Description
According to the fundamental analysts, every security has an intrinsic value which is taken as sum of present value of further dividends discounted on the basis of its perceived safety and risk.
FUNDAMENTAL ANALYSIS
? According to the fundamental analysts,
every security has an intrinsic value
which is taken as sum of present value
of further dividends discounted on
the basis of its perceived safety and
risk.
? Fundamental analysis is divided into
three parts
? Economic analysis
? Industry analysis
? Company analysis
Economic analysis
? Economic factors are very important to form a
strategy for making investment. In the first place, the
performance of a company depends on the
performance of macro economic conditions of a
country as well as of the world.
? If the economy of a Country is going through
recession; the performance of a company will be bad
in general. On the other hand, a booming economy
leads to a rise in income and demand for goods and
thereby flourishing of industrial sector .
key macro economic factors
are:
? Gross domestic Product (GDP)
? Savings and investment
? Inflation
? Interest rates
? Budget
? Tax structure
? Monsoon and agriculture
? Infrastructure facilities
Gross domestic Product
(GDP)
? Gross domestic Product (GDP) – GDP indicates
the rate of growth of the economy . It represents the
aggregate value of the goods and services produced
in the economy .
? The estimates of GDP are available on an annual
basis . The growth rate of economy points out the
prospects for the industrial sector and the return
investors can expect from investment in shares . The
higher growth rate is more favourable to the stock
market .
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 saving 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 etc. . The saving and
investment patterns of the public affect the
stock market to a great extent .
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. The industries which
come under the government price control policy may
lose the market, for example Sugar .
? The government control over this industry , affects
the price of the sugar and thereby the profitability of
the industry itself. If there is a mild level of inflation,
it is good to the stock market but high rate of
inflation is harmful to the stock market.
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 . Availability of cheap
fund , encourages speculation and rise in the
price of shares .
Budget
? The budget provides an elaborate
account of the government revenues
and expenditures. Balanced budget is
highly favourable 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 encourages investment in that
particular industry. Different tax exemptions
has impact on the profitability of the
industries .
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 increase in crops. This
would lead to increase in the stock market.
When the monsoon is bad, there is a
negative effect on the share market .
Infrastructure facilities
? Infrastructure facilities are essential for the
growth of industrial and agricultural sector. A
wide net work of communication system is a
must for the growth of the economy . Regular
supply of power without any power cut would
boost the production.
? Good infrastructure facilities affect the stock
market favourably.
Industry Analysis
? The investors must analyse the economic
significance of industries and invest in those
that offer continued success, measured by
the industry’s ability.
? An industry is a group of firms that have
similar technological structure of production
and produce similar products .
The table below gives the industry wise classification given in
Reserve Bank of India Bulletin .
? Industry Groups
Food Products
? Beverages, Tobacco and Tobacco products
? Textiles
? Wood and wood products
? Leather and leather products
? Rubber and plastic products
? Chemical and chemical products
? Non-metallic mineral products
? Basic metals, Alloys and metal products
? Machinery and Machine tools
? Transport equipment and parts
? Other Miscellaneous manufacturing industries
? These industries can be classified on
the basis of the business cycle i.e.
classified according to their reactions to
the different phases of the business
cycle . They are classified into growth,
cyclical, defensive and cyclical growth
industry .
Growth industry
? The growth industries have special features
of high rate of earnings and growth in
expansion, independent of the business cycle.
The expansion of the industry mainly
depends on the techno logical change .
? Like wise in every phase of the history certain
industries like colour televisions,
pharmaceutical and telecommunication
industries have shown remarkable growth .
Cyclical Industry
The growth and the profitability of the
industry move along with the business
cycle. During the boom period they enjoy
growth and during depression they suffer a
set back.
For example: the white goods like fridge,
washing machine and kitchen range products
command a good market in the boom period
and the demand for them slackens during
the recession.
Defensive Industry
? Defensive industry defines the movement of
the business cycle . For example , food and
shelter are the basic requirements . The food
industry withstands recession and depression.
The stocks of the defensive industries can be
held by the investor for income earning
purpose. They expand and earn income in
the depression period too.
Cyclical growth industry
? This is a new type of industry that is
cyclical and at the same time growing .
