Fundamental Analysis
Fundamental Analysis is about understanding the qualitative and quantitative factors that impact the earnings of a company. This analysis used to make an estimate of future earnings of the company.
Analysts follow two broad approaches to Fundamental Analysis - top down and bottom up analysis.
EIC framework
EIC framework is the commonly used approach used to understanding fundamental factors impacting the earnings of the company, scanning both the micro and macro data and other information.
EIC framework consists of
- Economic Factors
- Industry Factors
- Company Factors
Economic factors
Some of the indicators to be studied are
- GDP - Gross Domestic Product (including GDP growth)
- IIP - Index of Industrial Production
- Economic policy has an impact on the performance of most business. Direct and Indirect taxes, tax concessions and tax holidays impact business decisions.
- Fiscal Policy impacts government and private spending patterns and market borrowing.
- Monetary Policy impacts expectations for interest rates and inflation. External policies impact relative competitiveness of exports and imports and currency rates.
Tracking policy stance is critical part of economic analysis
Industry Factors
Some of these factors which are to be studied are
- Regulations
- Entry Barriers
- Cost
- Seasonal Factors
- Cyclicality
These are some of the examples of industry factors. There can be various other factors such as supply and demand, price elasticity, market segments, market shares and technology.
Analyst reports that speak of industry margins, industry PE and industry growth rates, consider these factors and their impact on other companies.
Company Factors
Analysis of company factors encompasses the following
- Ownership structure
- Capital Structure
- Capital Expenditure
- Product Segments
- Market Share and growth rates
- Competitive environments
- Management strategy and quality
- Financial History and prospects
- Market price statistics
- Risk factors to revenue and earnings
- Investment rationale
- Estimates for growth, margins and earnings
- Valuation of the shares
Apart from this detailed financial analysis for the company also forms a part of Fundamental Analysis.
Tools
In the current context there are various websites which offer specific information and tools to analyse the performance of a company
Some of these websites are
- screener.in
- trendlyne.com
- stockedge.com
Sentiments and Euphoria
In contrast to the study of fundamental analysis the stock markets - especially in short term tend to be noisy - and reactive - going up and down as fear and greed play amongst stock market participants.
However in the long term fundamental factors stand out.
This in essence is the "art of investing". easier said than done.
(disclaimer : this blog is for information purposes only)
