Fundamental Analysis
Prepared by: Mr. SOUR Ramo
1
1. Introduction
2. Economy Analysis
3. Industry Analysis
4. Company Analysis
5. Valuation
2
Introduction
1.1.Definition
• Fundamental analysis is a method of evaluating a security to measure its
intrinsic stock value by examining related economic, financial and qualitative
and quantitative factors.
Some of the factors to consider when analyzing the fundamentals of a company
include:
1 • Is the company making a profit?
2 • Can the company repay its debt?
3 • Is there potential for growth?
4 • What is the management like?
3
Introduction (Con’t)
1.2 Importance of Fundamental Analysis
1.3.1. Fundamental 1.3.2.Fundamental analysis
analysis is the best tool will protect investors from
to find the proper value fluctuating market conditions
of a stock by estimating and help investors to maximize
the future earnings. the return by finding
undervalued stocks.
4
Introduction (Con’t)
1.3 Importance of Fundamental Analysis
1.3.4.Fundamental analysis
1.3.3 Answers the following
allows investors appraise the
questions:
intrinsic value of shares
•Is the company’s revenue(sales)
through :
growing? Economy
•Is it actually making a profit? Analysis
•Is it in a position strongenough
to outrun its competitors in Industry
the future? Analysis
•Is it able to repay its debts?
Company
Analysis
5
Introduction (Con’t)
1.3 Importance of Fundamental Analysis
Two Ways of Fundamental Analysis
6
Economy Analysis
2.1 Concept
Macro economy is the There are so many check
dominant factor for points including global
fundamental analysis of economy, domestic economy,
a company. politics, unexpected events
such as war and natural
disasters.
Despite the importance of the
macro economy analysis, we do
not recommend to spend too much
time on it.
7
Economy Analysis(Con’t)
2.2 Politics
Politics has a
widespread influence on
a country’s economy,
especially in the When international fund
countries where the managers select stocks, the
politics is unstable. country’s political stability is a
key requirement for the
investment.
Unstable politics may cause
an abrupt change of
financial system, interest
rate, FX rate, etc, which
raise the investment risk.
8
Economy Analysis(Con’t)
2.3. Macro Economy Variables
• Macro economy variables include GDP, exchange rates,
balance of payments, interest rate, inflation, unemployment rate, etc.
• Economic Indicators’ Impacts on the stock market is seen below.
INDICATOR Good Impact Bad Impact
GDP/Growth Rate High Growth Rate Slow Growth Rate
Domestic Savings Rate High Low
Interest Rates Low High
Tax Rates Low High
Inflation Low High
IIP/Industrial
High Low
Production
9
Industry Analysis
3.1. Concept
Industry analysis is a type of
investment research that begins by
focusing on the status of an 3.1.1
Industry analysis covers sales and
industry. The purpose is to predict
earnings trend, government policy
the profitability and business
on the industry, competitive
growth of the industry in
conditions, stock price trend, and
the future.
so on.
3.1.3
3.1.2
Each industry has a different feature in
terms of growth stage, earnings trend, etc,
which implies that it is not justifiable to
compare multi industries by only one
valuation tool.
10
Industry Analysis(Con’t)
3.2. Porter’s Five Forces of Competitive Position
11
Industry Analysis(Con’t)
3.3. Industry Growth Curve
• All the industries have a similar growth curve, which has
infant, growth, and maturity stages.
12
Company Analysis
4.1. Qualitative Analysis
Qualitative analysis covers a company’s
13
Company Analysis(Con’t)
4.1. Qualitative Analysis (2)
The following questions will help you to get the solutions for the qualitative
analysis.
• Is the company run by family members or professional managers?
• What is the public image and reputations of the company?
• Does the company have the competitive technology and what kind of
efforts does it make for R&D?
• Does the facility have competitiveness in terms of quality and
economies of scale?
• Does the company have effective distribution channel and marketing activities?
• How is the company’s industrial relations? Does it communicate well with
the market and minority shareholders?
• How competitive is the overall man power of the company?
14
Company Analysis
4.2. SWOT Analysis
15
Company Analysis(Con’t )
4.3. PEST Analysis
16
Company Analysis(Con’t )
4.4. Price-Quality Matrix Analysis (1)
Price
Quality(Value) 17
Company Analysis(Con’t )
4.5. Financial Statements
• Financial Statement is a formal record of the financial activities and
position of a company. Relevant financial information is presented
in a structured manner.
Balance Sheet
Income
Cash Flow
Statement
Key Components of Financial Statement 18
Company Analysis(Con’t )
4.5. Financial Statements
4.5.1 Balance Sheet
• The balance sheet: shows a company’s assets, liabilities
and owners’ equity (or net worth)
Liabilities
Assets +
Shareholders’ Equity
19
Company Analysis(Con’t )
4.5. Financial Statements
4.5.1 Balance Sheet
4.5.1.1 Balance Sheet Items
• Assets • Liabilities and Equity
Current assets : Current liabilities :
① Cash & securities ① Accounts payable (AP)
② Accounts Receivable (AR) ② Short-term debt
③ Inventories Long-term liabilities
Fixed assets : Shareholders' equity
① Tangible assets like PPE
(Property, Plant And Equipment)
② Intangible assets
20
Company Analysis(Con’t )
4.5. Financial Statements
4.5.1 Balance Sheet
Assets
21
Company Analysis(Con’t )
4.5. Financial Statements
4.5.1 Balance Sheet
Liabilities
22
Company Analysis(Con’t )
4.5. Financial Statements
4.5.1 Balance Sheet
Equity
23
Company Analysis(Con’t )
4.5. Financial Statements
Phnom Penh Water Grand Twin International
Supply Authority (Cambodia) Plc.
