# Fundamental Analysis

## Fundamental analysis is about determining the intrinsic value of stock. This in turn depends on the stock's earning potential. Fundamental factors like the quality of management, the outlook of the industry, and the state and future of domestic and international economies all affect the earning potential of stock.Fundamental analysts look at the income statement, balance sheet and cash flow statements of a company to determine its intrinsic value. They also consider macroeconomic performance and domestic and international economies.

### Balance Sheet

It provides a snapshot of the company's financial health. It shows how much the company has (assets) as well as how much it owes to others (liabilities). Current assets include cash, inventories and account receivables. Assets include current assets, such as cash, inventories, and account receivables, and fixed assets, such as plant & equipments and property. There are two types of liabilities: current liabilities (i.e. There are two types of liabilities: current liabilities (i.e. obligations to be paid within one year) and long-term liabilities (i.e. obligations such as debt that must be paid in greater than one year).

## Cash Flow Statements

This shows the cash flow into and out to a company during a quarter or year. The cash flow can be divided into three parts: operations, financing, and investing.

## Income Statement

These are the most common ratios that provide insight into a company:

#### 1. Liquidity Analysis

Current Ratio = Current assets/Current liabilities
Quick Ratio = Current assets - Inventories/Current liabiliries

#### 2. Debt Analysis

Debt-to-equity ratio = Total debt/Total equity
Debt-to-asset ratio = Total Debt/Total assets
Analyzing the ratios above shows how dependent the company is on outside sources of financing.
Interest Coverage Ratio = EBIT/Annual Interest Expense
Cash flow coverage = Annual interest expense/Net cash flow

#### 3.Profitability Analysis

Net Profit Margin = Profit after tax/Sales
Return on equity = PAT/Shareholders equity
Return on assets = Total assets/PAT
Earning Per share (EPS) = PAT-Dividend/Outstanding shares
Payout Ratio = Net Income/Cash Dividend

#### 4. Efficiency Analysis

Inventory turnover = Average inventory/Cost of goods sold
Total Asset Turnover = Sales/Average total assets

#### 5. Value Ratios

Price-to-Earning Ratio = Market price per share/Earning per share
Dividend Yield = Annual dividends per share/Market price per share

#### Below is a breakdown of key ratio analysis, as described above.

1.Earning per Share (EPS): This denotes the earning amount for each outstanding share. It is the sum of net earnings divided by the total outstanding shares.

2.Price to Earning Ratio (P/E Rate):: This indicates whether stock prices are high or low relative to its earnings. A company with a high P/E ratio will be considered expensive, and vice versa. It is the market price of a share divided with its earning per share.
The P/E ratio is not the only indicator. Companies with high earnings growth tend to trade at higher P/E than those with a moderate growth rate. If the company is expected to grow quickly, or is growing rapidly, then current market prices might not seem as expensive.

3.Price to Book Ratio (P/B Rate): This price to book ratio allows stock owners to compare its market value with its book value. It is the current share price divided by book value per share.
You can also calculate it as the company's total market capitalization divided by the equity of all shareholders.

4.Net profit margin: This is the amount that a company retains in earnings from every rupee they earn. It is the sum of net profit after taxes and net sales for a given year.

5.Return On Equity (RoE:It measures how well a company utilizes reinvested earnings in order to generate additional cash. It is the net income divided by equity capital.

6.Return On Capital Employed (RoCE: This is the return that a company gets from its capital. It is the sum of net profit and capital employed.

7.Debt-to-Asset Ratio: This tells how much a company relies on debt to finance its assets.

8.Debt-to-Equity Ratio:It measures financial leverage of a company.

9.Operating cash flow margin: This is a way to determine if current cash flow can sustain the expenses.

10.Sales-to-Cash Flow Ratio: A measure of financial strength. This ratio measures sales relative to cash flow. A company that has a higher value will be more successful.

11. Profit after Tax (PAT) :This is calculated by subtracting expenses (cost of materials and manufacturing expenses) from income (net sales plus any other income) and allowing for taxation reserve and investment allowances.

12. Earnings before Interest, Tax, Amortization, and Depreciation (EBITDA) : is calculated by subtracting sales operations.

13. Discounted Cash Flow (or discounted cash flow): This method assumes that the company's current value is the future cash flow attributable by shareholders. It can be calculated as follows:
DCF = CF1/(1+r)1 + CF2/(1+r)2 + ...........CFn/(1+r)n

14. Dividend Discounted Model: This model focuses on the dividends that the company pays its shareholders. DDM and DCF are conceptually the same. DDM focuses only on dividend payments, while DCF focuses more on cash that can go to shareholders after all debt repayments and expenses have been paid.

Fundamental analysis involves analysing the economy, industry, and company. It includes past and expected earnings, government policies and regulations, as well as data on labour conditions, attitudes of international and domestic investors, and information about industry. These factors can have an impact on market movements.

Because macro data is so important in today's globalized economy, it's crucial to predict the course and development of the global and domestic economies. Economic activities have a direct impact on corporate profits and investor expectations.

Stable government, economic growth, stable budget, favourable demographics and social harmony can all fuel optimism among investors, which in turn leads to a boom in the market. Unfavorable events, such as economic slowdown and unstable government, unfavourable tax deficit, trade deficits, geo-political tensions and social tensions, falling production, high incomes, low spendings, etc., can lead to market decline. Market sentiment can be depressed, leading to recession and negative equity market performance. All of these factors can be assessed at a broader level by assessing socio-economic as well as political factors that help us to gauge the health and stability of economies.

Although socio-political and political changes can be somewhat static and change only after a certain time period, economic changes are dynamic. They are constantly changing.

These are the most important macroeconomic data that can be used to assess or appraise the economy's health.

Gross Domestic Product: This is a measure of the money value of products and services that are produced in a country's territory by residents and non-residents.

Balance Of Payments (BoP),It measures foreign currency flow and is composed of - Current Account, and Capital Account.

Current account:It includes trade in goods or services, investment income, and transfer.

Capital Account This account includes portfolio flows. This includes direct investments, such as buying equities or bonds.

Budget deficit: This is a difference between total income and expenses. Budget deficits are caused by higher spending, while budget surpluses are caused by higher income. A strong economy is one with a surplus budget, while a weak economy is one with a deficit budget.

Fiscal deficit:It's the difference between total income, i.e. Total income, including total debt, and revenue receipts.

Interest Rate/Credit policy: RBI assesses the prevailing economic factors domestically and globally and decides on a credit policy that will ensure stability and growth. Under different economic conditions, Central Bank pursues different credit policy. Central Bank will adopt a tighter credit policy when the economy is experiencing high growth. In contrast, if it is worried about hyper inflation occurring, it may tighten credit policy. However, if economy is experiencing slow growth and low inflation it may ease credit policy to boost economy.

Employment: Employment is a key indicator of the economy's health. Only a growing economy can create employment opportunities. A declining economy will lead to rising unemployment.

ISM Manufacturing Growing manufacturing activities indicate growing demands at the same time as increasing employment.

Index for Industrial Production:It is a broad measure of economic activity in various manufacturing sectors, including industry, mining, and electricity.

ISM services:Sectoral contributions to GDP are constantly changing in a growing economy. The rising contribution of the service sector to GDP not only indicates increased employment but also growth in manufacturing and industry.

Inflation: There are two main components to inflation. They are demand-pull and cost push inflation. Industry welcomes demand-pull inflation, while cost push inflation causes slowdown in the economy. CPI, PPI, and WPI are the broadest measures of inflation. Credit policy is greatly affected by inflation.

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