For example, the automobile industry
experiences periods of stagnation,
decline but they grow tremendously.
The changes in technology and
introduction of new models help the
automobile industry to resume their
growth path.
Industry life cycle
? The life cycle of the industry is
separated into four well defined stages
such as :
? Pioneering stage
? Rapid growth Stage
? Maturity and stabilization stage
? Declining stage
Pioneering stage
? The prospective demand for the product is promising.
The demand for the product attracts many producers
to produce the particular product . There would be
severe competition and only fittest companies
survive this stage .
? The producers try to develop brand name ,
differentiate the product and create a product image
. The severe competition often leads to the change of
position of the firms in terms of market shares and
profit. In this situation, it is difficult to select
companies for investment because the survival rate is
unknown .
Rapid growth stage
? This stage starts with the appearance of surviving firms from
the pioneering stage . The companies that have withstood the
competition grow strongly in market share and financial
performance . The technology of the production would have
improved resulting in low cost of production and good quality
products . The companies have stable growth rate in this stage
and they declare dividend to the shareholders .
? It is advisable to invest in the shares of these companies. The
pharmaceutical industry has improved its technology and the
top companies in this sector are giving dividend to the
shareholders. Likewise power industry, and telecommunication
industry can be cited as examples of expansion stage. In this
stage the growth rate is more than the industry’s average
growth rate .
Maturity and stabilization
stage
? In the stabilization stage, the growth rate
tends to moderate and the rate of growth
would be more or less equal to the industrial
growth rate or the gross domestic product
growth rate . Symptoms of obsolescence may
appear in the technology . To keep going,
technological innovations in the production
process and products should be introduced .
The investors have to closely monitor the
events that take place in the maturity stage
of the industry .
Declining stage
? In this stage, demand for the particular product and
the earnings of the companies in the industry decline
. Now-a-days very few consumers demand black and
white T.V. Innovation of new products and changes
in consumer preferences lead to this stage . The
specific feature of the declining stage is that even in
the boom period, the growth of the industry would
be low and decline at a higher rate during the
recession . It is better to avoid investing in the shares
of the low growth industry even in the boom period .
Investment in the shares of these types of companies
leads to erosion of capital .
Factors to be considered :
? Apart from industry life cycle analysis, the
investor has to analyse some other factors
too. They are as listed below :
? Growth of the industry
? Nature of the product
? Nature of the competition
? Government policy
? Labour
? Research and development
Growth of the industry
? The historical performance of the industry in terms of growth
and profitability should be analysed. Industry wise growth is
published periodically by the Centre for Monitoring Indian
Economy . The past variability in return and growth in reaction
to macro economic factors provide an insight into the future .
? Even though history may not repeat in the exact manner,
looking into the past growth of the industry, the analyst can
predict the future. The information technology industry has
witnessed a tremendous growth in the past so also the scrip
prices of the IT industry. With the Y2K millennium bug creating
a huge business opportunity even beyond the year 2000, the
sector is expected to maintain its growth momentum .
Nature of the Product
? The products produced by the industries are demanded by the
consumers and other industries . If industrial goods like pig
iron, iron sheet and coils are produced, the demand for them
depends on the construction industry . Like wise, textile
machine tools industry produces tools for the textile industry
and the entire demand depends upon the health of the textile
industry. Several such examples can be cited . The investor has
to analyse the condition of related goods producing industry
and the end user industry to find out the demand for industrial
goods .
? In the case of consumer goods industry, the change in the
consumers’ preference, technological innovations and substitute
products affect the demand. A simple example is that the
demand for the ink pen is affected by the ball point pen with
the change in the consumer preference towards the easy usage
of pen.
Nature of the competition
? Nature of competition is an essential factor that determines the
demand for the particular product, its profitability and the price of the
concerned company shares . The supply may arise from indigenous
producer and multinationals. In the case of detergents, it is produced
by indigenous manufactures and distributed locally at a competitive
price . This poses a threat to the company made products. The
multinationals are also entering into the field with sophisticated
product process and better quality product.
? Now the companies’ ability to withstand the local as well as
multinational competition counts much . The competition would lead
to a decline in the price of the product . The investor before investing
in the share of a company, should analyse the market share of the
particular company’s product and should compare it with the top five
companies.
