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Fundamental AnalysisFundamental Analysis

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Fundamental analysis

the practice of evaluating the information

contained in financial statements, industryreports, and economic factors to determine

the intrinsic value of a firm

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Intrinsic value

the “true” or economic, value of a firm

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Fundamentalist

analysts who utilize analysis in an attempt

to forecast future stock price movements

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Fundamental AnalysisFundamental Analysisversus Technical Analysisversus Technical Analysis

Technical analysis

examination of supply and demand for

securities to determine trends in pricemovements of stocks or financial

instruments

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Fundamental AnalysisFundamental Analysisversus Technical Analysisversus Technical Analysis

Technicians

the term given to analysts who examine

stocks and financial markets usingtechnical analysis

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Economic AnalysisEconomic Analysis

Forecasting business cycles

to determine when to expect changes in the

business cycle, or the direction in whichaggregate economic activity is moving

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Business cycle

the movement in aggregate economic

activity as measured by the gross domesticproduct (GDP)

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Expansion

increasing economic activity

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Contraction

decreasing economic activity

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Gross Domestic Product (GDP)

a measure of all of the goods and services

produced in the economy during aspecified time period

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Recession

two consecutive quarters of economic

contraction, or decline, in the GDP

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Business CyclesBusiness Cycles -- MonetaryMonetaryPolicy and Fiscal PolicyPolicy and Fiscal Policy

Monetary Policy

the means by which the RBI influences

economic conditions by managing thenation’s money supply

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Fiscal Policy

Government spending, which is primarily

supported by the government’s ability totax individuals and businesses

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Deficit spending

situation that occurs when the government

spends more than it collects in taxes

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Industry AnalysisIndustry Analysis

Defensive, or countercyclical, industries

industries that tend to perform best when

the economy is in a contraction orrecession, but are generally the poorest

performers in expanding economies

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Industry AnalysisIndustry Analysis

Industry life cycle

the various phases of an industry with

respect to its growth in sales and itscompetitive conditions

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Industry

Sales

Life-Cycle Stages

Introductory

Expansion

(Growth)

Mature

Industry Life CycleIndustry Life Cycle



Evaluating the FirmEvaluating the Firm’’ssFinancial PositionFinancial Position

Financial statement analysis

comparison to other similar firms

forecast direction for futurepredict earnings and dividends

risk evaluation

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Stock Valuation TechniquesStock Valuation Techniques

Valuation using P/E ratios

ratio computed by dividing the current

market price per share, P0, by the earningsper share, EPS0

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