MODULE III:-

FUNDAMENTAL
ANALYSIS TYBAF D
Name Roll Number Topics Contact Details
Prachi Shah 41 Economic Analysis (meaning & 79001 51043
key variable)
Raj Shah 42 Economic Analysis (Forecasting) 9930924271

Resha Shah 43 Industry Analysis (Industry Life 7021037478

cycle)
Rushabh Shah 44 Company Analysis (Solvency and 9372383461
profitability ratio)

Sapan Shah 45 Company analysis (Liquidity Ratio) 9082987005

Saumya Shah 46 Company Analysis (Coverage 7977328867

Ratio)
Shrenik Shah 47 Company Analysis (Ratio useful to 9819989843
equity shareholders)

Suchi Shah 48 Leverages(Meaning and Operating 9867119173

Leverage)
Vaibhavi Shah 49 Leverages(Financial and 9699251130
Combined Leverage)
Vidhi Shah 50 Assessment of Risk 8291476256
 ECONOMIC ANALYSIS
Meaning:-
❑ Economic analysis refers to evaluating costs and benefits to check the viability of a project, investment opportunity, event, or any other
matter.
❑ The analysis of the state of the economy at macro level incorporates how the economy performed in the past, how it is performing in
present, and how it is expected to perform in the future.
Key variables:-
❑ Growth rate of GDP
❑ Industrial production
❑ Savings and investments
❑ Inflation
❑ Money supply
❑ Unemployment
❑ Interest rates
❑ Institutional lending
 FORECASTING
FORECASTING:-
• Forecasting carry out economic analysis, it is essential to forecast economic performance. Forecasting can be done for
short term, intermediate term or long term depending upon time. Short term refers to up-to three years. Intermediate
period refers to three to five years, long term refers to more than five years.
• Barometric or indicator approach: In this approach various indicators are studied to find out how the economy will
perform in future. These indicators are classified into the following. Leading Indicators, Roughly coincidental
indicators, Lagging indicators
• Money supply and stock price,- Money supply in the economy plays a crucial role in the investment decision making.
The rate changes in money supply in the economy affects the GNP, corporate profits, interest rates and stock prices.
Increase in money supply increases inflation. Stock price increases during inflationary times.
• Econometric model building- Econometrics is a discipline where application of mathematics and statistical
techniques is made to economics theory. The analyst is able to forecast a variable more precisely.
• Opportunist model building or GNP model building or sectional analysis is frequently used in practice.
 INDUSTRY ANALYSIS
Industrial life cycle-
• 1. Embryonic stage/ Pioneering stage
• 2. Rapid Growth stage
• 3. Shakeout stage
• 4. Maturity/ Stabilization stage
• 5. Decline stage
 SOLVENCY RATIO & PROFITABILITY
RATIO
Profitability Ratio: These ratios show how well a company can
Solvency Ratio: Solvency ratio compare a company’s debt generate profits from its operations. These ratios are also called
level with its assets, equity, and earning to evaluate whether efficiency ratios as they measure the efficiency of the firms activities
a company can stay afloat in the long term by paying its long and its ability to generate profits.
term debt and interest on the debt. E.g. of solvency ratio
a) PROFIT IN RELATION TO SALES:
include current ratio , liquid ratio , proprietory ratio and debt
equity ratio. i) Gross Profit Margin Ratio : Gross profit / Net sales X 100

