CHAPTER -2

FUNDAMENTAL ANALYSIS

MEANING:
Fundamental analysis is a study of certain factors, such as financial statements, external
factors, news, events and trends in the industry to determine the true value of a stock.
Usually, it takes some time for the true stock value to change, depending on these factors.
This methos can help you determine the value of a company and its potential in the future.

OBJECTIVES OF FUNDAMENTAL ANALYSIS

1. To conduct a company's stock valuation and predict its probable price evolution.
2. To make a projection on its business performance.
3. To evaluate its management and make internal business decisions.
4. To calculate its risk.
5. To select the right time and right securities for the investment.

USES/APPLICATIONS OF FUNDAMENTAL ANALYSIS

1. Fundamental Analysis is used to evaluate a lot of information about the past

performance and the expected future performance of companies, industries and the
economy as a whole before taking the investment decision.
2. Fundamental analysis is really a logical and systematic approach to estimating the
future dividends and share price.
3. Fundamental analysis is a method used for evaluating a security or asset by
attempting to measure its intrinsic value by examining related economic, financial
and other qualitative and quantitative factors.
4. Fundamental analysts attempt to study everything that can affect the security's
value.
5. The fundamental approach is based on an in-depth and all- around study of the
underlying forces of the economy, conducted to provide data that can be used to
forecast future prices and market developments.
6. It helps an investor obtain information about the overall state of the market,
attractiveness and state of a specific security as compared to other securities.

STEPS INVOLVED IN FUNDAMENTAL ANALYSIS

1. Get familiar with the company: Go through the website, leam about its product, market,
how it has been performing, its future goals and past decisions. Once you know as much as
possible about the business, are going to be in a better position to evaluate the other
variables.

2. Read the financial reports: After gaining a full understanding of the company, may look
into the financial reports, such as the balance sheets, profit-and-loss statements, operating
costs, cash flow, revenue and expenses. Check whether the net profit has been on the rise in
the past five years. If this is so, then it is a positive sign. May also calculate the compounded
annual growth rate (CAGR). Can find financial reports of a company in trading and investing
platforms online.

3. Check the debt: Debt can impact the growth potential and performance of a company
negatively. It is advisable to refrain from investing in companies that have high debt, as this
can affect the returns. The ideal debt-equity ratio is less than one. Look for a company with
this debt-equity ratio for safer investments.

4. Study the competitors: Competition is an important factor in determining whether a

company can scale and grow as effectively as it aims to. If the competitors have a better
reputation in the market and produce better quality products, the chances of the company
succeeding can be less. It is better to go with a company that has already established itself as
a leader in the market and that enjoys a better reputation than its competitors.

5.Analyse the future prospects: Some products are seasonal and may even lose their
significance with time. Others can be evergreen products or they may have a use for
customers regularly in the foreseeable future. Analyse these aspects to see if the company
has the potential to grow and sustain itself in the long run. Diminishing product values
results in decreasing stock values.

6. Review all aspects periodically: Micro-and macroeconomic changes can affect the prices
and valuation of companies. The occurrence of new events and the innovation of technology
can make certain products obsolete or enhance their existing value. This makes it important
to remain aware of the current happenings, read industry-relevant news and follow the
company closely. This can help plan to hold or sell investments.

ADVANTAGES/ STRENGTHS OF FUNDAMENTAL ANALYSIS

Following are the various advantages of the fundamental analysis:

1. Long-Term Trends: Fundamental analysis is good for long term investments based on
long-term trends. The ability to identify and predict long-term economic, demographic,
technological or consumer trends can benefit investors and helps in picking the right
industry groups companies.
2 Value Spotting: Sound fundamental analysis will help identify companies that represent a
good value. Some of the most legendary investors think for long-term and value.
Fundamental analysis can help uncover the companies with valuable assets, a strong balance
sheet, stable earnings, and staying power.

3. Business Acumen: After such painstaking research and analysis, an investor will be
familiar with the key revenue and profit drivers behind a company. Earnings and earnings
expectations can be potent drivers of equity prices. A good un

influenced by the industry group.

