Table of Contents

Chapter 1 : Introduction to Fundamental Analysis

Chapter 2 : Approaches used in Fundamental Analysis





















Chapter 1
Introduction to Fundamental Analysis
Before doing any kind of investment in stock markets it is imperative for the investors to
understand the mechanics of stock market and the ways to pick stocks worthy of investment. The
very basic idea behind any investment process is to first identify the securities which are
undervalued and then invest in them in the hope that market mechanics will force the market
price of these securities to move towards their real value or intrinsic value and hence a gain can
be realized by selling them after an increase in price.
There are many techniques to identify the true value of stocks but the most popular and widely
used technique is Fundamental Analysis. As the name suggests fundamental analysis is the
study of the company you are investing in and the factors which are core or fundamental in
driving the value or growth of that company.
In its most basic form fundamental analysis is the study of the underlying forces that affect the
well being of the economy, industry groups and the companies. At the company level,
fundamental analysis may involve examination of financial data, financial ratios, management,
competition and business concept. At the industry level, the focus is on examination of supply
and demand forces for the products offered in the industry. For the national economy,
fundamental analysis focuses on economic data to assess the present and future growth of the
economy.
As with most analysis, the goal of fundamental analysis is to derive a forecast of stocks price
and profit from future price movements. So, to forecast stock prices fundamental analysis
combines economic, industry, and company analysis to derive a stock's current fair value. If fair
value is not equal to the current stock price, fundamental analysts believe that the stock is either
over or under valued and the market price will ultimately converge to its fair value.
Many investors use fundamental analysis alone or in combination with other tools to evaluate
stocks for investment purposes. The goal is to determine the current worth and more importantly
how the market values the stock.
While doing fundamental analysis it should be noted that some stocks are cheap and some are
costly. Some are worth Rs.1000 and some are even worth 1 rupee. But it should be realized that
price of the stock is not important. The price of the stock does not make a stock good to buy.
What is important is how much the price of the stock is likely to rise. If you invest Rs.1000 in
one stock of Rs.1000 and the price goes up to Rs.1080 you will make Rs.80. However, if you
invest Rs.1000 in a 1 rupee stock, you will have 1000 stocks. If the price of the stock goes up
from Rs.1 to Rs.2, then the Rs.1000 you invested is now Rs.2000. You made a profit of Rs.1000.




Thus you can see that the price of the stock is not important. What is important is the rise in the
stocks price. More specifically the percentage rise in the stock price.If the Rs.1000 stock
becomes worth Rs.1080, then that is an 8% rise. This 8% rise only makes us Rs.80. On the other
hand when we invest the same Rs.1000 in the 1 rupee stock and the stock price goes up to Rs.2;
it is a 100% rise as the stock price has doubled.
This 100% rise makes us Rs.1000. The point is that while choosing a company for investment
after fundamental analysis, we are interested in a company whose stock price will rise by a large
percentage.



















Chapter 2
Approaches used in Fundamental Analysis
Fundamental analysis involves three types of analysis:
(1) Economic Analysis: Corporate performance is very much influenced by macro-level
economic factors. Positive factors increase the worth of the shares as such factors have positive
impact on the performance of the company. These factors are: Monsoon, interest rates, GDP
growth, foreign exchange rates, inflation, public debts, budgetary deficits, taxation policy,
balance of trade, savings rate etc. Economic analysis is performed not only from the point of
national economy but also from the point of view of the global economy particularly when the
company is operating at global level. So for example if Indian Economy is going to generate 7%
GDP with 5% inflation this suggest that economy as a whole is growing well and this will have a
positive impact on the profitability of the companies functioning in India.
(2) Industry Analysis: Industry analysis gives an investor a deeper understanding of a
company's financial prospectus. The purpose of this analysis is to identity the companies which
are expected to provide good returns to the investors. It is a study of demand and supply of the
industrys products. Industry analysis should be done from global prospective. The main study in
industry analysis is the phase through which the industry is passing. There are four stages in any
through which every industry has to pass:
(i) Innovation stage
(ii) Expansion stage
(iii) Stagnation stage and
(iv) Declining stage
Industry analysis is quite important part of the fundamental analysis.
For example, when the industry is passing through expansion stage, not only the leaders but even
the laggards report good a performance. So for example if manufacturing sector as a whole is
doing well, this suggests that companies in the sector will also do well.






(3) Company Analysis:
There are two parts of company analysis:

(a) Non-Financial analysis: This includes analysis of leadership, top management, corporate
governance, corporate vision, corporate policies, and relationship with different stakeholders and
competitive advantage/disadvantages.

(b) Financial Analysis: Financial analysis means analysis of financial statements using the
accounting ratios and valuation techniques.
There are generally two approaches which can be utilized while doing fundamental analysis:
(a) Top down Approach: In this approach investors start their analysis with global economics,
including both international and national economic indicators such as GDP growth rates,
inflation, interest rates, exchange rates, productivity, and energy prices. They then narrow their
search down to regional/industry analysis of total sales, price levels, the effects of competing
products, foreign competition, and entry or exit from the industry. Only then they narrow their
search to the best business in that industry. Once the business or company is identified than
various valuation techniques are used to assess the true or intrinsic value of the company.
(b) Bottom up Approach: In the bottom-up approach investors start their analysis with specific
businesses or company and then move up with the industry and economy analysis.










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