COLLEGE OF BUSINESS AND ECONOMICS

Department of Management
Msc. In International Business
(Strategic Investment Management)
Investment Strategy & portfolio Management (MGMT-6212)
Group assignment on Fundamental Analysis

Group Members ID.Number

1.Aschalew Lemma GSE/9216/14
2. Geremew Adimasu GSE/8278/14
3.Dessalegn Munach GSE/6708/14
4.Hirut Geday GSE/6883/14
5.Haftamu Hiluf GSE/8184/14
6.Esmael Yaregal GSE/9564/14
7.Hariu Reshade GSE/3852/14
8.Liya Berihun GSE/1725/14
Submitted to: Tenkir S. (PhD)
• Jan, 03, 2023
CHAPTER THREE
FUNDAMENTAL ANALYSIS
 Fundamental Analysis

3.1 Economic/Market Analysis

3.2 Industry Analysis
3.3 Company Analysis
 Fundamental Analysis..

Definition:
Fundamental analysis is the analysis of market performance by
analyzing a companies (or security’s) inherent and future prospect
and valuation.
Analysts refer to data such as annual reports customer feedback,
ratings on financial health, information about the overall industry
the company belongs to company communication, and share holders
concerns to determine what the intrinsic price of company’s stock is.
Cont’d
• Fundamental Analysis is to evaluate a lot of information about the past
performance and the expected future performance of companies,
industries and the economies as a whole before taking the investment
decision, such evaluation and analysis is called fundamental analysis.
Cont’d

• Fundamental analysis (FA) measures a security's intrinsic value by

examining related economic and financial factors.
Intrinsic value is the value of an investment based on the issuing company's
financial situation and current market and economic conditions.
When intrinsic value is greater than market price that means stock is
undervalued & investors will look at it as an opportunity to buy that stock.
But, when market price is greater than intrinsic value that means the stock
is overvalued & it is not the good time to invest rather sell it.
• Fundamental analysis is really logical and systematic approach to estimating
the future dividends and share price.
Cont’d
• Fundamental analysis is an investing method that helps identify
potential opportunities by assessing how financial and economic factors
might affect a security’s future value.
fundamental analysis is based on present and future cash flow, earnings
results, competitive factors, and macroeconomic outlook.
• Fundamental analysts study anything that can affect the security's
value, from macroeconomic factors such as the state of the economy
and industry conditions to microeconomic factors like the effectiveness
of the company's management.
Fundamental analysis uses three sets of data:
1.Historical data: to check how things were in the past
2.Publicly known information: about the company, including
announcements made by the management and what others say about
the company
3.Information that is not known publicly but is useful, i.e., how the
leadership handles crises, situations, etc.
Types of Fundamental Analysis
• There are two main types of fundamental analysis –
1.Qualitative: a study that involves brand value, management decisions,
the financial performance of the company over a given period, and
other similar factors.
2.Quantitative: an analysis that is purely number-based and considers
the company’s financial statements and concludes the share price from
the observations.
There are possible objectives in fundamental Analysis

1.To conduct a company stock valuation and predict its probable price
evolution.
2.To make a projection on its business, performance.
3.To evaluate its management and make internal business decisions.
4.To calculate its risk.

The main objective of fundamental analysis is to know the intrinsic

value of the security.
Approach in Fundamental Analysis
Two Approaches in Fundamental Analysis;
Top-Down Approach
Bottom-up Approach
Top-Down Approach
In this approach an analyst investigates both national and international
economic indicators like energy price, GDP growth rate, inflation and interest
rates.
Bottom- up Approaches
In this method an analysts starts the search with specific businesses,
irrespective of the industry or region.
Levels of Fundamental Analysis
Economic /Market Analysis
Industry Analysis
Company Analysis
3.1 Economic/Market Analysis
 Economic analysis relates to the analysis of the economy/macro
economic analysis.
 This related to study about the economy in details and analysis
whether economic conditions are favorable for the companies to prosper
or not.
 Analysts always try to find out whether the economic development is
conducive for the growth of the company.
 An investor in a security market can give prediction about the future
of share price of a company on the basis of the study of forces affecting
economic environment of the country.
CONT…