5. Knowing Who is Who: Stocks move as a group. Knowing a company's business, investors
can better categorize stocks within their relevant industry group that can make a huge
difference in relative valuations. The primary motive of buying a share is to sell it
subsequently at a higher price. In many cases, dividends are also to be expected. Thus,
dividends and price changes constitute the return from investing in shares.

WEAKNESSES OF FUNDAMENTAL ANALYSIS

1. Time Constraints: Fundamental analysis may offer excellent insights, but it can be
extraordinarily time consuming. Time-consuming models often produce valuations that are
contradictory to the current price prevailing on securities market.

2. Industry / Company Specific: Valuation techniques vary depending on the industry group
and specifics of each company. For this reason, a different technique and model is required
for different industries and different companies. This can get quite time consuming and limit
the amount of research that can be performed.

3. Subjectivity: Fair value is based on assumptions. Any changes to growth or multiplier

assumptions can greatly alter the ultimate valuation. Fundamental analysts are generally
aware of this and use sensitivity analysis to present a base-case valuation, a best-case
valuation and a worst-case valuation.

4. Analyst Bias: The majority of the information that goes into the analysis comes from the
company itself. Companies employ investor relations managers specifically to handle the
analyst community and release information. The analysts because of their relationship with
company officials can show biasness.

APPROACHES OR TYPES OF FUNDAMENTAL ANALYSIS

1. Top-down Approach
The financial analyst first makes forecast for the economy, then for industries and
finally for companies in Top - down approach.
 2. Bottom-Up Approachh
In Bottom -up approch, the investor starts his analysis with company analysis then
goes for industry and at last for economic analysis that is with national or
international economic indicators.
3. Qualitative Approach
Qualitative fundamental analysis focuses more on the subjective and Quantifiable
aspects of an entity to determine its stock value. Rather thean analyzing the
quantifiable data, it studies factors like the brand value, employee satisfaction, how
enic the or experienced the management is, customer feedback and other details.
4. Quantitative Analysis
A quantitative analysis considers the quantitative or numerical factors to estimate
the value of a stock. It is primarily based on statistics and mathematical calculations.
EIC Framework
EIC (Economy, Industry, Company) analysis framework is a fundamental approach
used in the investment decision-making process, providing a structured way to
examine the macroeconomic environment, the specific industry, and individual
companies.

EIC FRAMEWORK
EIC (Economy, Industry, Company) analysis framework is a fundamental approach used in
the investment decision-making process, providing a structured way to examine the
macroeconomic environment, the specific industry, and individual companies.

1. Economic Analysis

The first step in the EIC framework is to analyze the overall economic environment
because macroeconomic factors significantly influence both industries and individual
companies. Economic analysis involves examining various indicators, including GDP growth,
inflation rates, interest rates, unemployment rates, fiscal and monetary policies, and other
economic indicators that can affect investment decisions. Understanding the economic
context helps investors predict which sectors are likely to prosper and which are likely to
underperform.

2. Industry Analysis

The next step involves analyzing the specific industry in which the company operates. This
includes understanding the industry's growth potential competitive landscape, regulatory
environment, and technological advancements. The goal is to identify industries with high
growth prospects and understand where a company stands within its industry.

3. Company Analysis

This is the crux of fundamental analysis, focusing on a thorough examination of the company
itself. It involves:

• Financial Statement Analysis: Reviewing the company's balance sheet, income statement,
and cash flow statement to assess its financial health, profitability, liquidity, and operational
efficiency.

• Ratio Analysis: Using key financial ratios like the price-to-earnings(P/E) ratio, debt-to-
equity ratio, return on equity (ROE), and others to compare a company's performance
against its peers and industry averages.

• Management and Governance: Evaluating the company's leadership, strategic direction,

corporate governance practices, and any competitive advantages.

