
4. Voting Rights: Most equity shareholders have voting rights. This allows them to select the
people who will govern the company. Choosing effective managers assists the company to
enhance its annual turnover. As a result, investors can receive higher average dividend
income.
5. Additional Profits: Equity shareholders are eligible for additional profits a company makes.
It, in turn, increases the wealth of the investor.
6. Liquidity: Equity shares are highly liquid investments. The shares are trade on the stock
exchanges. As a result, you can buy and sell the share anytime during trading hours.
Therefore, one does not have to worry about liquidating their shares.
7. Limited Liability: Losses a company makes doesn’t affect the ordinary shareholders. In
other words, the shareholders are not liable for the company’s debt obligations. The only
effect is the decrease in the price of the stocks. This will have an impact on the return on
investment for a shareholder.
Advantages
The following are the advantages of investing in equity shares:
 High Returns: Equity shares have the potential to generate high returns as they are high
risk investments. Higher the risk, the higher the reward. The shares are highly volatile, and
the prices fluctuate owing to many factors. Demand, supply, economic factors, company
performance, geo-political factors, etc., all impact the share price.
 Voting Rights: Equity shareholders enjoy voting rights. They can vote for or against
corporate policies and business decisions.
 Limited Legal Obligations: Though equity shareholders own a part of the company, they
have limited legal liabilities.
 Liquidity: These shares trade on the stock exchange. Buying and selling them is quite easy.
Disadvantages
The following are the risks and disadvantages of investing in equity shares:
 Company’s Performance: The performance of the share largely depends on the company’s
performance. When the company is not performing and is unable to make profits, the equity
shareholder will not receive any dividends.
 Capital Loss: Since equity shares are high-risk, high-reward investments, the probability of
capital loss is also high. Due to many internal and external factors, the share price fluctuates.
A negative impact may lead to a capital loss for the investors.
 Volatility: Volatility in share prices can be for many reasons. The market sentiments drive
the share prices up and down. Timing the markets is an impossible strategy to adopt. The
share prices fluctuate within seconds and microseconds.
Types of Equity Share
 Authorized Share Capital- This amount is the highest amount an organization can issue.
This amount can be changed time as per the companies recommendation and with the help of
few formalities.
 Issued Share Capital- This is the approved capital which an organization gives to the
investors.
 Subscribed Share Capital- This is a portion of the issued capital which an investor accepts
and agrees upon.
 Paid Up Capital- This is a section of the subscribed capital, that the investors give. Paidup
capital is the money that an organization really invests in the company’s operation.
 Right Share- These are those type of share that an organization issue to their existing
stockholders. This type of share is issued by the company to preserve the proprietary rights of
old investors.
 Bonus Share- When a business split the stock to its stockholders in the dividend form, we
call it a bonus share.
 Sweat Equity Share- This type of share is allocated only to the outstanding workers or
executives of an organization for their excellent work on providing intellectual property
rights to an organization.
Valuation of Equity
The Dividend Discount Method is one of the popular methods for finding out the price of the
stocks and helping investors be aware of the expected returns. This is based on assumptions,
which makes it far off from any kind of reality check against the estimated stock prices. The
use of this model is recommended to investors and entities operating on a large scale.

Dividend discount model

1. Zero-Growth Dividend Discount Model – This model assumes that all the dividends paid
by the stock remain the same forever until infinite. The zero-growth model assumes that the
dividend always stays the same, i.e., there is no growth in dividends. Therefore, the stock
price would be equal to the annual dividends divided by the required rate of return.
2. Constant Growth Dividend Discount Model – This dividend discount model assumes
dividends grow at a fixed percentage. They are not variable and are consistent throughout.
3. Super growth model/Variable Growth Dividend Discount Model or Non-Constant
Growth – This model may divide the growth into two or three phases. The first one will be a
fast initial phase, then a slower transition phase, and ultimately ends with a lower rate for the
infinite period. The purpose of the supernormal growth model is to value a stock that is
expected to have higher than normal growth in dividend payments for some period in the
future. After this supernormal growth, the dividend is expected to go back to normal with
constant growth.

NORMAL GROWTH RATE

Meaning

A normal growth rate in economics refers to the sustainable and steady increase in the Gross
Domestic Product (GDP) of a country over a specific period. This rate reflects the average
annual expansion a nation can achieve without causing imbalances or disruptions in its
economic environment.

Typically, normal growth is influenced by factors such as population growth, technological

advancements, and capital accumulation. Governments and policy makers strive to maintain a
stable normal growth rate as it supports the creation of jobs, income growth, and an overall
improvement in living standards for the population.

IMPORTANCE OF NORMAL GROWTH RATE

Economic Stability: Normal growth rate plays a crucial role in maintaining economic
stability by providing a sustainable pace of expansion for an economy. When the economy
grows at a consistent and moderate rate over time,

Employment Opportunities: Normal growth rate is essential for creating and sustaining
employment opportunities within an economy. As the economy grows, businesses expand,
invest in new projects, and hire additional workers to meet growing demand..

Income Distribution: Normal growth rate can contribute to more equitable income
distribution by fostering broad-based economic development and reducing disparities
between different segments of society.

Business Confidence and Investment: A stable and predictable normal growth rate instills
confidence among businesses and investors, encouraging them to make long-term
investments and strategic decisions.

Fiscal Sustainability: Normal growth rate is vital for ensuring fiscal sustainability by
supporting government revenues and reducing budget deficits over time. As the economy
grows, tax revenues increase, providing governments with resources to finance public
expenditures, invest in infrastructure, and fund social programs.
International Competitiveness: Normal growth rate is essential for enhancing the
international competitiveness of an economy by enabling it to sustain productivity gains,
technological advancements, and innovation over time.

SUPER NORMAL GROWTH RATE

A super normal growth rate in economics denotes an exceptionally high and often
unsustainable level of economic expansion within a specific period. Unlike a normal growth
rate, which reflects a steady and sustainable increase in Gross Domestic Product (GDP), a
super normal growth rate surpasses typical expectations, leading to rapid and extraordinary
economic growth.

A super normal growth rate implies an economic environment experiencing an unprecedented

level of expansion. This can result from factors such as a sudden surge in consumer demand,
breakthrough innovations, or favorable global economic conditions, propelling the economy
to levels significantly beyond its usual trajectory.

IMPORTANCE OF SUPER NORMAL GROWTH RATE

Economic Development: A super normal growth rate pace of economic development,

surpassing the typical rate of expansion observed in an Accelerated This rapid growth can
signifies an accelerated Infrastructure development, and overall prosperity within a relatively
short period.

Poverty Alleviation: Super normal growth rates have the potential to lift large segments of
the population out of poverty by creating employment opportunities to lift large segments of
expanding access to essential services such as healthcare and education.

Technological Advancement and Innovation: Super normal growth rates often coincide
with periods of heightened technological advancement and innovation, driven by increased
investment in research and development, entrepreneurship, and knowledge-intensive
industries.

Attraction of Foreign Investment: Countries experiencing super normal growth rates

become attractive destinations for foreign investment, as investors seek opportunities for high
returns and capital appreciation. Foreign direct investment (FDI) flows into these economies,
fueling further expansion, job creation, and infrastructure development.

Global Influence and Geopolitical Significance: Super normal growth rates elevate the
global influence and geopolitical significance of a country, positioning it as a key player in
regional and international affairs. Economic power translates into political influence,
allowing countries to shape global agendas, foster diplomatic relations, and exert soft power
through economic diplomacy and development assistance.

Sustainable Development Challenges: While super normal growth rates offer numerous
benefits, they also pose challenges related to sustainability, resource management, and
environmental degradation.