ASSIGNMENT ON

“FUNDAMENTAL ANALYSIS OF COMPANY”

SUBMITTED TO :
:- Mr Priya Ranjan Pradhan

SUBMITTED BY :
NAME :- Amit Ratha
Regd No :- 2206102009
MBA, 2nd Year
 FUNDAMENTAL ANALYSIS OF COMPANY
Fundamental analysis of a company seeks to make a studied guess on the cash
flows of a company based on how the economy, industry and the company will
perform. Once this is done, the investor gets an idea of what the company/stock
is actually worth. Technical analysis, on the other hand, is very different.
Fundamental analysis is a method of evaluating a company's intrinsic value by
examining its financial statements, management, competitive advantages, and
overall business health.

Here are key aspects of fundamental analysis for assessing a company:

Financial Statements:
• Balance Sheet: Review assets, liabilities, and equity to assess the
company's financial position.

• Income Statement:-

Analyze revenues, expenses, and profits to understand the company's

earning potential.

• Cash Flow Statement:

Evaluate the company's cash generation and usage.

• Revenue and Earnings Growth:

 Assess the historical and projected revenue and earnings growth.
Consistent growth may indicate a healthy and sustainable business.

• Profit Margins:

Analyze gross, operating, and net profit margins to understand how

efficiently the company is converting revenue into profit.

• Competitive Positioning:
Examine the company's competitive advantages, market share, and
industry positioning. Consider factors like brand strength, technology, or
cost advantages.

• Management Quality:
Evaluate the competence and track record of the management team. Look
for transparency, effective communication, and a history of prudent
decision-making.

• Dividends and Share Buybacks:

Assess the company's dividend history and policies. Companies that pay
consistent dividends or engage in share buybacks may indicate financial
stability.

• Debt Levels and Solvency:

Examine the company's debt levels and its ability to meet its financial
obligations. A manageable level of debt is generally favorable.

Cash Reserves:
Evaluate the company's cash reserves. Sufficient liquidity provides a cushion for
economic downturns and supports investment in growth opportunities.

• Return on Equity (ROE) and Return on Assets (ROA):

ROE measures the return generated on shareholders' equity, while

ROA assesses the efficiency of asset utilization. Higher values are
generally favorable.

• Valuation Ratios:
 Use metrics like price-to-earnings (P/E), price-to-sales (P/S), and price-to-
book (P/B) ratios to assess the company's valuation relative to its peers and
historical performance.

• Economic and Industry Trends:

Consider broader economic and industry trends that may impact the
company's performance. Changes in market conditions can affect various
industries differently.

• Regulatory Environment:

Be aware of the regulatory environment in which the company operates.

Changes in regulations can impact business operations and profitability.

• Risks and Challenges:

Identify and assess potential risks and challenges the company may face,
both internally and externally. This includes industry-specific risks,
competitive pressures, and geopolitical factors.

• Corporate Governance:

Evaluate the company's corporate governance practices, including the

board structure, executive compensation, and adherence to ethical
standards.

• Sustainability Practices:
Consider the company's commitment to environmental, social, and
governance (ESG) factors. Sustainable business practices are increasingly
important to investors.

• It's important to note that fundamental analysis is a comprehensive process

that involves considering multiple factors. Analysts often use a
combination of quantitative and qualitative data to form a holistic view of
a company's financial health and potential for future growth. Investors
should also be aware of the limitations of fundamental analysis and
consider other factors such as market conditions and investor sentiments.

• Earnings Per Share (EPS):

Measures the company's profitability on a per-share basis. Calculated as
net income divided by the number of outstanding shares.

• Revenue and Sales Growth:

 Analyzing trends in revenue and sales growth over time indicates the
company's ability to generate income.

• Profit Margins & Gross Margin:

Calculated as (Revenue - Cost of Goods Sold) / Revenue, indicating the

percentage of revenue retained after direct production costs.

• Operating Margin:
Measures operating efficiency calculated as (Operating Income /
Revenue).

• Net Profit Margin:

Represents the percentage of revenue retained as net profit, calculated as
(Net Income / Revenue).

• Dividend Yield and Dividend History:

Dividend Yield: Indicates the annual dividend payment as a percentage of

the stock's current market price.

• Dividend History:
Examining the consistency and growth of dividend payments over time.

• Book Value:

The book value per share represents the company's equity on a per-share
basis, calculated as (Total Equity - Preferred Equity) / Number of Shares.

• Competitive Positioning and Industry Analysis:

Assessing the company's competitive position within its industry and
understanding industry trends and dynamics.