ECONOMIC ANALYSIS: INTRODUCTION

The performance of the company depends on the performance of the economy. If the
economy is booming, incomes rise, demand for d for goods increases and hence the
industries and companies in general tend to be prosperous

MACRO ECONOMIC ANALYSIS – FACTORS

The analysis of the following factors indicates the trends in macroeconomic changes that
affect the risk and return on investment:

(i) Growth Rate of Gross Domestic Product: The gross domestic product is a measure of the
total production of final goods and services in the economy during a specified period usually
a year. The growth rate of GDP is the most important indicator of the performance of the
economy. The higher the growth rate of GDP, other things being favourable it is for stock
market.

(ii) Monsoons: Agriculture accounts for about a quarter of the Indian economy and has
important linkages, direct and indirect, with industry. Hence, the increase or decrease of
agricultural production has a significant bearing in industrial production and corporate
performance. Companies using agricultural raw materials as inputs supplying inputs to
agriculture are directly affected by the changes in agricultural production. Other companies
also tend to be affected due to indirect linkages.
 A spell of good and monsoons imparts dynamism to the industrial sector and buoyancy to
the stock market. Likewise, a streak of bad monsoons casts its shadow over the industrial
sector and the stock market.

(iii) Fiscal Deficit: The central budget as well as the state budgets prepared annually provides
information on revenues, expenditures and deficit or surplus. In India, governmental
revenues come more from indirect taxes such as excise duty and custom duty and less from
direct taxes such as income tax. The bulk of the government expenditures go toward
administration, interest payment, defence subsidies etc.

(iv)Interest Rate: A rise in interest rates depresses corporate profitability and also leads to
an increase in the discount rate applied by equity investors, both of which have an adverse
impact on stock prices. On the other hand, a fall in iGlobal Economy Analysis

(v) Balance of Payments, Forex Reserves, and Exchange Rates: A balance of payments
deficit depletes the forex reserves of the country and has an adverse impact on the
exchange rate; on the other hand, a balance of payments surplus augments the force
reserves of the country and has a favourable impact on the exchange rate.

(vi) Unemployment: It is primary indicator of the health of an economy. A certain level of

unemployment is considered to be unavoidable due to:

1. Structural changes in an economy.

2. Workers who are voluntary switching jobs.

This unavoidable level of unemployment is called the natural level of unemployment.

(vii) Institutional Lending: A positive increase by institutional investors gives impetus to

industrial growth which in turn increases the consumption from the primary sector
therefore leading to overall growth. Similarly, a negative growth in the institutional investors
creates effect vice versa.

(viii) Industrial Wages: Increase in industrial wages improves the purchasing power of
Industrial labour and increase the demand factor leading to economic growth which has a
positive outlook for the stock market.

(ix) Technological Innovations: Technological innovations lead to improvement in industrial

productivity and improvement in the agricultural productivity. Therefore, leading to
economic growth which in turn improve in investment scenario and result into more
investors in the businesses which have positively impact on the stock market.

(x) Tax Structure: Tax structure of an economy also affects the stock market. If the tax
exemptions and subsidies has been given, it will result into more investors in the business
which have positive impact on the stock market.

GLOBAL ECONOMY
 The global economy refers to the interconnected worldwide economic activities that take
place between multiple countries.

BENEFITS OF GLOBAL ECONOMY

 Increased Trade Opportunities

 Economic Growth
 Reduced Poverty
 Cultural Exchange and Understanding
 Access to Capital and Resources
 Enhanced Access to Information and Technology
 Improved Standards of Living
 Environmental Benefits

DISADVANTAGES OF GLOBAL ECONOMY

 Increased Economic Inequality

 Vulnerability to Economic Shocks
 Loss of Jobs and Wage Pressures
 Dependency on Global Supply Chains
 Environmental Degradation
 Loss of Cultural Identity

GLOBAL ECONOMY ANALYSIS FACTORS

This analysis encompasses various economic indicators, policy decisions, geopolitical

events, and emerging trends. A thorough understanding of these elements can provide
insights into global economic health, growth prospects, and potential risks.

• Economic Growth and Development: Assessing the global economy starts with
understanding the growth dynamics of major economies and regions. This includes looking
at gross domestic product (GDP) growth rates, which indicate the overall economic health
and activity levels. Economists and analysts also examine development indicators such as
income levels, poverty rates, andemployment figures to gauge broader economic well-being.