i) Proprietory Ratio= Proprietors Fund / Total assets ii) Operating Profit to Sales Ratio : Operating profit / net sales X 100
iii ) Net Profit Margin Ratio : Net profit / Net sales X 100B)
ii) Debt-Equity Ratio : Debt / Equity
b) PROFIT IN RELATION TO ASSETS
i) Return on investment: Profit / Capital employed X 100
ii ) Return on Equity: Net profit after tax / Proprietory Equity X 100
iii ) Asset Turnover Ratio : Net sales / Total assets
iv) Inventory Turnover ratio : cost of goods sold / Average stock
 LIQUIDITY RATIO
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.
1. The primary step is to determine the type of analysis which would work best for your company.
2. The next step involves implementing the selected method for conducting the financial analysis.
3. The final step involves reviewing the results. The weaknesses are then attempted to be corrected.
Liquidity ratio = Current asset- Inventory /Current liability.
• A liquidity ratio is a type of financial ratio used to determine a company’s ability to pay its short-term
debt obligations. The metric helps determine if a company can use its current, or liquid, assets to cover
its current liabilities.
 COVERAGE RATIOS
• A coverage ratio, broadly, is a metric intended to measure a company's ability to
service its debt and meet its financial obligations, such as interest payments or
dividends. The higher the coverage ratio, the easier it should be to make interest
payments on its debt or pay dividends. The trend of coverage ratios over time is also
studied by analysts and investors to ascertain the change in a company's financial
position. A coverage ratio, broadly, is a measure of a company's ability to service its
debt and meet its financial obligations. The higher the coverage ratio, the easier it
should be to make interest payments on its debt or pay dividends. Coverage ratios
come in several forms and can be used to help identify companies in a potentially
troubled financial situation. Common coverage ratios include the interest coverage
ratio, debt service coverage ratio, and asset coverage ratio.
 RATIOS USEFUL TO EQUITY
SHAREHOLDER
• The shareholder equity ratio indicates how much of a company's assets have been generated by issuing
equity shares rather than by taking on debt. The lower the ratio result, the more debt a company has used
to pay for its assets. It also shows how much shareholders might receive in the event that the company is
forced into liquidation. The shareholder equity ratio is expressed as a percentage and calculated by
dividing total shareholders' equity by the total assets of the company. The result represents the amount of
the assets on which shareholders have a residual claim. The figures used to calculate the ratio are recorded
on the company balance sheet.
(a) Return on equity= Profit after tax/Equity Shareholders Fund
(b) Earnings per Share(EPS)= Earnings available to equity shareholders/No. of outstanding Equity Shares
(c) Dividend payout ratio= Dividend paid to Equity Shareholders/Earnings available for Equity Shareholders.
 LEVERAGES & OPERATING
LEVERAGES
MEANING:-
➢ The concept of leverage has originated from science.
➢ The term ‘LEVERAGE’ means sensitiveness of one financial variable to change in another.
• Leverage is a measure of risk.
OPERATING LEVERAGE:-
➢ OL is a measure of business risk.
➢ OL is present only when there is fixed operating cost.
➢ OL is not affected by different types of financing.
FORMULA: OPERATING LEVERAGE [OL]= CONTRIBUTION/EBIT
 FINANCIAL LEVERAGE
• Financial Leverage is a measure of Financial Risk
• Financial leverage is a borrowed fund of a firm.
• Basically, it is a leverage that refers to debt in a firm’s capital structure.
• When there is Fixed Financing cost than the financial leverage arises.
• Financial Leverage depends upon the operating profits of the firm.
• Higher the burden of interest, higher the DFL i.e firm borrows more and it increases it’s risk.
Formula: Financial Leverage (FL) = Earnings before interest and tax(EBIT)
Earnings before tax(EBT)
Where, EBIT = Sales – (Variable cost + Fixed cost)
EBT = EBIT – Interest
Degree of Financial Leverage (DFL)
Degree of financial leverage is the ratio of the percentage increase in Earnings Per Share (EPS) to the percentage increase in Earnings Before
Interest and Taxes (EBIT).
Formula: DFL= Percentage change in earnings per share (EPS)
Percentage change in earnings before interest and tax (EBIT)
 COMBINED LEVERAGE
• Combined leverage maybe defined as the potential use of fixed costs, both operating and financial,
which magnifies the effect of sales volume change on the earning per share of the firm.
• In other words, Combined leverage is a combination of operating leverage and Financial leverage.
• A firm will have wide fluctuations in the EPS for even a small change in sale level. Thus, the
effect of change in sales level on the EPS is called as Combined leverage.
• Formula: Combined leverage= Operating leverage x Financial leverage
= Contribution
EBT
Where, Contribution= Sale – Variable Cost
EBT = EBIT – Interest
 ASSESSMENT OF RISK
• Risk is measured by Beta. Beta is the ratio of covariance between returns of a security and
market to variance of the market returns variance and covariance depends on the 3 fundamental
factors nature of business operating leverage financial leverage.
• Nature of business : Companies Behave differently with the business cycle The earnings of
some companies fluctuate more with the business cycle whereas some companies earnings are
unaffected by business cycle .If companies earnings are More sensitive to business conditions it
is likely to have higher beta.
• Operating leverage : Operating leverage refers to the use of fixed costs.
• Financial leverage can be defined as the use of fixed cost finance to increasing earning per
share.
THANK YOU