MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 2.1
Fundamental Security Analysis - Economic Analysis
The intrinsic value of an equity share depends on a multitude of factors. The earnings of the company, the growth rate and the risk exposure of the company have a direct bearing on the price of the share. These factors in turn rely on the host of other factors like economic environment in which they function, the industry they belong to, and finally companies’ own performance.
Introduction
The intrinsic value of an equity share depends on a multitude of
factors. The earnings of the company, the growth rate and the risk exposure of
the company have a direct bearing on the price of the share. These factors in
turn rely on the host of other factors like economic environment in which they
function, the industry they belong to, and finally companies’ own performance.
The fundamental school of thought appraised the intrinsic value of
shares through
Economic Analysis
Industry Analysis
Company Analysis
Economy-Industry-Company Analysis Framework
The analysis of economy, industry and company fundamentals
constitute the main activity in the fundamental approach to security analysis.
In this era of globalization we may add one more circle to the diagram to
represent the international economy.
The logic of this three tier analysis is that the company
performance depends not only on its own efforts, but also on the general
industry and economy factors. A company belongs to an industry and the industry
operates within the economy. As such, industry and economy factors affect the
performance of the company.
The multitude of factors affecting the performance of a company can
be broadly classified as:
Economy-wide factors such as growth rate of the economy, inflation
rate, foreign exchange rates, etc. which affect all companies.
Industry-wide factors such as demand-supply gap in the industry,
the emergence of substitute products, changes in government policy relating to
the industry, etc. these factors such as the age of its plant, the quality of
management.
Company specific factors such as the age of its plant, the quality of management brand image of its products, its labour-management relations, etc. these factors are likely to make a company’s performance quite different from that of its competitors in the same industry.
Fundamental analysis thus involves three steps:
Economy Analysis
Industry Analysis
Company analysis
Let us see what each of these analyses implies.