• Inflation Trends: Inflation is a critical global economic indicator that affects purchasing
power, monetary policy, and investment returns. Analysts monitor inflation rates across
different countries, looking for trends that might signal rising costs of living or potential
stagflation scenarios, where growth accompanies high inflation potential stagnation
scenarios, where slow growth accompanies high inflation.
• Monetary and Fiscal Policies: The policies set by central banks and governments
significantly impact the global economy. This includes interest rate decisions, quantitative
easing measures, tax policies, and government spending. These policies can influence
currency values, trade balances, and international capital flows.

• Trade Relations and Agreements: Trade dynamics, including export and import volumes,
trade balances, and tariffs, are vital for understanding the global economy. Trade
agreements and disputes can reshape economic relationships and supply chains, affecting
industries and economies worldwide.

• Currency and Exchange Rates: Currency values play a crucial role in the global economy,
influencing international trade, investment decisions, and economic competitiveness.
Exchange rate movements can signal investor sentiment, economic health, and policy shifts,
making them important for global economic analysis.

• Global Supply Chains: The structure and efficiency of global supply chains are critical for
economic stability and growth. Disruptions, whether from geopolitical tensions, natural
disasters, or other factors, can have far-reaching impacts on production, prices, and the
availability of goods.

• Geopolitical Events: Political stability, international relations, and geopolitical events can
significantly impact the global economy. Conflicts, elections, and policy shifts can alter
economic expectations and disrupt markets.

• Technological Advancements: Technological innovation drives productivity, creates new

industries, and reshapes existing ones. Understanding the impact of technologies like
artificial intelligence, renewable energy, and digital currencies is essential for a
comprehensive global economic analysis.

• Environmental and Social Factors: Sustainability and social issues, including climate
change, demographic shifts, and income inequality, increasingly influence global economic
policies and investment decisions. These factors can affect resource availability, regulatory
landscapes, and consumer behavior.

• Emerging Markets: The role of emerging markets in the global economy is growing. These
countries often offer higher growth potential but come with increased volatility and risk.
Analyzing the economic conditions, risks, and opportunities in these markets is crucial for a
rounded global economic outlook.

• Global Economic Risks: Identifying and assessing potential economic risks, such as
financial crises, debt levels, and systemic vulnerabilities, is essential for anticipating
challenges that could affect global economic stability and growth.

DOMESTIC ECONOMY
 The domestic economy refers to the economic activities that take place within the birders
if a specific country, encapsulating all products, consumption, and exchange of goods and
services occurring internally.

ADVANTAGES OF DOMESTIC ECONOMY

 Control Over Economic Policies

 Protection of Domestic Industries\
 Job Creation and Employment Stability
 Promotion of National Identity and Culture
 Strengthening of Supply Chains and Resilience
 Support for Small and Medium-sized Enterprises (SMEs)
 Environmental Sustainability

DISADVANTAGES OF DOMESTIC ECONOMY

 Limited Market Access

 Vulnerability to Economic Volatility
 Risk of Protectionism and Trade Wars
 Limited Access to Resources and Expertise
 Reduced Economic Diversity and Specialization

Factors affecting Domestic economy

• Gross Domestic Product (GDP): GDP is the foremost indicator of a domestic economy's
size and health, representing the total value of all goods and services produced over a
specific period. Analysts look at both the nominal and real GDP (adjusted for inflation) to
gauge economic growth and productivity. Trends in GDP growth rates can indicate whether
an economy is expanding, stagnating, or contracting.

• Unemployment Rate: The unemployment rate measures the percentage of the labor force
that is jobless and actively seeking employment. It's a key indicator of labor market health.
High unemployment suggests an economy is underperforming or in recession, while low
unemployment points to a robust, growing economy.