For the Economic Analysis, the macro economic

factors are studied to know about the condition of an
economy or performance of the security market of any
country.
Major Tools Of Economic Analysis
Gross Domestic Product
Fiscal Policy
Monetary Policy
Business Cycle
Economic& Political stability
Employment
Global Economy(import/ export, exchange rate)
GDP(Economic Performance)

 GDP is the measure of the value of goods and services produced within
the domestic boundary of a country.
 The GDP is one the most important indicators used for the measurement
of the strength of a country's economy.
 We can understand it in this way also that increase in GDP means
increase in the production of goods and services which in turn will result
increase in sales of a company and thus increase in profits of the
company. This increase in profit will lead to more returns to equity share
holders and thus it affects share prices.
 Fiscal Policy
Government Expenditure(Demand)
Tax and debt policy
Monetary Policy
Interest rate
Inflation rate
Monetary supply
Business Cycle
Expansion, peak, contraction &thought
SAVING RATE

Changes in individual saving rate effect the flow of funds in to

investment.
Increase in interest rate will result in an increase in demand for equity
shares.
Thus, share market will be bullish as it has an impact of increase in
share price.
Decrease in interest rate (lower saving rate) means lesser disposal of
funds by household into equity market which will reduce the demand
for equity.
Exchange rate

Exchange rate is also another factor that affects the trade or net
exports between the countries.
This in turn will also affect the trade and business of the companies
{having global presence} that is related to any foreign market whether
for buying raw material, selling goods or in any other way.
The effect on such companies activities or business will affect that
companies profitability and enhance the prices of shares. Thus exchange
rate affects share prices.
 3.2 Industry Analysis
Industry analysis is useful in a number of investment applications that make
use of fundamental analysis. It uses the following:
• Understanding a company's business and business environment
• Identifying active equity investment opportunities
• Portfolio performance attribution
Industry classification attempts to place companies into groups on the basis
of commonalities. Three major approaches to industry classification are:
• Products and/or services supplied
• Business-cycle sensitivities
• Statistical similarities
Objective of industry Analysis
Understand how industry structure drives competition which
determines the industries level of profits.
Assess industry attractiveness.
Use evidence of structural change to forecast future profitability.
Identify key success factors.
Types of industry analysis

There are three common types of industry analysis (to create profitable
competitive strategy )
1.Porter’s Five Forces Analysis (Competitive Forces Model)
2.Broad Factors Analysis (PEST Analysis)
3.SWOT Analysis
 1. Porter’s Five Forces Analysis (Competitive Forces
Model)
This is one of the most famous models developed for industry analysis. It was
introduced by Michael Porter in his book “Competitive Strategy: Techniques
for Analyzing Industries and Competitors” in 1980.
According to Porter, there are five forces that help in doing accurate industry
analysis. They are as follows:
a. The level of competition in the industry/Rivalry among existing firms
b. Threat of substitutes of products or services
c. Bargaining power of buyers
d. Bargaining power of suppliers
e. Barriers to entry
 2. Broad Factors Analysis (PEST Analysis)
It is Commonly called the PEST Analysis, this type of industry analysis
evaluates the impact of Political, Economic, Social and Technological
factors on an industry. PEST analysis helps analyze the macro
environment in which the industry operates.
a. Political factors: include government policies and regulations relating
to taxes, tariffs, environment, labor laws, trade, ease of doing business,
and overall political stability.
b. Economic factors: include inflation, interest rates, exchange rates,
GDP growth rates, capital market conditions, etc.
Cont’d
c) Social factors: are the trends in society, like demographics,
population growth, and behavior in terms of health and fashion, etc.
d) Technological factors: are the developments that change the way a
company operates and the way of living life.
3. SWOT analysis

