Fundamental Analysis¶

Examines various factors affecting supply and demand conditions, thereby influencing future income from and value of an investment

Studies fundamental factors that determine earnings and risks associated with a share

Suitable for

• Long-term investing: value of share that should prevail in capital market
• Determining intrinsic worth of share
• Explaining price-behavior of shares in terms of underlying fundamental factors

Why invest in assets with low P/E ratio?¶

• Store of value
• Expected future earnings

GEIC Model¶

• **G**lobal economy
• Domestic **e**conomy
• **I**ndustry
• **C**ompany

flowchart LR

subgraph ee[Economic<br/>Environment]
    direction LR
    ge[Global<br/>Economy]
    e[Domestic<br/>Economy]
    i[Industry] 
end

ee --> Company --> Performance --> v[Value<br/>of share]

Global Economy¶

• Prospects for Exports
• Price competition
• Cost of foreign inputs
• Profits through foreign investments
• Exchange rate fluctuations
• Risk of changing political environment in world
• Increasing/decreasing peace in international scenario

Stronger globalization and international collaboration, higher the importance of monitoring global economy. Eg: sub-prime crisis

Economy¶

Shocks: Change in macro-economic vars provide a force that goes against inertia inherent in the performance of firms, and hence the share prices

Types of shocks

• Supply
• Demand
• Financial market

PEST¶

SWOT¶

Strengths, Weaknesses, Opportunities, Threats

Industry¶

An industry is set of companies that serves a particular niche of consumers

Industry Phase¶

Identify which phase of the life cycle the industry belongs to

• Pioneering
• Expansion
• Stabilization/Maturation
• Decay

Structural Analysis¶

Intensity of competition among firms in the same industry determines its profitability

Michael Porter’s Model: Rivalry among existing competitors depends on

• Threat of entry: New supplier
• Threat of substitution: New industry
• Bargaining powers of consumers
• Bargaining powers of suppliers

Company¶

• Quantitative: Financial
• Qualitative: Non-Financial
• Quality of mgmt
• Product portfolio/range
• Collaborations
• Shareholders pattern and listing
• R&D, Innovation
• Diversification
• Does this company fall under strict Govt regulations
• Disputes & contingent liabilities
• Availability of inputs

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