• Inflation Rate: Inflation, the rate at which the general level of prices for goods and services
is rising, erodes purchasing power. Central banks closely monitor inflation to adjust
monetary policy accordingly, aiming to maintain price stability. Both hyperinflation and
deflation can have Inefficiencies and Higher Costs detrimental effects stability.

• Interest Rates: Interest rates set by a country's central bank are a critical tool for
influencing economic activity. Lower interest rates can stimulate borrowing and investing,
while higher rates may cool down an overheated economy or curb inflation. The balance
between stimulating growth and controlling inflation is a delicate one.
• Fiscal Policy: Government spending and policies can significantly economic health. Fiscal
taxation impact stimulus (increased spending or lower taxes) can spur economic growth
during downturns, while contractionary fiscal policy (reduced spending or higher taxes) can
help cool down an overheating economy.

• Balance of Trade: The balance of trade, the difference between a country's exports and
imports, affects a nation's GDP. A trade surplus (more exports than imports) can be a sign of
economic strength, while a trade deficit (more imports than exports) may indicate an
economy's reliance on foreign goods and services.

• Consumer and Business Confidence: Surveys measuring consumer confidence and

business sentiment provide insight into future economic activity, as they reflect how
households and businesses view their financial prospects. High confidence levels typically
lead to increased spending and investment, fueling economic growth.

• External Factors: An economy does not operate in isolation; it's affected by global
economic conditions, including international trade, foreign exchange rates, global
commodity prices, and economic policies of major trading partners. Events like geopolitical
conflicts, global pandemics, or international financial crises can also have significant impacts.

• Debt Levels: National debt levels and their sustainability can influence a country's
economic health. High debt levels may restrict government spending and could lead to
higher taxes or inflation, affecting economic growth and stability.

• Sectoral Performance: Analyzing the performance of key economic sectors (such as

manufacturing, services, agriculture, and technology) provides insights into the economy's
structure and growth drivers. It can also highlight areas of vulnerability or strength.

• Demographic Trends: Demographic changes, including aging populations or workforce

growth, can have long-term impacts on an economy. For instance, an aging population may
increase healthcare and pension costs, while a growing workforce can boost economic
growth potential.

• Technological Innovation: The rate of technological advancement and innovation within a

country can significantly affect its productivity and economic growth. Economies that foster
innovation through investments in research and development (R&D) and education tend to
have a competitive advantage in the global market.

• Regulatory Environment: The ease of doing business, regulatory efficiency, and the legal
framework within a country can greatly influence economic activity. A environment
conducive regulatory can attract foreign investments, promote entrepreneurship, and
enhance economic growth.

INDUSTRY ANALYSIS
 Industry analysis is a market evaluation tool companies use to assess the level and
intensity of competition in a specific industry. Businesses use this tool to understand their
market position and evaluate how internal and external factors such as technological
changes, demand and supply dynamics, access to finance and the entry of new rivals can
affect their competitive advantage.

In other word, Industry analysis refers to an evaluation of the relative strengths and
weaknesses of particular industries.

OBJECTIVES OF INDUSTRY ANALYSIS

Following are the objectives of industry analysis:

(i) To understand how industry structure drives competition, which determines the level of
industry profitability.

(ii) To assess industry attractiveness.

(iii) To use evidence on changes in industry structure to forecast future profitability.

(iv) To formulate strategies to change industry structure to improve industry profitability.

(v) To identify key success factors.

KEY INDICATORS IN ANALYSIS

The industry analysis should take into account the following factors among others as
influencing the performance of the company, whose shares are to be analysed:

1. The Past Performance of the Industry: Past sales and past earnings for certain years may
be analyzed to forecast future earnings. The cost structure of the industry may also be
analysed to look into the leverages of the industry.

2. The Performance of the Product and Technology of the Industry: If the analysts feel that
the demand for the product for a particular industry would soon vanish, no investment is
made in that industry. In the age of rapid technological obsolesce, the degree of
permanence has become an important consideration in the industry analysis.

3. Role of Government in the Industry: Government polices affect the industries directly.
Factors like tax subsidies and tax holidays, regulations and pricing policy, Entry and exit
barriers set by government and liberalization of licensing must be analyzed. Government
policies on environment and pollution control standards affect various industries.