• Management and Corporate Governance:

Evaluating the competence and integrity of the company's management
team. This includes reviewing executive leadership, corporate governance
practices, and the company's strategic direction.

• Economic and Market Conditions:

 Considering broader economic and market factors that may impact the
company's performance, such as interest rates, inflation, and market trends.

• SWOT Analysis:

Conducting a Strengths, Weaknesses, Opportunities, and Threats (SWOT)

analysis to identify internal and external factors influencing the company.

• Future Growth Prospects:

Examining the company's growth strategies, innovation initiatives, and
market expansion plans to assess its future prospects.

Fundamental analysis requires a comprehensive examination of these factors to

gain a holistic understanding of a company's financial health and investment
potential. Investors often use fundamental analysis in conjunction with other
methods, such as technical analysis and market trends, to make well-informed
investment decisions.
HOW DO YOU CALCULATE FUNDAMENTAL ANALYSIS OF THE
COMPANY
Fundamental analysis, as explained earlier, tells you the true value of a stock.

This intrinsic/fair value of a company/stock is the present value of all expected

future cash inflows (or earnings) from that company/stock. This is what the
process of fundamental analysis achieves.

The fair value represents the potential price of a company. If the market value is
the same or lower than fair value, then you should buy the stock and wait. Use a
fundamental report to get the fair value.

WHAT ARE THE COMPONENTS OF FUNDAMENTAL ANALYSIS

A few elements of quantitative fundamental analysis are EPS, P/E ratio, P/B ratio,
Debt/Equity ratio and RoE ratio. These are among the few fundamental indicators
that help you understand deeper about the company/stock.

• Earnings Per Share is called EPS. This is a measure of profitability.

• EPS = Net Profit of The Company divided Number of Outstanding Shares

 • Price to Earnings Ratio is called P/E ratio. This is a measure of valuation.

• P/E = Price of Stock divided Earnings Per Share

• Price to Book ratio is called P/B ratio. This is a measure of valuation for
banking and financial companies.

• P/B = Price of Stock divided Book Value of Stock/Company

• Debt to Equity ratio is called D/E. This is a measure of indebtedness.

• Debt to Equity Ratio = Total Liabilities of the company divided Total

shareholder's equity.

• Return on Equity Ratio is called RoE. It is a profit measure that can be

generated with the money that has been invested by its shareholders.

• Return on equity = Net Income of company divided by Shareholder’s

equity

Technical Analysis vs. Fundamental Analysis

• Fundamental analysis and technical analysis, the major schools of
thought when it comes to approaching the markets, are at opposite ends of
the spectrum. Both methods are used for researching and forecasting future
trends in stock prices, and like any investment strategy or philosophy, both
have their advocates and adversaries.
• Fundamental analysis is a method of evaluating securities by attempting
to measure the intrinsic value of a stock. Fundamental analysts’ study
everything from the overall economy and industry conditions to the
financial condition and management of
companies. Earnings, expenses, assets, and liabilities are all important
characteristics to fundamental analysts.
• Technical analysis differs from fundamental analysis in that the stock's
price and volume are the only inputs. The core assumption is that all known
fundamentals are factored into price; thus, there is no need to pay close
attention to them. Technical analysts do not attempt to measure a security's
intrinsic value, but instead, use stock charts to identify patterns and trends
that suggest what a stock will do in the future.

Limitations of fundamental Analysis :

While fundamental analysis is a valuable tool for evaluating the intrinsic value of
a company, it has certain limitations that investors should be aware of. Here are
some key limitations:
Time-Consuming:
Fundamental analysis can be a time-consuming process, requiring in-depth
research and analysis of financial statements, industry trends, and company-
specific factors. For investors looking for quick trading opportunities, this may
not be the most practical approach.
Dependence on Historical Data:

Fundamental analysis relies heavily on historical financial data. However, past

performance does not guarantee future results, and market conditions can change
rapidly. Economic and industry trends may evolve, making historical data less
reliable for predicting future performance.
Subjectivity in Financial Statements:
Financial statements are prepared based on accounting principles, and companies
have some discretion in how they apply these principles. This subjectivity can
introduce a level of uncertainty and make it challenging to compare financial
statements across companies accurately.
Incomplete Information:

Companies may not disclose all relevant information in their financial statements.
Certain critical factors, such as pending legal issues, undisclosed liabilities, or
upcoming technological disruptions, may not be fully reflected in financial
reports.
Market Sentiment and Investor Behaviour:

Fundamental analysis assumes that market prices will eventually reflect a

company's intrinsic value. However, market prices can be influenced by factors
such as investor sentiment, speculation, and short-term market trends, which may
not necessarily align with a company's fundamentals.