Wednesday, 8 January 2020

Unit 4: Fundamental Analysis

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Unit 4: Fundamental Analysis

A commonly advocated procedure for fundamental analysis involves a 3-step analysis: macro-economic analysis, industry analysis, and company analysis.

In a globalised business environment, the top-down analysis of the prospects of a firm must begin with the global economy.

There are two broad classes of macroeconomic policies, viz. demand side policies and supply side policies.

Fiscal and monetary policies are the two major tools of demand side economics.

Fiscal policy is concerned with the spending and tax initiatives of the government.

Monetary policy is concerned with money supply and interest rates.

The macro-economy is the overall economic environment in which all firms operate.

After conducting analysis of the economy and identifying the direction, it is likely to take in the short intermediate and long term, the analyst must look into various sectors of the economy in terms of various industries.

An industry is a homogenous group of companies.

That is, companies with the similar characteristics can be divided in to one industrial group.

There are many bases on which grouping of companies can be done.

The securities analyst will take into consideration the following factors into account in assessing the industry potential in making investments.

Post-sales and earnings performance, the government's attitude towards industry, labour conditions and competitive conditions are the various factors that are to be taken into account while conducting industry analysis.

For earning profits, investors apply a simple and common sense decision rule, that is, maximization.

A careful examination of the company quantitative and qualitative fundamentals is, therefore, very essential.

As Fischer and Jordan have aptly put it: “If the economic outlook suggests purchase at the time, the economic analysis of the industry analysis will aid the investor selecting their proper industry in which to invest.

Nonetheless, when to invest and in which industry is not enough.

It is also necessary to know which companies industries should be selected”.


Cyclical Industry: In this category of the industry, the firms included are those that move closely with the rate of industrial growth of the economy and fluctuate cyclically as the economy fluctuates.

Defensive Industry: It is a grouping that includes firms, which move steadily with the economy and less than the average decline of the economy in a cyclical downturn.

End Use and Regression Analysis: It is the process whereby the analyst or investor attempts to dial the factor that determines the demand for the output of the industry.

This is also known as end-use demand analysis.

Erratic Events: It refers to the unpredictable sales caused by unforeseen events like strikes, riots, Notes war scares, floods, and other disturbances.

Growth Industry: This is an industry that is expected to grow consistently and its growth may exceed the average growth of the economy.

Net Asset Value: Net asset value (NAV) is a term used to describe the value of an entity's assets less the value of its liabilities.

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