4. Labour Conditions: Labour scenario in a particular industry is very important. The number
of trade unions and their operating mode has an impact on labour productivity. Frequent
strikes and lockouts result in loss of production and high fixed capital loss. Availability of
skilled and unskilled labour must be analyzed.
5. Research and Development: For any industry to survive competition in national and
international market, the product and production process must be competitive. This
depends on R&D. The expenditure on R&D should be studied before making any investment
in industry.

6. Competitive Conditions in the Market: The competitive conditions in the industry be

analysed with following questions in mind:

(a) Whether there is barrier to entry or threat of entry of new firms in the industry.

(b) Extent of competition among existing players is another dimension.

(c) Whether there is a substitute product which can replace the given product.

7. Inter Linkages with Other Industries: In the industry analysis, the interdependence and
inter-linkages of one industry with other industries should be considered. For example, the
position of auto-ancillary industry depends on the position of the auto industry. Similarly,
the demand of cement industry depends on the infrastructure budget of the government.

8. Cost Structure and Profitability: Cost structure of the industry in terms of fixed and
variable costs must be analyzed. Factors like inventory turnover and asset turnover must be
analyzed which is an indication of capacity utilization of an industry. Analysing Profitability
ratios helps us understand the profitability of the industry.

9. Nature of the Product and Demand: The products produced by industries are demanded
by consumers and other industries. An investor must analyse the condition of the feeder
industry as well as the end user industry to assess the demand for industrial goods. In case
of consumer goods industry, a change in consumer preference. technological innovations
and substitute products affect the demand.

10. Capacity Installed and Utilised: The demand for industrial products in the economy is
estimated by the Planning Commission and the government, and the units are given licensed
capacity on the basis of these estimates. If the demand is rising as expected and the market
is good for the product, the utilisation of capacity will be higher. If, however, the quality of
the product is poor, competition is high and there are other constraints to the availability of
inputs and there are labour problems, then the capacity utilisation will be low and
profitability will be poor.

SWOT ANALYSIS FOR THE INDUSTRY.

a) Strength: Strength of an industry refers to its capacity and comparative advantage in

the economy. Other elements that may add to the strength of an industry are: high
quality products, good customer service, restriction on entry of competitive product
etc.
 For example, the existing research and development facilities and the greater
dependence on allopathic drugs are two elements contributing to the strength of
pharmaceutical industry in India.
b) Weakness: Weakness refers to the restrictions and inherent limitations in the
industry, which keep the industry away from meeting its target.
For example, Lack of infrastructure facility, rail-road links etc. are weakness of the
tourism industry in India.
c) Opportunities: Opportunities refers to the expectation of favourable situation for an
industry. It may be identified by a trend analysis or by a pattern of changing
consumer preferences.
For example, changing preference from gold to diamond jewellery has brought a lot
of opportunities for the diamond industry.
d) Threats: Threats refers to an unfavourable situation that has a potential to endanger
the existence of an industry. Threats may also come in the shape of new product or
industry.
For example, after liberalisation of import policy in India, import of Chinese goods
has threatened many industries in India such as toys etc.

PORTER'S FIVE FORCES MODEL FOR INDUSTRY ANALYSIS

The porter five force model is a framework for industry analysis and business strategy
development by Michael Porter in 1979. It uses concepts to determine the competitive
intensity and profitability and attractiveness of an industry.

1. Threat of New Entrants: The entry of new companies in the market increases the
competition and reduces profitability. The entry and exit barriers for a particular industry
decide the number of new entrants. Government rules and regulation for starting a
company is a major factor for new entrants. The capital required starting new companies,
economies of scale, customer switching costs, resistance of existing players are main barriers
for entrants.

2. Bargaining Power of Buyers: Buyers are a competitive force. They can bargain for price
cut, superior and better service and induce rivalry among competitors. If they are powerful,
they can depress the profitability of suppliers. Bargaining power of buyers is high when-

 Its purchasing power is relatively large to the seller.

