1. SECURITY ANALYSIS Security analysis An examination and evaluation of the various factors affecting the value of a security. Security analysis is about valuing the assets, debts and equities of the companies from the perspective of outside investors using publicly available information. The security analyst must have a thorough understanding of financial statements, which are an important source of this information.

2. SECURITY ANALYSIS Various approaches of Security analysis  Fundamental Analysis  Economic Analysis  Industry analysis  Company analysis  Technical Analysis

3. Fundamental Analysis A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. FA is really a logical and systematic approach for estimating the future dividends and share price. FA assumes that share price is determined by a number of fundamental factors regarding economic, industry, and company. FA is the detailed analysis of the fundamental factors affecting the performance of the company.

4. For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as  interest rates and the overall state of the economy, and  information about the bond issuer, such as potential changes in credit ratings.  For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth.  In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated.  One of the most famous and successful fundamental analysts is the  Oracle of Omaha,  Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.

5.  Fundamental Analysis is a three stage process involving  first Economic analysis,  followed by Industry analysis and  Finally Company analysis. FA is the scientific study of the basic factors, which determines the share’s value.

6. Economic Analysis The performance of the company depends much on the performance of the economy.  Boon – Industries and companies is prosperous  Recession – performance of the company is poor

7. Economic Analysis  GNP  Savings and investments  Inflation: Higher rate of inflate – erode Purchasing power-low demand for the products. Low rate of inflation – industries & Co’s are prosperous  Agriculture  Rates of interest – low rate of interest- credit availability easy  Government revenues, expenditure and deficits  Infrastructure – SEZ  Monsoon  Political stability

8. Industry Analysis IA is one of the stages of FA is considered as an important analysis.  It indicates to an investor whether the industry is growth industry or not.  It gives an investor a choice of the industry in which the investments should be made.  IA refers to an evaluation of the relative strengths and weakness of particular industries divided in to three stages.

9. 1.Life cycle of an industry 2.Characteristics of an industry 3.Profit potential of an industry Life cycle of an industry  Pioneering stage – technology and product are new. Weak firms are eliminated and only a few firms survive the stage.  Expansion stage – companies in expansion stage are quite attractive for investment.  Stagnation stage  Decay stage

10. Characteristics of an industry  Relationship between demand and supply  Period of life  State of labour  Government’s attitude  Availability of raw materials  Cost structure

11. Profit potential of an industry.

12. Company30-Jun-0030- Jun-11 Change Bharat Heavy Electricals Ltd. 66.732,046.552,967% Axis Bank Ltd.33.21,289.003,783% Tata Power Co. Ltd.82.051,303.601,489% Sun Pharmaceutical Inds. Ltd 26.84496.801,751% HDFC Bank Ltd.50.86500.52884%

13. Company analysis  Marketing success  Sales  Growth in sales  Stability of sales Accounting policies  Inventory pricing  Depreciation method  Cost or Market value method  FIFO  LIFO  Non-operating income  Tax carry over

14. Profitability 1.Gross profit margin 2.Net profit margin 3.Earnings power 4.Return on equity 5.EPS 6.Cash earning per share Financial statement analysis – 1.Balance sheet, 2.P&L a/c Ratio analysis

15. Balance sheet: The balance sheet describes the assets, liabilities, and equity of the firm at a point in time Key variables to watch on the balance sheet are cash, accounts receivable, inventories, and long-term debt.

16. Analyzing Financial Ratios Financial ratios are the microscope that allows us to see behind the raw numbers and find out what’s really going on Financial ratios fall into five categories: – Liquidity – Efficiency – Leverage – Coverage – Profitability When analyzing ratios always remember that no one ratio provides the whole story, and that the standards for each ratio are different for every industry

17. Liquidity Ratios The current ratio, quick ratio and cash ratio all fall into this category They help us to see if the company is able to meet its short-term obligations

18. Efficiency Ratios The efficiency ratios tell us how effectively management is using the firm’s assets to generate sales Inventory turnover, accounts receivable turnover, days sales outstanding, fixed asset turnover, and total asset turnover all fall into this category

19. Leverage Ratios How much debt does the firm have? That’s the question answered by the leverage ratios Examples are the debt ratio and debt to equity ratio Remember that lots of debt is great as long as sales are increasing, but terrible if sales decline Some debt is, without a doubt, good, but too much can be disastrous Especially be on the lookout for companies with a high proportion of fixed costs (high operating leverage) and with lots of debt. Airlines are a good example

20. Coverage Ratios Coverage ratios are most important to creditors, but whatever is important to creditors is important to shareholder’s too Examples of coverage ratios include the times interest earned ratio and the fixed charge coverage ratio

21. Profitability Ratios Investors tend to focus the most on profitability ratios, but the others are important as well Examples include the gross profit margin, operating profit margin, net profit margin, return on assets and return on equity

22. Using Financial Ratios There are two key uses of financial ratios: – Trend Analysis – Looking for trends over time in ratios. For example, we’d like to see that the inventory turnover ratio is rising. Normally, at least five years of data should be used. – Comparison to Industry Averages – If we assume that, on average, the firm’s competitors are doing things right, then it makes sense to make these comparisons. This can also help to identify areas of relative strength and weakness

23. Growth Rates Growth rates of various variables are important as well Key variables to calculate growth rates of are revenues, operating profits, and free cash flow

24. Graham and Dodd Method of Investing Definition Fundamental investment tactics founded by Benjamin Graham and David Dodd in the 1930s. They wrote about their strategy in a book entitled “Security Analysis." In it, they advocate that investors should purchase stocks in corporations with undervalued stocks because they will eventually reach true market value and give investors a positive return.positivereturn

25. Criteria that investors should look for in a company are:company  More current assets than current liabilities,  All long term debt, and  Selling at a low Price/Earning Ratio  The theory does not take into consideration the potential for earnings growth.  Followers of this approach may also look for STOCKS selling below their liquidating value.STOCKSvalue

26. Ratios Used in Value Investing Evaluation EBIT Earnings Per share = ------------------------------------------ No. of Outstanding Equity Share Sales Sales Per share = ------------------------------------------ No. of Outstanding Equity Share Price Per share Price – Earnings Ratio = -------------------------- Earnings per share Earnings Yield = ------------------------- Price Per share

27. Sales Capital Turnover = ------------------------------------------ Tangible Assets – Short term Accrued payables Cash flow from operations after taxes Cash flow Per share = -------------------------------------------------- No. of Outstanding Equity Share Net income + Minority + Tax adjusted interest Return on Capital = ------------------------------------------------------ Tangible assets – Short term Accrued payables Net Income + Minority interest + Tax Adjusted Interest Earnings Yield = ------------------------------------------------------------- Sales

28. Sales in Final Period Growth in Sales = ------------------------------------------------------ Sales in Base Period Net Earned for Total capital in Final Period Growth in Total Return = ------------------------------------------------------ Net Earned for Total capital in Base Period Earnings per share in Final Period Growth in Earnings Per Share = ------------------------------------------------------ Earnings per share in Base Period Growth Ratios

29. Worst Year Percent decline in return on capital = ------------------------------------------------- Average of previous three years Payout Ratios Dividend paid on common Payout Ratio = ------------------------------------------------------ Net Income available for common Dividend paid on common Dividend to cash flow = ------------------------------------------------------ Cash flow from operations after taxes Stability Ratios