Government policy
? The government policies affect the very nerve of the
industry and the effects differ from industry to
industry. Tax subsidies and tax holidays are provided
for export oriented products . Government regulates
the size of the production and the pricing of certain
products. The sugar, fertilizer and pharmaceutical
industries are often affected by the inconsistent
government policies. Control and decontrol of sugar
price affect the profitability of the sugar industry .
? When selecting an industry, the government policy
regarding the particular industry should be carefully
evaluated .
Labour
? The analysis of labour scenario in a particular industry is of
great importance. The number of trade unions and their
operating mode have impact on the labour productivity and
modernization of the industry.Textile industry is known for its
militant trade unions . If the trade unions are strong and strikes
occur frequently, it would lead to fall in the production . In an
industry of high fixed cost , the stoppage of production may
lead to loss . When trade unions oppose the introduction of
automation, in the product market the company may stand to
lose with high cost of production. The unhealthy labour
relationship leads to loss of customers’ goodwill too .
? Skilled labour is needed for certain industries. In the case of
Indian labour market, even in computer technology or in any
other industry skilled and well-qualified labour is available at a
cheaper rate. This is one of the many reasons attracting the
multinationals to set up companies in India .
Research and development
? For any industry to survive the competition in
the national and international markets,
product and production process have to be
technically competitive. This depends on the
R & D in the particular company or industry .
Economies of scale and new market can be
obtained only through R& D . The percentage
of expenditure made on R & D should be
studied diligently before making an
investment .
Pollution standards
? Pollution standards are very high and
strict in the industrial sector. For some
industries it may be heavier than
others; for example, in leather,
chemical and pharmaceutical industries
the industrial effluents are more .
SWOT analysis :
? The above mentioned factors themselves would
become strength, weakness, opportunity and threat
(SWOT) for the industry . Hence , the investor should
carry out a SWOT analysis for the chosen industry .
Take for instance, increase in demand for the
industry’s product becomes its strength, presence of
numerous players in the market, i.e. competition
becomes the threat to a particular company in the
respective industry. The progress in the research
and development in that particular industry is an
opportunity and entry of multinationals in the
industry and cheap imports of the particular products
are threat to that industry . In this way the factors
have to be arranged and analysed .
COMPANY ANALYSIS
? In the company analysis the investor
assimilates the several bits of information
related to the company and evaluates the
present and future values of the stock . The
risk and return associated with the purchase
of the stock is analysed to take better
investment decisions. The valuation process
depends upon the investors’ ability to find
information from the relationship and inter-
relationship among the company related
variables .
The competitive edge of
the company
? Major industries in India are composed of hundreds
of individual companies. In the information
technology industry even though the number of
companies is large , few companies like Tata
InfoTech, Infosys etc., control the major market
share. The large companies are successful in meeting
the competition . Over the time they would have
proved their ability to withstand competition and to
have a sizeable share in the market . The
competitiveness of the company can be studied with
the help of
? Market Share
? Growth of annual sales
? Stability of annual sales
The Market Share
? The market share of the annual sales helps to
determine a company’s relative competitive
position within the industry .
? If the market share is high , the company
would be able to meet the competition
successfully .
? While analyzing the market share , the size of
the company also should be considered
because the smaller companies may find it
difficult to survive in the future . The leading
companies of today’s market will continue to
lead at least in the near future .
Growth of sales
? The company may be a leading company, but if the growth in
sales is comparatively lower than another company, it indicates
the possibility of the company losing the leadership. The rapid
growth in sales would keep the shareholder in a better position
than one with the stagnant growth rate . The company of large
size with inadequate growth in sales will not be preferred by the
investors. Growth in sales is usually followed by the growth in
profits. Investor generally prefers size and the growth in sales
because the larger size companies may be able to withstand
the business cycle rather than the company of smaller size .
? The growth in sales of the company is analysed both in rupee
terms and in physical terms. Physical term is very essential
because it shows the growth in real terms . The rupee term is
affected by the inflation. Companies with diversified sales are
compared in rupee terms and percentage of growth over time .
Stability of sales
? If a firm has stable sales revenue , other things being
remaining constant, will have more stable earnings.
Wide variation in sales leads to variations in capacity
utilization, financial planning and dividend .
