ECONOMIC ANALYSIS

Submitted by:

Mrs. Kajal Puri

Asstt. Prof. in PG Department of Commerce and Management

FUNDAMENTAL ANALYSIS

• Fundamental analysis is the method of finding out the future price of a stock which an investor wishes to buy.
• It relates to the examination of the intrinsic worth of a company to find out whether the current market price is fair or not.

OBJECTIVES

1. To identify the under-priced and over-priced securities in the market place.
2. To make long term decisions and not to make speculative profits.
3. To beat the market.

INTRINSIC VALUE

• It is the present value of all future cash payments to be made on the security like dividends, interest, repayment of principal amount and other proceeds.

According to Grahamand Dodd:

“ Intrinsic value of a security is that value which is justified by the factors e.g. assets, earnings, dividends, definite prospects including the factor of management of the company.

APPROACHES

Economic Analysis

Industry Analysis

Company Analysis

Company Analysis

Industry Analysis

Economic Analysis

Top-Down

Bottom-Up

ECONOMIC ANALYSIS

• Investors are concerned with the forces in the company which affect the performance of organisation in which they want to invest.
• A study of economic forces gives an idea bout future corporate earnings and payment of dividends.

• ECONOMIC ANALYSIS
• Economic Trends:
• GDP, Production, BOP etc.
• Economic Policies:
• Fiscal, Monetary, Industrial, EXIM policy
• Relationship
• b/w trends and policies and their stability
• World Trends:
• and impacts on India Economy

ECONOMIC FORCES

• Population
• Performance of Agriculture
• Technological developments
• Natural resources
• Role of Government
• Business Conditions
• Political Stability
• Balance of Trade

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ECONOMIC TOOLS

• GROWTH RATES OF NATIONAL INCOME:
• Growth rates are the indicators of prosperity
• Some measures Include GNP, GDP and NNP.
• 4 stages of Business Cycle are: Depression, Recovery, Boom and Recession

• MONETARY POLICY OF CENTRAL BANK:
• It decides the amount of money in circulation.
• Deals with the credit limits of banks and the purchasing power of consumers.

• INFLATION LEVELS:
• Inflation is the trend of rising prices.
• Measured using Wholesale Price Index or Retail Price Index.

• INTEREST RATES:
• Interest rate is the cost of credit. It is the price paid by individuals or organizations when they borrow.
• Determined by Monetary Policy and trends in Money Supply

• FISCAL POLICY OF THE GOVERNMENT:
• This policy involves the collection and spending of revenue of the government.
• Expenditure includes public works and subsidies and Revenues are taxes and profits from PSUs.

• FOREIGN EXCHANGE RATES:
• The purchasing power parity approach implies that exchange rates should adjust to compensate for price differentials around the world.

• INFRASTRUCTURE:
• Availability of infrastructural facilities like power, transportation, communication channels, conditions of roads etc. affect the economy

• CONSUMER FEELINGS AND SENTIMENTS:
• Generally expressed in terms of future expenditure planned and the feelings about future economies.

• EXPECTATIONS
• LONG TERM GROWTH

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• SHORT TERM GROWTH

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ECONOMIC FORECASTING

• A technique to find out the future return of an investment.
• Economic forecasts may be short term, intermediate or long term.
• Successful investments depend upon forecasting, so the investor must be knowledgeable enough to understand and evaluate the economic trends.

SURVEYS

• Survey of the business that the investor is interested in.

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• Survey
• Personal Contact

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• Questionnaire Method

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BAROMETRIC METHOD

• This methods attempts to forecast the general economic indicators of the future relating to business depressions and business prosperity.

• LEAD INDICATORS:

Money Supply

Manufacturing Utilization

• COINCIDENT INDICATORS:

Personal Income

Industrial Production

• LAGGING INDICATORS:

Loans Outstanding

Ratio of Stock to sale

DIFFUSION INDICES

• A diffusion index is the measure of how widespread a phenomenon is.
• It combines the different indicators into one total measure.

ECONOMIC MODEL BUILDING

• This method aims to take an independent and a dependent variable and then to specify in a mathematical manner.

OPPORTUNISTIC MODEL BUILDING

• Also known as GNP Model building
• Makes use of national accounting data.

• Estimation of Demand
• Components of GNP
• Summation of GNP

• Economic Analysis is the most important segment of Fundamental analysis.
• The conditions prevailing in the economy have outstanding effects on the industries and the specific companies investors are interested in.

INDUSTRIAL ANALYSIS

• Industry analysis is defined as an assessment tool designed to offer business entity a comprehensive idea about the complex nature of a specific industry.
• It includes reviewing the market, political, and economic factors that have a direct impact on the development of an industry. Meaning of industry analysis.

FEATURES OF INDUSTRIAL ANALYSIS

• Economies of scale.
• Brand loyalty.
• Government Regulation.
• Customer Switching Costs.
• Absolute Cost Advantage.
• Ease in distribution.
• Strong Capital base.

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COMPANY ANALYSIS

• Company analysis is a process carried out by investors to evaluate securities, collecting info related to the company's profile, products and services as well as profitability.
• It is essential for a company analysis to be comprehensive to obtain strategic insight. Being a thorough evaluation of an organization, the company analysis provides insight to rationalize processes and make revenue potentials better.

FEATURES OF COMPANY ANALYSIS

• Identify company and industry's economic characteristic.
• Identify and know about the products and/or services.
• Understanding the risks and concerns about the company.
• Analyzing the Financial Statements:
• Qualitative Factors.
• Quantitative Factors.

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SWOT ANALYSIS