1. Chapter 7 Fundamental Analysis

2. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis2 Analysis Mass of data requires techniques to be used Different user requirements Goal of process is ‘informed decision- making’ Challenges are how to: contextualise compare Fundamental Analysis / Technical Analysis

3. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis3 Fundamental Analysis (FA) Focus on business fundamentals Macro- and Micro- issues economy competitors financial performance Principal techniques: common-size statements ratios (percentages, etc.)

4. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis4 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

5. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis5 Ratios Reduce information to common form Enable inter-firm comparison Categories: liquidity activity financing profitability investment

6. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis6 Use of ratios Ratios only one part (Calculation) of process Overall process can be summarised 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

7. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis7 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

8. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis8 Technical Analysis (TA) ‘Patterns can be captured, understood and predicted’ e.g. share price movements can be predicted Charles Dow 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

9. Copyright 2006 John Wiley & Sons Ltd Financial Information Analysis9 Summary Techniques developed to aid decision-making: Fundamental Analysis - WHAT Technical Analysis - WHEN Fundamental Analysis: analyses commercial, economic contexts etc. uses ratios, etc. for comparison and analysis This course based primarily on Fundamental Analysis Process summarised as OCAID