Periodically all the financial newspapers provide
information about the market share of different
companies in an industry . The fall in the market
share indicates the declining trend of the company,
even if the sales are stable in absolute terms. Hence,
the stability of sales also should be compared with its
market share and the company, even if the sales are
stable in absolute terms .
Sales forecast
? The company may be in a superior
position commanding more sales both
in monetary terms and physical terms
but the investor should have an idea
whether it will continue in future or not.
For this purpose, forecast of sales has
to be done.
EARNINGS OF THE
COMPANY
? Sales alone do not increase the earnings but the costs and
expenses of the company also influence the earnings of the
company . Further, earnings do not always increase with the
increase in sales. The company’s sales might have increased
but its earnings per share may decline due to the rise in costs .
? The rate of change in earnings differs from the rate of change
of sales. Sales may increase by 10% in a company but earnings
per share may increase only by 5% . Sometimes, the volume of
sales may decline but the earnings may improve due to the rise
in the unit price of the article. Hence , the investor should not
depend only on the sales, but should analyse the earnings of
the company .
Capital Structure
? The equity holders’ return can be increased
manifold with the help of financial leverage,
i.e. using debt financing along with equity
financing. The effect of financial leverage is
measured by computing leverage ratios . The
debt ratio indicates the position of the long
term and short term debts in the company
finance . The debt may be in the form of
debentures and term loans from financial
institutions .
Management
? Good and capable management generates
profit to the investors. The management of
the firm should efficiently plan, organize and
control the activities of the company. The
basic objective of management is to attain
the stated objectives of company for the
good of the equity holders, the public and
the employees. If the objectives of the
company are achieved, investors will have a
profit .
FINANCIAL ANALYSIS :
? The best source of financial information about a
company is its own financial statements. This is a
primary source of information for evaluating the
investment prospects in the particular company’s
stock . Financial statement analysis is the study of a
company’s financial statement from various
viewpoints. The statement gives the historical and
current information about the company’s operations.
Historical financial statement helps to predict the
future .
? The current information aids to analyse
the present status of the company. The
two main statements used in the
analysis are:
? Balance sheet
? Profit and loss account
doc_898682784.ppt
According to the fundamental analysts, every security has an intrinsic value which is taken as sum of present value of further dividends discounted on the basis of its perceived safety and risk.
FUNDAMENTAL ANALYSIS
? According to the fundamental analysts,
every security has an intrinsic value
which is taken as sum of present value
of further dividends discounted on
the basis of its perceived safety and
risk.
? Fundamental analysis is divided into
three parts
? Economic analysis
? Industry analysis
? Company analysis
Economic analysis
? Economic factors are very important to form a
strategy for making investment. In the first place, the
performance of a company depends on the
performance of macro economic conditions of a
country as well as of the world.
? If the economy of a Country is going through
recession; the performance of a company will be bad
in general. On the other hand, a booming economy
leads to a rise in income and demand for goods and
thereby flourishing of industrial sector .
key macro economic factors
are:
? Gross domestic Product (GDP)
? Savings and investment
? Inflation
? Interest rates
? Budget
? Tax structure
? Monsoon and agriculture
? Infrastructure facilities
Gross domestic Product
(GDP)
? Gross domestic Product (GDP) – GDP indicates
the rate of growth of the economy . It represents the
aggregate value of the goods and services produced
in the economy .
? The estimates of GDP are available on an annual
basis . The growth rate of economy points out the
prospects for the industrial sector and the return
investors can expect from investment in shares . The
higher growth rate is more favourable to the stock
market .
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 saving 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 etc. . The saving and
investment patterns of the public affect the
stock market to a great extent .
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. The industries which
come under the government price control policy may
lose the market, for example Sugar .
? The government control over this industry , affects
the price of the sugar and thereby the profitability of
the industry itself. If there is a mild level of inflation,
it is good to the stock market but high rate of
inflation is harmful to the stock market.
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 . Availability of cheap
fund , encourages speculation and rise in the
price of shares .
Budget
? The budget provides an elaborate
account of the government revenues
and expenditures. Balanced budget is
highly favourable 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 encourages investment in that
particular industry. Different tax exemptions
has impact on the profitability of the
industries .
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 increase in crops. This
would lead to increase in the stock market.