 Its switching costs are low.
 It poses strong threat to backward integration.

3. Bargaining Power of Suppliers: Suppliers can exert competitive force in an industry as

they can raise prices, lower quality and curtail the range of free services they provide.
Powerful suppliers can affect the profitability of the buyer industry. Suppliers have strong
bargaining power when-

 A few suppliers dominate the industry and there are many buyers
 There are no substitutes for the product supplied.
 The switching cost of buyers is high.
 If suppliers pose a threat of forward integration.

4. Rivalry among Existing Players: Firms in an industry compete on the basis of price,
quality, promotions, services etc. A firms attempt to improve its competitive position
provokes retaliatory action from others. This can affect the profitability of industry. Rivalry
tends to be high when-

 The number of competitors is large.

 Few firms are capable of engaging in competitive battle.
 Industry growth is sluggish forcing the firms to acquire a larger market share.
 The level of fixed cost is high forcing the firms to achieve higher capacity utilization.
 The industry has high exit barriers.

5. Threat from the Substitutes: All firms in an industry face competition from industries
producing substitute's products. Substitute product may limit the profit potential of the
industry. The threat of substitute products is high when-

 The price performance trade-offs offered by substitutes is attractive.

 The switching costs for buyer is low.
 The substitute products produced by are industry earning superior profits.

PESTLE ANALYSIS

PESTLE analysis evaluates the political, economic, social, technological, legal and
environmental factors that can affect a business. Here are some considerations of the
analysis:

a) Political Factors: The analysis assesses political factors such as government policies, trade
regulations, tariffs and the overall political climate of the region a company is operating or
intends to operate.

b) Economic Factors: This aspect of the analysis examines factors such as Gross Domestic
Product (GDP), net income, imports and exports, unemployment rate, interest rates, access
to credit and taxation.

c) Social Factors: Social factors the analysis evaluates include the local cultures and customs,
demography, customer buying behaviour and attitudes of the local population.

d) Technological Factors: The analysis also evaluates how technological factors such as
research and development efforts, industry trends and the Internet can affect a business.
e) Legal Factors: The analysis also checks how labour laws, employment contracts, industry
regulations and other legal requirements can influence a company.

f) Environmental Factors: The analysis also studies the potential impacts of environmental
issues, such as climate change, on the business.

BUSINESS CYCLE

Meaning

The term “Business Cycle” is used in economic to describe the periodic fluctuations in
economic activity that an economy experiences over time. These fluctuations can be
measured by indicators such as GDP, unemployment, and inflation.

Meaning of Trade Cycle

Trade cycle consist of recurring alteration of expansion and contraction in aggregate

economic activity, the alternating movements in each direction being self-reinforcing and
pervading virtually all parts of the economy.

Definitions of the Trade Business Cycle

According to Mitchell, Business Cycle are of fluctuations in the economic activities of

organized communities.

PHASES OF BUSINESS CYCLE

Phase-1: Depression, Contraction or Downswing

This period is characterized by:

a) A sharp reduction in the volume of output, trade and other transactions.

b) An increase in the level of unemployment.

c) A sharp reduction in the aggregate income of the community especially wages and profits.
In a few cases, profits turn out to be negative.

d) A drop in prices of most of the products and fall in interest rates.

e) A steep decline in consumption expenditure and fall in the level of aggregative effective
demand.

f) A decline in marginal efficiency of capital and hence the volume of investment.

g) Absence of incentives for production as the market has become dull.

h) A low demand for Loan able funds, surplus cash balances with banks leading to a
contraction in the creation of bank credit.

i) A high rate of business failures.

j) An increasing difficulty in returning old debts by the debtors. This forces them to sell their
inventories in the market where prices are already falling. This deepens depression further.

k) A decline in the level of investment in stocks as it becomes less attractive and less
profitable. This reduces the deposits with the banks and other financial institutions leading
to a contraction in bank credit.

l) A lot of excess capacity exists in capital and consumer goods industries which work much
below their capacity due to lack of demand.

