FUNDAMENTAL ANALYSIS AND TECHNICAL ANALYSIS OF

FINANCIAL INFORMATION

FUNDAMENTAL ANALYSIS

What is Fundamental Analysis of Financial Information?

Fundamental analysis is the valuation method which uses micro economics and financial data to
analyze stock movements. The result of fundamental analysis is to find an intrinsic value for a
stock for better wealth creation. To a fundamental investor, the market price of a stock tends to
revert towards its intrinsic value. If the intrinsic value of a stock is above the current market
price, then the investor would purchase the stock because he believes that the stock price would
rise and move towards its intrinsic value. If the intrinsic value of a stock is below the market
price, then the investor would sell the stock because he believes that the stock price is going to
fall and come closer to its intrinsic value. Fundamental analysts study everything from the
overall economy and industry conditions to the financial condition and management of
companies. Earnings, expenses, assets, and liabilities are all important characteristics to
fundamental analysts.

Aspects of Fundamental Analysis

Fundamental Analysis uses both financial and non financial aspects of the company and also the
macros of the industry as a whole. Financial aspect can be done by analyzing financial
information of the company which can be found in the annual reports of the company. Non
financial aspect uses information such as estimates of its growth, demand for products sold by
the company, industry comparisons, economy-wide changes, changes in government policies etc.

Steps of Fundamental Analysis

Fundamental analysis consists of a systematic series of steps to examine the investment rationale
of a company and then identify opportunities. Some of these are:
 Macroeconomic analysis – which involves analyzing capital flows, interest rate cycles,
currencies, commodities, indices, world geography etc.
 Industry analysis – which involves the analysis of the industry and the companies that
form a part of that sector.
  Situational analysis of a company means the parameter that impacts the business of the
company.
 Financial analysis comprises of all the Financial Statements of the Company.

Analysis of Financial Statement:

The financial performance or the numbers of a company, as presented in the financial statements,
can be used to calculate ratios that give a snapshot review of the company’s performance. Some
of the important ratios of the company are:

Debt/ Equity (D/E)

Higher debt in a business can prove to be a detrimental for a company. In absence of its ability to
pay to the lenders, businesses may have to face bankruptcy. When businesses tend to thrive on
borrowed money, then it could be quite dangerous if the assets are unable to generate the
expected revenues and profitability. The liability will still have to be met whether or not the
businesses thrive.

EBITDA Margin
This ratio is useful in finding out the profitability of the company’s business operations, purely
based upon its optimization of direct costs to generate higher revenues. It helps one to understand
if the company is able to generate cash from its sales after meeting all its operating expenses or
not.

Return on Equity (ROE)

ROE communicates how effectively a business allocates its capital to generate return. An
efficient allocator of capital would have high ROE and a poor quality of capital allocation in a
business to have low ROE. This ratio means how much percentage of return is generated on the
equity used.

Current Ratio
This ratio measures the company’s liquidity situation by comparing its current assets with its
current liabilities. A ratio of more than 1 means that the company’s current assets are more than
current liabilities. This ratio can also be used to ascertain Working Capital Ratio. A ratio less
than 1 will raise question about the solvency of the company.
Asset Turnover
This ratio indicates how many times the assets of the business are put to use to generate revenues
for the business. If assets are lying idle, then that’s not good for the business as capital deployed
is not generating any revenue. On the other hand, if asset is continuously put to use to produce
goods and services, it would improve the revenues and the profits. Therefore, higher the ratio,
better the firm.

TECHNICAL ANALYSIS

What is Technical Analysis of Financial Information?

Technical analysis differs from fundamental analysis in that the stock's price and volume are the
only inputs. The core assumption is that all known fundamentals are factored into price, thus
there is no need to pay close attention to them. Technical analysts do not attempt to measure a
security's intrinsic value, but, instead, use stock charts to identify patterns and trends that suggest
what a stock will do in the future. Technical analysis involves plotting stock information like
prices, volumes and open interest on a chart and applying various patterns and indicators to it in
order to assess the future price movements. The time frame to which technical analysis is applied
can be for intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily,
weekly or monthly. The price data is studied from the historic point of view to arrive at any
conclusion or target for any stock, commodity or Indices.

Some of the Technical Analysis Indicators:

Moving averages
The mostly used trend-following indicator for technical analysis is the moving averages. They,
from a data series make it easier to spot trends, something that is especially helpful in volatile
markets. They also form the base indicator for application of many more technical indicators and
overlays. Normally stocks above 50 dma are considered bullish and below 200 dma are
considered bearish. After the breach of any of the moving averages the momentum on either side
becomes very swift and fast.

Relative Strength Index (RSI)

RSI is a momentum oscillator generally used in sideways or ranging markets where the price
moves between support and resistance levels. Relative Strength Index is one of the most useful
technical tool employed by many traders to measure the velocity of directional price movement.
It helps to understand whether the stock is overbought or oversold. As any reaction from
overbought and oversold levels are generally very fierce and fast. RSI above 70 is considered to
be overbought and RSI below 30 is considered to be oversold.

Bollinger Bands
Bollinger bands are trading bands developed by John Bollinger. It consists of a 20 period simple
moving average with upper and lower bands. The upper band is 2 standard deviation above the
moving average and similarly lower band is 2 standard deviation below the moving average.
This makes Bollinger bands more dynamic and adaptive to volatility. Stocks moving between
the bands are good trading bets.

Money Flow Index

Money flow index takes into account volume action and on the basis of volume action; it
attempts to measure the strength of money flowing in and out of the security which now a days is
also known as smart money flow indicator.

HOW TO MAKE RIGHT INVESTING DECISIONS USING BOTH FUNDAMENTAL

AND TECHNICAL ANALYSIS TOGETHER

Fundamental is basically a background check of how companies operated and performed in the
past years and what can be their future in the coming years. By fundamental analysis we can
judge whether the company will grow in the future or not, whether the company can pay regular
dividend or not or whether the company is growth oriented and dynamic or not. We can select
good companies for long term investments through fundamental analysis.

After selecting the company through fundamental analysis, we can use technical analysis to enter
into the stock for investment using technical indicators. Technical indicators give us buy and sell
signals of the stock. By using Technical Indicators we can enter the trade when the price is low.
If we want to invest for short term then technical indicators give us buy and sell signals for short
term trends.

For example, we can use screener to fundamentally select a stock. Stockedge App gives us
fundamental parameters about the company. We can also compare the company with its peers
also. We should select a fundamental strong company because if the company becomes bankrupt
then we can make huge losses. After selecting the company, at which price to enter is a crucial
factor, for that we can use Technical indicators.

Conclusion
Technical analysis is a useful tool for stock analysis; it has benefits as well as limitations. Same
goes with fundamental analysis. Fundamental analysis is a method of evaluating securities by
attempting to measure the intrinsic value of a stock. Technical analysis differs from fundamental
analysis in that the stock's price and volume are the only inputs. Fundamental analysis and
technical analysis, the major schools of thought when it comes to approaching the markets, are at
opposite ends of the spectrum. Both methods are used for researching and forecasting future
trends in stock prices, and, like any investment strategy or philosophy, both have their advocates
and adversaries. If we use the strength of both the analysis then we can have good growth in our
investments.