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Fundamental Analysis: - Prof. Debasish Ghosh

Fundamental analysis involves 5 steps: 1) overview of firm and strategies, 2) evaluate industry structure, 3) evaluate firm's economic position, 4) predict future course, 5) estimate intrinsic value. It aims to understand what drives a firm's value and how that value could change. Key aspects analyzed include the firm's financials, profitability, cash flows, risks, and building financial projections to estimate intrinsic value. The overall goal is to obtain a comprehensive understanding of the firm and industry to estimate the firm's intrinsic value.

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Shivam Arora
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61 views12 pages

Fundamental Analysis: - Prof. Debasish Ghosh

Fundamental analysis involves 5 steps: 1) overview of firm and strategies, 2) evaluate industry structure, 3) evaluate firm's economic position, 4) predict future course, 5) estimate intrinsic value. It aims to understand what drives a firm's value and how that value could change. Key aspects analyzed include the firm's financials, profitability, cash flows, risks, and building financial projections to estimate intrinsic value. The overall goal is to obtain a comprehensive understanding of the firm and industry to estimate the firm's intrinsic value.

Uploaded by

Shivam Arora
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Fundamental Analysis

- Prof. Debasish Ghosh


Fundamental Analysis
Five Steps:

1) Overview of firm and its strategies

2) Evaluate structure of industry

3) Evaluate firm’s economic position

4) Predict future course of firm

5) Valuation of firm

Goal : Estimate Intrinsic value of the firm


1) Overview of Firm and its Strategies

A) Key lines of business


- Number of lines of business?
- Is the firm diversified?

B) Major products / services


- Characteristics of products/services
 Commodity?
 Specialized, quality?

C) Primary markets
- Number of major customers?
- Dependence on a few customers?
- Diversified markets?
1) Overview of Firm and its Strategies (Contd.)
D) Age of firm
- Firm’s life cycle
[Start up, emerging growth, established growth, maturity,
decline]

E) Current operating strategy


- Growth (organic or via acquisition)
- Restructuring
- Downsizing
- Diversifying
- Steady state

F) Management (quality, strengths, experience, reputation)

G) Corporate governance (quality, red flags)


2) Evaluate Structure of Industry

A) Number of firms and concentration


- What percentage of industry sales captured by industry
leaders?

B) Level of competitiveness
- Barriers to entry?
- Relative market shares of firms in industry?
- Competition – domestic, foreign, both?
- Characteristics of major competitors?
 Strengths, weaknesses, strategies

C) Growth profile
- Historical, current and projected rates of growth
2) Evaluate Structure of Industry (Contd.)

D) Seasonal or cyclical patterns


- Sensitivity to business cycle?
 Cyclical, counter-cyclical, or acyclical?

E) Regulatory environment
- Established agencies
 FDA, EPA, FDIC, NRC, FAA, etc.
- Emerging “Issues”
 SEC, Sarbanes – Oxley, Eliott Spitzer, etc.

F) Sensitivity to macroeconomic conditions


- Interest rates, inflation, consumer confidence

G) Technological change and innovation


- Importance – history, resources
2) Evaluate Structure of Industry (Contd.)

H) Production profile
- Labor or capital intensive?
- Unionized?
 History of labor relations
- Constraints on availability of raw materials, labor,
other production inputs?

I) Drivers of business
- What drives success in industry?
- What drives stock price/returns of firms in
industry?
3) Evaluate Firm’s Current Economic Position
A) Financial position
- Balance sheet analysis
 Types of assets (tangible, intangible, current,
long term)
 Nature of liabilities (maturity structure, off-
balance-sheet)
 Capital structure (leverage)
 Components of residual equity (contributed or
retained)

B) Profitability
- Income statement analysis
 Operating revenues and expenses
 Profit margins
 Nonrecurring or unusual items
3) Evaluate Firm’s Current Economic Position
(Contd.)
C) Cash flow
- Statement of cash flows analysis
 Cash from operations
 Cash from investing activities
 Cash from financing activities

D) Time series (firm through time)

E) Cross-section (firm relative to competitors)

F) Risk
- Economic- macroeconomic risks
- Business – risk of not earning cost of capital
- Financial – risk of not meeting financial obligations
4) Predict Future Course of Firm

Build financial model


- Project firm’s future operations
 Necessary to understand the business model
 Necessary to understand firm’s strategy
 Necessary to understand and assess sustainability
of competitive advantages (or lack thereof)

- Structure projections as pro forma financial statements

- Carefully articulate assumptions

- Sensitivity analysis on key assumptions


5) Estimate the intrinsic Value of Firm

a) Valuation model
(Discounted cash flow)

b) Sensitivity analysis

c) Reasonable range for intrinsic value


Valuation

This process is as much ART as SCIENCE.

The goal is not just the “number” (the intrinsic value) but an
understanding of what drives the value and how that value
could change.

Other valuation models (e.g., multiples or relative valuation)


do not provide insight into the underlying economics of the
firm’s business.

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