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

SWOT analysis helps summarize various industry forces and determine
their impact on the company.
Business Cycle and industries characteristics:
Cyclical industry - performance is positively related to economic activity
Example, Auto companies.
Defensive industry - performance is insensitive to economic activity
Example , food growth industries.
Growth industry - characterized by rapid growth in sales, independent of the
business cycle. Example, Technology, Artificial Intelligent, Fast moving consumer
goods
 Countercyclical industries- moves opposite to the prevailing economic trend
Example, pharmatical,education service,public service, insurance.
 Interest sensitive industries - are practically sensitive to expectations about changes
in the interest rates ( like, financial institutions).
Industry Life Cycle:
a) Start-up stage:
characterized by extremely rapid growth.
 it is difficult to predict which firm will emerge as
industry leaders.
Some firms will turn out to be wildly successful
and others will fail altogether.
there is considerable risk in selecting one
particular firm within the industry.
Cont’d
b) Consolidation Stage:
 characterized by growth that is less rapid but still
faster than that of the general economy.
• Industry leaders begin to emerge.
• The survivors from the start stage are more stable,
and market share is easier to predict.
• The performance of the surviving firms will more
closely truck the performance of the overall industry.
• Growth (building market share and economies of
scale)
Cont’d
c)Maturity stage:
characterized by growth no faster than the general economy.
•Firms at this stage sometimes are characterized by having reasonably stable
cash flow but offering little opportunity for profitable expansion.
•Mature growth (maximum profitability)
•Stabilization (increase in unit sales may be achieved by decreasing prices)
Cont’d
d) Minimal or negative growth stage:
 The industry grows less rapidly than the rest of the economy or
actually shrinks.
 This could be due to obsolescence of the product, competition from
new products or competition from new low-cost suppliers.
• (demand shifts lead to declining sales and profitability - losses)
Importance of industry analysis
Industry analysis helps an investor understand the market factors that
tend to impact the company in question. These factors can be the
industry’s demand-supply forces, demographics, competitiveness,
entry and exit costs, and so on.
Industrial analysis also helps understand if the industry has reached
the saturation point or if there is growth potential. If there’s no growth
in the industry, the company can also become saturated unless it
ventures into newer sub-industries.
3.3 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 also referred as
fundamental analysis.’ A company analysis incorporates basic info
about the company, like the mission statement and apparition
and the goals and values.
 During the process of company analysis, an investor also
considers the company’s history, focusing on events which
have contributed in shaping the company.
Factors to consider In Company Analysis
1 Financial Factor/Quantitative
2.Non Financial Factor/qualitative
Financial Factor: Ratio analysis, balance sheet analysis ,cash flow analysis,
capital structure analysis, comparative financial statements, common size
financial statements, fund flow analysis, trend percentage.
Non Financial Factor: Nature of business, company’s market share,
efficiency of management, raw material availability, government policy,
competitive strength of a company, technology used, production
diversification, research and development, growth cycle of a company.
Cont’d
a company analysis looks into the goods and services proffered by the
company. If the company is involved in manufacturing activities, the
analysis studies the products produced by the company and also analyzes
the demand and quality of these products.
In company analysis analysts consider the basic financial variables for the
estimation of the intrinsic value of the company. These variables contain
sales, profit margin, tax rate, depreciation, asset utilization, sources of
financing and other factors. The conduction of further analysis of company
include the competitive position of the company in the industry,
technological changes, management, labor relations, foreign competition
and so on.
Steps of Company Analysis
Measuring Earnings
Forecasting earnings
Applied Valuations
Measurement of Earnings is based on two types of information:
1.Internal information consists of data and events made public by firms
concerning their operations.
2 external sources of information are those generated independently
outside a company, they provide supplements to internal sources.
 REFERENCE
 Ultimate Investor. Capstone. Levy, Haim ,Thierry Post (2005). Investments. FT / Prentice Hall. Nicolaou, Michael A. (2000)

 The Theory and Practice of Security Analysis. MacMillan Business. Nofsinger, John R. (2008).

 Portfolio Construction, Management and Protection. Wilmott, Paul (2009).

 https://www.cooperativecollegejsr.ac.in/studymaterial/mcom/sapm.pptx
 https://www.cfachicago.org/wp-content/uploads/2019/10/INTRODUCTION-TO-COMPANY-ANALYSIS.pdf
 https://www.tickertape.in/blog/what-is-industry-analysis-and-how-to-do-it/
 https://www.arsdcollege.ac.in/wp-content/uploads/2020/03/ISM-CHAPTER-%E2%80%93-5.pptx
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