When the monsoon is bad, there is a
negative effect on the share market .
Infrastructure facilities
? Infrastructure facilities are essential for the
growth of industrial and agricultural sector. A
wide net work of communication system is a
must for the growth of the economy . Regular
supply of power without any power cut would
boost the production.
? Good infrastructure facilities affect the stock
market favourably.
Industry Analysis
? The investors must analyse the economic
significance of industries and invest in those
that offer continued success, measured by
the industry’s ability.
? An industry is a group of firms that have
similar technological structure of production
and produce similar products .
The table below gives the industry wise classification given in
Reserve Bank of India Bulletin .
? Industry Groups
Food Products
? Beverages, Tobacco and Tobacco products
? Textiles
? Wood and wood products
? Leather and leather products
? Rubber and plastic products
? Chemical and chemical products
? Non-metallic mineral products
? Basic metals, Alloys and metal products
? Machinery and Machine tools
? Transport equipment and parts
? Other Miscellaneous manufacturing industries
? These industries can be classified on
the basis of the business cycle i.e.
classified according to their reactions to
the different phases of the business
cycle . They are classified into growth,
cyclical, defensive and cyclical growth
industry .
Growth industry
? The growth industries have special features
of high rate of earnings and growth in
expansion, independent of the business cycle.
The expansion of the industry mainly
depends on the techno logical change .
? Like wise in every phase of the history certain
industries like colour televisions,
pharmaceutical and telecommunication
industries have shown remarkable growth .
Cyclical Industry
The growth and the profitability of the
industry move along with the business
cycle. During the boom period they enjoy
growth and during depression they suffer a
set back.
For example: the white goods like fridge,
washing machine and kitchen range products
command a good market in the boom period
and the demand for them slackens during
the recession.
Defensive Industry
? Defensive industry defines the movement of
the business cycle . For example , food and
shelter are the basic requirements . The food
industry withstands recession and depression.
The stocks of the defensive industries can be
held by the investor for income earning
purpose. They expand and earn income in
the depression period too.
Cyclical growth industry
? This is a new type of industry that is
cyclical and at the same time growing .
For example, the automobile industry
experiences periods of stagnation,
decline but they grow tremendously.
The changes in technology and
introduction of new models help the
automobile industry to resume their
growth path.
Industry life cycle
? The life cycle of the industry is
separated into four well defined stages
such as :
? Pioneering stage
? Rapid growth Stage
? Maturity and stabilization stage
? Declining stage
Pioneering stage
? The prospective demand for the product is promising.
The demand for the product attracts many producers
to produce the particular product . There would be
severe competition and only fittest companies
survive this stage .
? The producers try to develop brand name ,
differentiate the product and create a product image
. The severe competition often leads to the change of
position of the firms in terms of market shares and
profit. In this situation, it is difficult to select
companies for investment because the survival rate is
unknown .
Rapid growth stage
? This stage starts with the appearance of surviving firms from
the pioneering stage . The companies that have withstood the
competition grow strongly in market share and financial
performance . The technology of the production would have
improved resulting in low cost of production and good quality
products . The companies have stable growth rate in this stage
and they declare dividend to the shareholders .
? It is advisable to invest in the shares of these companies. The
pharmaceutical industry has improved its technology and the
top companies in this sector are giving dividend to the
shareholders. Likewise power industry, and telecommunication
industry can be cited as examples of expansion stage. In this
stage the growth rate is more than the industry’s average
growth rate .
Maturity and stabilization
stage
? In the stabilization stage, the growth rate
tends to moderate and the rate of growth
would be more or less equal to the industrial
growth rate or the gross domestic product
growth rate . Symptoms of obsolescence may
appear in the technology . To keep going,
technological innovations in the production
process and products should be introduced .
The investors have to closely monitor the
events that take place in the maturity stage
of the industry .
Declining stage
? In this stage, demand for the particular product and
the earnings of the companies in the industry decline
. Now-a-days very few consumers demand black and
white T.V. Innovation of new products and changes
in consumer preferences lead to this stage . The
specific feature of the declining stage is that even in
the boom period, the growth of the industry would
be low and decline at a higher rate during the
recession . It is better to avoid investing in the shares
of the low growth industry even in the boom period .
