CH – ANALYSIS OF COMPANIES FOR INVESTMENT STRATEGY - PowerPoint Presentation

1. CH – ANALYSIS OF COMPANIES FOR INVESTMENT STRATEGYLecture compiled by Dr. Parminder Kaur Assistant Professor Department of Commerce For B.Com(Prog) IV Sem Sec C

2. INTRODUCTIONIn case of securities market, an investor has number of securities available for investment. But, he would like to invest in one, which has good prospects in future. In order to assess the future earning potential of any security, an individual has to conduct fundamental analysis of the company. Fundamental analysis involves in-depth examination of all possible factors, which have bearing on the prospects of the company as well as its share price. For Fundamental analysis we will do EIC Analysis. EIC analysis is broadly divided into three stages in the sequential manner namely:Economic AnalysisIndustry AnalysisCompany Analysis

3. Economic AnalysisThe economic activity of any country has an impact on investment in many ways. When the state of economy is good and it is at the growing stage, the investment takes place and stock markets are in boom phase. The reverse situation takes place when the economic activity is low. In view of this, it is necessary to analyse all macro economic environment properly. The parameters which are used to analyse macro economic environment are given below:Growth Rate of Gross Domestic Product (GDP)InflationInterest RatesBudgetBalance of PaymentMonsoon and AgricultureInfrastructure facilities

4. Industry Analysis The industry analysis is done by classifying them on the basis of business cycle. They can be classified into following categories:Growth Industry: The growth industries have unique feature that they are independent of the business cycle. The industries exhibit growth irrespective of the changes in the economy.Cyclical Industry: The growth of this industry depends on the business cycle. When there is boom period in the business cycle of other industries or economy as a whole, this industry also exhibit growth and vice versa. Defensive Industry: This category of industry exhibits constant growth during all phases of economy. They do not depend on business cycle of other industries. For example, food industry.Cyclical Growth Industry: This type of industry experiences period of growth and stagnation due to change in technology. For example, computer hardware industry.

5. Company AnalysisIn order to study any company, data is collected with a view to analyse the quantitative as well as qualitative aspects of the company. The quantitative factors- normally comprise of various financial ratios which are used to examine the operating efficiency of the company. Financial ratio analysis is performed by comparing two items in the financial statements. The resulting ratio helps in proper interpretation as one figure in isolation may fail to convey required information. In order to examine financial strength of company, the financial statements namely, Profit and Loss Account and Balance sheet, are used. Before one proceeds to know how to use them, one must be clear about the information transmitted by them. Both documents are vital as they not only show the corporate health of the organization but also as an indication to various shareholders of how well or badly the organization is performing. It serves as a guide for potential investors or lenders intending to be associated with a company as a shareholder or debenture holders.

6. Company Analysis Cont….The balance sheet shows the profit for an accounting period increased on proprietor’s funds. The trading and profit and loss account shows, in detail, how that profit or loss has arisen.After having understood various kind of financial information parameters contained in Profit and Loss Account and Balance Sheet of a company, one should know how to use them. With the help of this financial information, investors and analyst conduct financial ratio analysis. Ratios are the means of presenting information, in the form of ratio or percentage, which facilitate a comparison among different figures. Often the same ratios of similar companies are used to compare the performance of one company with another. One can also calculate ratio of the same companies for different years to find the improvement or growth over a period of time. Financial ratio analysis is helpful in assessing an organization’s internal strengths and weaknesses. Present and potential investors can quickly assess whether the company is a good investment or not. Management can compare current performance with previous periods and competing companies.

7. Areas of any company generally used for analysis (a)Profitability ratios: It reflects efficient allocation of resources by management and “profitability ratios” when compared to others in the industry will indicate how well management has performed this task. The main profitability ratios normally used are: Operating profit ratio –Operating profit ratio = Operating profit/Net Sales Gross profit ratio –Gross profit ratio = Gross profit/ Net Sales Net profit ratio –Return on sales = Net Income/Net Sales

8. Liquidity ratios Management shall keep the firms liquidity as low as possible but at the same it shall also ensure that short term obligations are timely met. The main Liquidity ratios normally used are: Current Ratio -Current Ratio = Current Assets/Current LiabilitiesAcid Test Ratio -Acid Test Ratio = Quick Assets/Current LiabilitiesCash Ratio –Cash Ratio = (Cash + Marketable Securities)/Current Liabilities

9. Leverage ratios The leverage of an organization has to be considered with respect both to its profitability and the volatility of the industry. The main Leverage ratios normally used are:Debt Ratio –Debt Ratio = Total Liabilities/Total assetsEquity Ratio –Equity Ratio = Total Equity/Total assetsDebt-Equity Ratio –Debt-Equity Ratio = Total Liabilities/Total EquityInterest Coverage Ratio –Interest Coverage Ratio = EBIT/ Interest Expense

10. Activity and Management efficiency ratios In order to examine the productivity and efficiency of a company, Activity ratios are calculated. These are compared with the industry average to examine how well the company is using its productive capacity and performing other functions efficiently. The main Activity and Management efficiency ratios normally used are:Receivable turnover Ratio –Receivable turnover = Net Credit Sales/Average Accounts ReceivableInventory turnover Ratio –Inventory turnover = Cost of Sales/Average InventoryReturn on Assets Ratio –Return on Assets = Net Income/Average Total AssetsReturn on Stockholders’ Equity Ratio –Return on Stockholders’ Equity = Net Income/Average Stockholders’ Equity.

11. ThankyouLecture sourced fromBook “Investing in Stock Market” by Dr. Abhishek Singh, Gurleen Kaur And OthersBook “Investing in Stock Market” by Dr. J. K. Singh and Dr. Amit Kumar Singh