24
Company Analysis(Con’t )
4.5. Financial Statements
4.5.2 Income Statement
• Income Statement(Profit and loss account) shows the company’s
revenues and expenses over a period of time.
25
Company Analysis(Con’t )
4.5. Financial Statements
4.5.2 Income Statement
26
Company Analysis
4.5. Financial Statements
Relationship between
Income Statement and Balance Sheet
27
Company Analysis(Con’t )
4.5. Financial Statements
4.5.3. Cash Flows
• Cash flow is used to assess the quality of a company’s income, that is,
how liquid it is, which can indicate whether the company is positioned
to remain solvent.
Key Cash Flow Items
Operating Investing Financing
activities activities activities
28
Company Analysis(Con’t )
4.5. Financial Statements
4.5.3. Cash Flows
29
Company Analysis(Con’t )
4.6. Ratio Analysis
4.6.1. Introduction
Ratio analysis standardizes It makes it possible to
financial information compare one company’s
for comparison. current status with its
historical data as well as
other companies’.
Ratio analysis shows growth,
profitability, and stability.
30
Company Analysis(Con’t )
4.6. Ratio Analysis
4.6.2. Growth Analysis
• Growth analysis usually offers sales, EBITDA (Earnings
before interest expense, tax, depreciation, and
amortization), operating profit, and net profit.
31
Company Analysis(Con’t )
4.6. Ratio Analysis
4.6.3. Profitability Analysis
• Profitability is commonly measured by gross margin, EBITDA
margin, operating margin, net margin, ROE, and ROA.
• The formula is as followings;
Gross margin = gross profit/sales
EBITDA margin = EBITDA/sales
Operating margin = operating profit/sales
Net margin = net profit/sales
ROE = net profit/total shareholders’ equity
ROA = net profit before interest expense and tax/total asset
32
Company Analysis(Con’t )
4.6. Ratio Analysis
4.6.4. Stability Analysis
• Stability analysis is the minimum to check the investment risk.
The most commonly used tools is liability to equity,
as it is easy to calculate. However, we use other tools
for more accuracy, which are total debt to equity, net debt
to equity, current ratio, and interest coverage.
33
Company Analysis(Con’t )
4.6. Ratio Analysis
4.6.4. Stability Analysis
• The formula is as followings;
Liability to equity = total liability/total shareholders’ equity
Total debt to equity = total interest bearing debt/ total shareholders’ equity
Net debt to equity = (total interest bearing debt – total interest bearing asset)
/ total shareholders’ equity
Current ratio = current asset/current liability
Interest coverage = operating profit/interest expense
Quick ratio = (Cash and Cash equivalents + investments + accounts receivable)
/ Current Liabilities
34
Company Analysis(Con’t )
4.7. Valuation
4.7.1. Introduction
Valuation is the process of
estimating what a stock Valuations are classified into
is worth, which helps us absolute valuations and
to make Buy/ Sell decision relative valuations.
by suggesting a fair value
or target price.
Absolute valuations suggest
fair value (=intrinsic value),
which include DCF and DDM.
Relative valuations suggest target price,
which include PE, PB, EV/EBITDA, and
35
Dividend yield.
Company Analysis(Con’t )
4.7. Valuation
4.7.2 Absolute Valuations
DCF (Discounted Cash Flow) is a method of valuing a company’s
stock price using the concepts of the time value of money.
Formula:
36
Company Analysis(Con’t )
4.7. Valuation
4.7.2 Absolute Valuations
Example:
37
Company Analysis(Con’t )
4.7. Valuation
4.7.2 Absolute Valuations
• DDM (Dividend Discount Model) is a method of valuing a
company’s stock price based on the theory that its stock is worth
the sum of all the future dividend payments, discounted back to the
present value.
The simple formula : Fair Value = this year’s dividend/ (cost of
equity –long term growth rate)
Example : this year’s dividend = 200, Cost of equity = 8%, growth
rate = 3%, DDM = 200/(8%-3%) = 4000
38
Company Analysis(Con’t )
4.7. Valuation
4.7.3. Relative Valuations
• PER (Price to Earnings ratio) is the most commonly used in the real
world due to its simplicity of calculation.
PER = Market price per share/Earnings(net profit) per share
Example: market price = 100, EPS= 10
39
Company Analysis(Con’t )
4.7. Valuation
4.7.3. Relative Valuations
• PBR (Price to Book ratio) is also frequently used in the real world.
The concept is to compare a company’s current market price to its
book value.
PBR = Market price per share/shareholders’ equity per
share
Example : Market price/share = 100, shareholders’
equity/share = 120
40
Company Analysis(Con’t )
4.7. Valuation
4.7.4. Valuation Comparisons
• Absolute valuation suggests the fair value, which is independent from
the market situation. However, the fair value is sensitive
to an assumption change.
41
42