Investment in the shares of these types of companies
leads to erosion of capital .
Factors to be considered :
? Apart from industry life cycle analysis, the
investor has to analyse some other factors
too. They are as listed below :
? Growth of the industry
? Nature of the product
? Nature of the competition
? Government policy
? Labour
? Research and development
Growth of the industry
? The historical performance of the industry in terms of growth
and profitability should be analysed. Industry wise growth is
published periodically by the Centre for Monitoring Indian
Economy . The past variability in return and growth in reaction
to macro economic factors provide an insight into the future .
? Even though history may not repeat in the exact manner,
looking into the past growth of the industry, the analyst can
predict the future. The information technology industry has
witnessed a tremendous growth in the past so also the scrip
prices of the IT industry. With the Y2K millennium bug creating
a huge business opportunity even beyond the year 2000, the
sector is expected to maintain its growth momentum .
Nature of the Product
? The products produced by the industries are demanded by the
consumers and other industries . If industrial goods like pig
iron, iron sheet and coils are produced, the demand for them
depends on the construction industry . Like wise, textile
machine tools industry produces tools for the textile industry
and the entire demand depends upon the health of the textile
industry. Several such examples can be cited . The investor has
to analyse the condition of related goods producing industry
and the end user industry to find out the demand for industrial
goods .
? In the case of consumer goods industry, the change in the
consumers’ preference, technological innovations and substitute
products affect the demand. A simple example is that the
demand for the ink pen is affected by the ball point pen with
the change in the consumer preference towards the easy usage
of pen.
Nature of the competition
? Nature of competition is an essential factor that determines the
demand for the particular product, its profitability and the price of the
concerned company shares . The supply may arise from indigenous
producer and multinationals. In the case of detergents, it is produced
by indigenous manufactures and distributed locally at a competitive
price . This poses a threat to the company made products. The
multinationals are also entering into the field with sophisticated
product process and better quality product.
? Now the companies’ ability to withstand the local as well as
multinational competition counts much . The competition would lead
to a decline in the price of the product . The investor before investing
in the share of a company, should analyse the market share of the
particular company’s product and should compare it with the top five
companies.
Government policy
? The government policies affect the very nerve of the
industry and the effects differ from industry to
industry. Tax subsidies and tax holidays are provided
for export oriented products . Government regulates
the size of the production and the pricing of certain
products. The sugar, fertilizer and pharmaceutical
industries are often affected by the inconsistent
government policies. Control and decontrol of sugar
price affect the profitability of the sugar industry .
? When selecting an industry, the government policy
regarding the particular industry should be carefully
evaluated .
Labour
? The analysis of labour scenario in a particular industry is of
great importance. The number of trade unions and their
operating mode have impact on the labour productivity and
modernization of the industry.Textile industry is known for its
militant trade unions . If the trade unions are strong and strikes
occur frequently, it would lead to fall in the production . In an
industry of high fixed cost , the stoppage of production may
lead to loss . When trade unions oppose the introduction of
automation, in the product market the company may stand to
lose with high cost of production. The unhealthy labour
relationship leads to loss of customers’ goodwill too .
? Skilled labour is needed for certain industries. In the case of
Indian labour market, even in computer technology or in any
other industry skilled and well-qualified labour is available at a
cheaper rate. This is one of the many reasons attracting the
multinationals to set up companies in India .
Research and development
? For any industry to survive the competition in
the national and international markets,
product and production process have to be
technically competitive. This depends on the
R & D in the particular company or industry .
Economies of scale and new market can be
obtained only through R& D . The percentage
of expenditure made on R & D should be
studied diligently before making an
investment .
Pollution standards
? Pollution standards are very high and
strict in the industrial sector. For some
industries it may be heavier than
others; for example, in leather,
chemical and pharmaceutical industries
the industrial effluents are more .
SWOT analysis :
? The above mentioned factors themselves would
become strength, weakness, opportunity and threat
(SWOT) for the industry . Hence , the investor should
carry out a SWOT analysis for the chosen industry .
Take for instance, increase in demand for the
industry’s product becomes its strength, presence of
numerous players in the market, i.e. competition
becomes the threat to a particular company in the
respective industry. The progress in the research
and development in that particular industry is an
opportunity and entry of multinationals in the
industry and cheap imports of the particular products
are threat to that industry . In this way the factors
have to be arranged and analysed .
