Fundamental Analysis Essay

5641 Words Apr 6th, 2011 23 Pages
Fundamental Analysis
Fundamental analysis is the study of a company’s financial strength, based on historical data; sector and industry position; management; dividend history; capitalization; and potential for future growth. It is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices. The analysis attempts to find the intrinsic value of a security that helps investors to make decisions.
The fundamental information that is analyzed can include a company's financial reports, and non-financial information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy-wide changes, changes in government policies etc.
The various steps involved
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Taxation
The level of taxation in a country has a direct effect on the economy. If tax rates are low, people have more disposable income.
Government Policy
Government policy has a direct impact on the economy. A government that is perceived to be pro-industry will attract investment.

INDUSTRY ANALYSIS:
The importance of industry analysis is now dawning on the Indian investor as never before. It is very important to analyse the health of an industry because no company is operating in isolation. Analysis of an industry can be performed using the tools like:
Industry Life Cycle
The first step in industry is to determine the cycle it is in, or the stage of maturity of the industry. All industries evolve through the following stages:
1. Introduction
2. Growth
3. Maturity
4. Decline

Porter’s Five Forces Model
There are competitive forces and it is these competitive forces that determine the extent of the inflow of funds, the return on investment and the ability of companies to sustain these returns. Porter has identified five competitive forces that shape every industry and every market.
The five forces identified by Porter are:
1. Threat of new entrants
2. Threat fo substitutes
3. Baggaining power of the customers
4. Bargaining power of the suppliers
5. Rivalry among competitors

SWOT Analysis
SWOT analysis of an industry gives an investor the overall picture about the industry. A scan of the internal and…

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