1. Chapter 7
Fundamental Analysis

2. Analysis Mass of data requires techniques to be used
Different user requirements
Goal of process is “informed decision-making”
Challenges are how to:
contextualize
compare
Fundamental analysis / technical analysis
Chapter 7
© Philip O’Regan 2016

3. Fundamental analysis (FA)
Focus on business fundamentals
Macro- and micro- issues
economy
competitors
financial performance
Principal techniques:
common-size statements
ratios (percentages, etc.)
Chapter 7
© Philip O’Regan 2016

4. Common-size statements
Provide a common base
e.g., express all as % of sales
Enables comparison:
cross-sectional
segmental
temporal
May remove size as explanatory variable
Chapter 7
© Philip O’Regan 2016

5. Ratios Reduce information to common form Enable inter-firm comparison
Categories:
liquidity
activity
financing
profitability
investment
Chapter 7
© Philip O’Regan 2016

6. Use of ratios Ratios only one part (calculation) of process
Overall process can be summarized as OCAID:
Observation: assessment of available information
Calculation: reduction to other forms e.g. ratios
Analysis: initial contextualization
Interpretation: identification/evaluation of significance
Decision-making: goal of FIA
Art/skill
Chapter 7
© Philip O’Regan 2016

7. Ratios: issues/problems
Ratios only a means to an end
Perpetuate problems in accounting data
Assumptions not always sustainable
Benchmarking a useful technique
Statistical issues:
negative numbers
small numbers
numerator/denominator
Chapter 7
© Philip O’Regan 2016

8. Technical analysis (TA)
“Patterns can be captured, understood and predicted”
e.g. share price movements can be predicted
Trends
primary
secondary
Not normally used for long-term investment
Increasingly used in tandem with FA:
fundamental analysis: WHAT to buy;
technical analysis: WHEN to buy
Chapter 7
© Philip O’Regan 2016

9. Summary Techniques developed to aid decision-making:
fundamental analysis – WHAT
technical analysis – WHEN
Fundamental analysis:
analyzes commercial, economic contexts, etc.
uses ratios, etc. for comparison and analysis
This course based primarily on fundamental analysis
Process summarized as OCAID
Chapter 7
© Philip O’Regan 2016