COMPANY ANALYSIS
? In the company analysis the investor
assimilates the several bits of information
related to the company and evaluates the
present and future values of the stock . The
risk and return associated with the purchase
of the stock is analysed to take better
investment decisions. The valuation process
depends upon the investors’ ability to find
information from the relationship and inter-
relationship among the company related
variables .
The competitive edge of
the company
? Major industries in India are composed of hundreds
of individual companies. In the information
technology industry even though the number of
companies is large , few companies like Tata
InfoTech, Infosys etc., control the major market
share. The large companies are successful in meeting
the competition . Over the time they would have
proved their ability to withstand competition and to
have a sizeable share in the market . The
competitiveness of the company can be studied with
the help of
? Market Share
? Growth of annual sales
? Stability of annual sales
The Market Share
? The market share of the annual sales helps to
determine a company’s relative competitive
position within the industry .
? If the market share is high , the company
would be able to meet the competition
successfully .
? While analyzing the market share , the size of
the company also should be considered
because the smaller companies may find it
difficult to survive in the future . The leading
companies of today’s market will continue to
lead at least in the near future .
Growth of sales
? The company may be a leading company, but if the growth in
sales is comparatively lower than another company, it indicates
the possibility of the company losing the leadership. The rapid
growth in sales would keep the shareholder in a better position
than one with the stagnant growth rate . The company of large
size with inadequate growth in sales will not be preferred by the
investors. Growth in sales is usually followed by the growth in
profits. Investor generally prefers size and the growth in sales
because the larger size companies may be able to withstand
the business cycle rather than the company of smaller size .
? The growth in sales of the company is analysed both in rupee
terms and in physical terms. Physical term is very essential
because it shows the growth in real terms . The rupee term is
affected by the inflation. Companies with diversified sales are
compared in rupee terms and percentage of growth over time .
Stability of sales
? If a firm has stable sales revenue , other things being
remaining constant, will have more stable earnings.
Wide variation in sales leads to variations in capacity
utilization, financial planning and dividend .
Periodically all the financial newspapers provide
information about the market share of different
companies in an industry . The fall in the market
share indicates the declining trend of the company,
even if the sales are stable in absolute terms. Hence,
the stability of sales also should be compared with its
market share and the company, even if the sales are
stable in absolute terms .
Sales forecast
? The company may be in a superior
position commanding more sales both
in monetary terms and physical terms
but the investor should have an idea
whether it will continue in future or not.
For this purpose, forecast of sales has
to be done.
EARNINGS OF THE
COMPANY
? Sales alone do not increase the earnings but the costs and
expenses of the company also influence the earnings of the
company . Further, earnings do not always increase with the
increase in sales. The company’s sales might have increased
but its earnings per share may decline due to the rise in costs .
? The rate of change in earnings differs from the rate of change
of sales. Sales may increase by 10% in a company but earnings
per share may increase only by 5% . Sometimes, the volume of
sales may decline but the earnings may improve due to the rise
in the unit price of the article. Hence , the investor should not
depend only on the sales, but should analyse the earnings of
the company .
Capital Structure
? The equity holders’ return can be increased
manifold with the help of financial leverage,
i.e. using debt financing along with equity
financing. The effect of financial leverage is
measured by computing leverage ratios . The
debt ratio indicates the position of the long
term and short term debts in the company
finance . The debt may be in the form of
debentures and term loans from financial
institutions .
Management
? Good and capable management generates
profit to the investors. The management of
the firm should efficiently plan, organize and
control the activities of the company. The
basic objective of management is to attain
the stated objectives of company for the
good of the equity holders, the public and
the employees. If the objectives of the
company are achieved, investors will have a
profit .
FINANCIAL ANALYSIS :
? The best source of financial information about a
company is its own financial statements. This is a
primary source of information for evaluating the
investment prospects in the particular company’s
stock . Financial statement analysis is the study of a
company’s financial statement from various
viewpoints. The statement gives the historical and
current information about the company’s operations.
Historical financial statement helps to predict the
future .
? The current information aids to analyse
the present status of the company. The
two main statements used in the
analysis are:
? Balance sheet
? Profit and loss account
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