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RESEARCH
SESSION
 FUNDAMENTAL ANALYSIS
T O P I C S C O V E R E D

Meaning

Components of FA

Difference between FA & TA

Ratio Analysis

Basics of Valuation

FIC SRCC
 M E A N I N G

Fundamental analysis is a technique used to determine a stock's

intrinsic value. It involves an evaluation of the management,
business model, financial ratios, financial statements, and other
metrics of a company.
Intrinsic value is the value of an investment based on the
company's financial situation and current market and economic
conditions.
USE OF FUNDAMENTAL ANALYSIS
Using Fundamental Analysis, we come across the
intrinsic value of a stock. This has mainly 2 uses:

If the intrinsic value is If the intrinsic value is lower

higher than the market than the market price, the
price, the stock is deemed stock is deemed overvalued,
undervalued, and a buy and a recommendation to not
buy or to sell if the stock is
recommendation is given.
held.
FUNDAMENTAL ANALYSIS AND TECHNICAL ANALYSIS

BASIS FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS

Fundamental analysis is the practice of analyzing Technical analysis is a method of determining a

MEANING securities by determining the intrinsic value of the stock's future price using charts to identify patterns
stock. and trends.

APPROACH Long term Short term

FUNCTION Investing Trading

FOCUS Both Past and Present data. Past data only.

 COMPONENTS OF FA

Economic Industry Company Analysis

Analysis Analysis

Quantitative Qualitative
Analysis Analysis
 To ascertain whether or not economic forces are favouring the
company, macroeconomic and microeconomic variables are examined.

M A C R O V A R I A B L E S M I C R O V A R I A B L E S

Inflation Demand
GDP Supply
 Knowing the business environment, industry growth prospects, risk,
average return on investment, and other factors.

F A C T O R S

Past Sales and Labour Level of

The Attitude of
Earnings Conditions Competition
Government
Performance of all in the
towards the
companies in the Industry
Industry
industry
QUANTITATIVE ANALYSIS QUALITITATIVE ANALYSIS

Majorly focuses on Focuses on those

data derived from aspects that cannot be
the financial quantified. Involves
statements of analysing: Business
companies like Model, Competitive
balance sheet, Advantage (Moats),
income statement, Management and
CFS, etc. Corporate Governance.
 RATIO ANALYSIS

Quantitative analysis using ratios based on the financial statements of the

company. Ratio analysis is a cornerstone of fundamental equity analysis.

Liquidity Ratios Solvency Ratios Profitability Ratios Efficiency Ratios

Measure a company's ability to pay off its short term debts

Current Ratio Quick/Acid Test Ratio

 Measure a company's ability to pay off its long term debts

Leverage/ gearing ratio Debt to Assets Ratio Equity Ratio

 Assess a company's ability to earn profits from its sales or
operations, balance sheet assets, or shareholders' equity.

Net Profit Ratio Return on Equity Return on Capital

Employed
 Turnover/Efficiency ratios or activity financial ratios, are
used to measure how well a company utilises its resources.

Working Capital Inventory Turnover Ratio

Turnover Ratio
 INTRINSIC VALUATION RELATIVE VALUATION
Relates the value of an asset Estimates how much to pay
to its capacity to generate for an asset by looking at
cash flows and the risk in what others are paying for
these cash flows. 'comparable' assets, scaled
to a common metric that
In its most common form, they all share (earnings,
intrinsic value is computed revenues, subscribers).
with a discounted cash flow
valuation, with the value of an
asset being the present value
of expected future cash flows
on that asset.
 What is it?: In discounted cash flow valuation, the value of an
asset is the present value of the expected cash flows on the
asset.
Philosophical Basis: Every asset has an intrinsic value that can
be estimated, based upon its characteristics in terms of cash
flows, growth and risk.
Information Needed: To use DCF valuation, you need:
1. To estimate the life of the asset
2. To estimate the cash flows during the life of the asset
3. To estimate the discount rate to apply to these cash flows to get
present value
Market Inefficiency: Markets are assumed to make mistakes in
pricing assets across time, and are assumed to correct
themselves over time, as new inform
Required rate of Return : Cost of Equity = Risk Free Rate + Equity
Beta * (Equity Risk Premium)
Beta: The standard procedure for estimating betas is to regress
stock returns (Rj) against market returns (Rm); The slope of the
regression corresponds to the beta of the stock, and measures
the riskiness of the stock Beta of 1= Standard Risk, >1: More risky
and <1 :Less risky
Risk-free rate: Long term Govt Zero Coupon Bond Yield
Equity Risk Premium: Excess return earned by an investor when
they invest in the stock market over a risk-free rate. This return
compensates investors for taking on the higher risk of equity
investing.
Example of DCF

Risk free rate= 4%

Beta= 1.2
Equity Risk Premium = 5%
 What is it?:The “value” of any asset can be estimated by looking
at how the market prices “similar” or ‘comparable” assets.
Philosophical Basis: The intrinsic value of an asset is impossible
(or close to impossible) to estimate. The price of an asset is
whatever the market is willing to pay for it (based upon its
characteristics).
Information Needed: To do a relative valuation, you need:
1. An identical asset, or a group of comparable or similar assets
2. A standardized measure of value (in equity, this is obtained by
dividing the price by a common variable, such as earnings or book
value)
3. And if the assets are not perfectly comparable, variables to control
for the differences
Market Inefficiency: Pricing errors made across similar or
comparable assets are easier to spot, easier to exploit and are
much more quickly corrected.
PE = Market Price per Share / Earnings per Share

IF PE of the firm < comparable firms, the firm is undervalued

IF PE of the firm > comparable firms, the firm is overvalued

IF EV/EBITDA< Comparable firms, the firm is undervalued

IF EV/EBITDA> Comparable firms; the firm is overvalued
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