Fundamental analysis is not for speculator but is for those who are prepared to study and analyze a company; for those who arrive a decision after careful thought and deliberation. Fundamental Analysis is for the rational man. Here it has been explained briefly how an investor can analyze a company, a sector using fundamental analysis approach.
1. Political-Economic Analysis: A stable political environment is necessary for steady, balanced growth. On other had instability causes insecurity if there’s possibility of Government being ousted and replaced by other that hold diametrically different political and economical beliefs. Inflation erodes purchasing power. Low inflation indicates stability and companies prosper at such times. Low taxation stimulates investment while budgetary deficits act as detrimental to Investment. An Investor need to keep a close watch on these developments to make use of the situation to his benefit.
2. Industry Analysis: Importance of industry can never be understated. State of Industry will affect company’s performance. It is important to determine cycle. These are initial phase or sunrise, expansion or growth, stabilization or maturity and decline. Investors should purchase in first two stages and disinvest at the maturity stage. However it needs thorough study of the product and industry life cycle to ascertain the stage or cycle.
3. Company Analysis: The Next stage of Fundamental Analysis is Company Analysis. Areas to be examined are the company, the results and the ratios.
• Management: Management is the single most important factor to consider in a company. Investor must check on integrity of managers, proven competence and how they are been rated by their peers. Wrong management can result into catastrophe like Satyam.
• Annual Report: Investor should read Annual report to determine the state of the company. The annual report is broken into Director’s report, the Auditor’s report, Financial statement and the schedules. Director’s report enunciates the opinion of the director on the industry and explains performance of the company, its plan to modernize, expand and diversify. The Auditors report comments on any changes made in accounting principles and the effect of these changes on the result.
• Financial Statements: It consist of Balance sheet and Profit & Loss Statement. The balance sheet details all the assets and liabilities a company has on a particular date. The profit and loss accounts detail numerically the activities the company had undertaken during the accounting period and the result of these activities like profit or loss. The schedules and notes are found after the financial statements and gives important information such as accounting policies that the company has followed.