Phase-2: Recovery or Revival

The recovery may be initiated by the following factors:

a) Increase in government expenditure so as to increase purchasing power in the hands of

consumers.

b) Changes in production techniques and business strategies.

c) Diversification in investments or Investment in new regions.

d) Explorations and exploitation of new sources of energy etc.

e) new innovations-developing new products or services, new marketing strategy etc.

Phase-3: Prosperity or Full-employment

a) A high level of output, income, employment and trade.

b) A high level of purchasing power, consumption expenditure and effective demand.

c) A high level of Marginal Efficiency of Capital and volume of investment.

d) A period of mild inflation sets in leading to a feeling of optimism among businessmen anc
industrialists.

e) An increase in the level of inventories of both inputs and outputs.

f) A rise in Interest Rate.

g) A large expansion in bank credit and financial institutions lend more money to business
men.

h) Firms operate almost at full capacity along with its production possibility frontier.
i) Share markets give handsome gains to investors as dividends and share prices go up.
Consequently, idle funds find their way to productive investments.

j) A state of exuberance and enthusiasm exists in business community.

k) Industrial and commercial activity, both speculative and non-speculative show remarkable
expansion.

l) There is all round expansion, development, growth and prosperity in the economy.
Everyone seems to be happy during this period.

Phase-4: Boom or Over full Employment or Inflation

a) Prices, wages, interest, incomes, profits etc. move in the upward direction.

b) MEC raises leading to business expansion.

c) Business people borrow more and invest. This adds fuel to the fire. The tempo of boom
reaches new heights.

d) There is higher output, income and employment. Living standards of the people also
increases

e) There is higher purchasing power and the level of effective demand will reach new
heights.

f) There is an atmosphere of "over optimism" all round, which results in over investment.
Cost of living increases at a rate relatively higher than the increase in household incomes.

g) It is a symptom of the end of prosperity phase and the beginning of recession.

Phase-5: Recession: A turn from prosperity to Depression

a) The period of recession begins when the phase of prosperity ends. It is a period of
time where in the aggregate level of economic activity starts declining. There is
contraction or slowing down of business activities.
b) The demand for goods decline.
c) Investment plans are given up.
d) The cancellation of orders for the inputs by the producers of consumer goods creates
a chain in the input market.
e) In order to get rid of their high inventories and to clear off their bank obligations,
producers reduce market prices.
f) In anticipation of further falls in prices, consumers postpone their purchases.
g) Production schedules by firms are curtailed and workers are laid-off.
h) Banks curtail credit.
i) Share prices decline.

CONTROL OF BUSINESS CYCLE

 1. Monetary Policy
2. Fiscal Policy
3. Direct Controls

MEASURE OF THE BUSINESS CYCLE

1. Gross Domestic Product (GDP)

2. Inflation
3. Unemployment Rates
4. Industrial Production
5. Retail Sales
6. Stock Market
7. Housing Market

COMPANY ANALYSIS

Company analysis deals with return and risk of individual share and security. The analyst
tries to forecast the future earnings which has direct effect on share price.

Key Components of Company Analysis

1. Financial Analysis: Involves examining financial statements, ratios, and metrics to assess
profitability, liquidity, solvency, and operational efficiency. Common metrics include return
on equity (ROE), debt-to-equity ratio, and profit margins.

2. Business Model and Competitive Advantage: Iniate how a company makes moneyand its
unique value proposition. It also assesses the company's sustainable competitive advantages
or moats, such as brand strength, proprietary technology, or network effects.

3. Management Quality: Considers the experience, track record, and leadership skills of the
company's management team. Effective leadership can significantly influence a company's
strategic direction and operational success.

4. Market Position and Share: Looks at the company's position within the industry and its
market share. A leading position can indicate stronger competitive advantages and
bargaining power.

5. Growth Prospects: Assesses future growth opportunities, based on factors like market
expansion, product development, and potential for market share gains. This includes
evaluating the company's strategy for capitalizing on these opportunities.

6. Risks: Identifies potential risks that could affect the company's performance, including
operational, financial, regulatory, and market risks.