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FUNDAMENTAL ANALYSIS OF A STOCK
Presented by
Mr Fahim Akhtar, Secretary General Association for investor's awareness
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SCHEME / SEQUENCE
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What fundamental is
Significance of fundamentals
How to analyze a stock
Forming a view / strategy
FUNDAMENTAL
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Fundamental analysis is performed on historical
and present data, but with the goal of making
financial forecast . There are several possible
objectives:To conduct a company stock valuations and predict its probable price evolution, To make a projection on its business performance, To evaluate its management and make internal business decisions
SIGNIFICANCE OF FUNDAMENTALS
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Give true picture
Emotions can be overcome
Growth can be measured
Investment strategy can be formed
Brings professional approach in trade
HOW TO ANALYZE A STOCK
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DATA REQUIRED
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Financial reports both current and historical All current information about company Plans of company currently in implementation Impact of rules or taxation
WHERE DATA IS AVAILABLE
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Company websites
KSE website
Few forums ( discussion forums)
aia websites
WHAT IS IMPORTANT TO SEE
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Balance sheet Income statement Cash Flow statement
BALANCE SHEETBALANCE SHEET
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A summary of a firm’s financial position on
a given date that shows total assets = total
liabilities + owners’ equity.
INCOME STATEMENTINCOME STATEMENT
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A summary of a firm’s revenues and
expenses over a specified period, ending with net
income or loss for the period
CASH FLOWCASH FLOW
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Provides information what actually happening
in business beyond that either contained in balance
sheet or income statement
BALANCE SHEET
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a. How the firm stands on a specific date.
b. What ALF owned.c. Amounts owed by customers.d. Future expense items already
paid.e. Cash/likely convertible to cash
within 1 year.f. Original amount paid.g. Acc. deductions for wear and
tear.
a. How the firm stands on a specific date.
b. What ALF owned.c. Amounts owed by customers.d. Future expense items already
paid.e. Cash/likely convertible to cash
within 1 year.f. Original amount paid.g. Acc. deductions for wear and
tear.
Cash $ 90 Acct. Rec.cc 394 Inventories 696 Prepaid Exp d d 5 Accum Tax Prepay 10
Current AssetsCurrent Assetsee $1,195 $1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329)
Net Fix. AssetsNet Fix. Assets $ 701 $ 701 Investment, LT 50 Other Assets, LT 223
Total AssetsTotal Assets bb $2,169 $2,169
ALI Fert Balance Sheet (thousands) Dec. 31, 20011ALI Fert Balance Sheet (thousands) Dec. 31, 20011a
ALI FERT – ASSET SIDE
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a. Note, Assets = Liabilities + Equity.
b. What ALF owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
a. Note, Assets = Liabilities + Equity.
b. What ALF owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxes d d 16 Other Accrued Liab. d d 100 Current Liab.Current Liab. ee $ $ 500 500 Long-Term Debt f f
530 Shareholders’ Equity Com. Stock ($1 par) g g
200 Add Pd in Capital g g
729 Retained Earnings h h 210 Total Total EquityEquity $ $1,1391,139 Total Liab/EquityTotal Liab/Equitya,ba,b $2,169 $2,169
ALI fert Balance Sheet (thousands) Dec. 31, 2011ALI fert Balance Sheet (thousands) Dec. 31, 2011
ALI FERT – LIABILITIES SIDE
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
Net Sales $ 2,211 Cost of Goods Sold bb 1,599
Gross Profit $ 612 SG&A Expenses c c 402 EBITd $ 210 Interest Expensee 59 EBT f f $ 151 Income Taxes 60
EATg $ 91 Cash Dividends 38 Increase in REIncrease in RE $ 53 $ 53
Statement of Earnings (in thousands) for Year Ending Statement of Earnings (in thousands) for Year Ending December 31, 2011December 31, 2011a
INCOME STAEMENT
CurrentCurrent
Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
For ALI Fert December 31, 2007
CurrentCurrent
Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities
For ALI Fert December 31, 2007
Shows a firm’s ability to cover its current
liabilities with its current assets.
Balance Sheet Ratios
Liquidity Ratios
$1,195$1,195$500$500 = 2.392.39
LIQUIDITY RATIO
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ALF Industry
2.39 2.15
2.26 2.09
1.91 2.01
ALF Industry
2.39 2.15
2.26 2.09
1.91 2.01
Year
2011
2010
2009
Current RatioCurrent Ratio
Ratio is stronger than the industry average.
LIQUIDITY RATIO COMPARISION
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Acid-Test (Quick)Acid-Test (Quick)
Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities
For ALF December 31, 2007
Acid-Test (Quick)Acid-Test (Quick)
Current Assets - InvCurrent Assets - InvCurrent LiabilitiesCurrent Liabilities
For ALF December 31, 2007
Shows a firm’s ability to meet current liabilities
with its most liquid assets.
Balance Sheet Ratios
Liquidity Ratios
$1,195 - $696$1,195 - $696$500$500
= 1.001.00
LIQUIDITY RATIO
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ALF Industry
1.00 1.25
1.04 1.23
1.11 1.25
ALF Industry
1.00 1.25
1.04 1.23
1.11 1.25
Year
2007
2006
2005
Acid-Test RatioAcid-Test Ratio
Ratio is weaker than the industry average.
LIQUIDITY RATIO COMPARISION
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• Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
• Note that this industry has a relatively high level of inventories.
• Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
• Note that this industry has a relatively high level of inventories.
RatioRatio ALFALF IndustryIndustry
Current 2.39 2.15
Acid-Test 1.00 1.25
SUMMARY
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• Cash generated by company is sufficient for expansion strategy
• Stock holders wants to know if company can pay dividends
• Suppliers knows they will get their credit supplies paid• Investors wants to evaluate future growth potentials
• Cash generated by company is sufficient for expansion strategy
• Stock holders wants to know if company can pay dividends
• Suppliers knows they will get their credit supplies paid• Investors wants to evaluate future growth potentials
WHY CASH FLOW IS IMPORTANT
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• Cash flow from operating activities• Cash flow from investing activities• Cash flow from financing activities
• Cash flow from operating activities• Cash flow from investing activities• Cash flow from financing activities
FORMAT OF CASH FLOW
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• Find consistent growth• Watch gain in income• Cash flow is to be seen critically• If all these factors do not support try to find and
ascertain reason•
• Find consistent growth• Watch gain in income• Cash flow is to be seen critically• If all these factors do not support try to find and
ascertain reason•
FORMING A STRATEGY
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QUESTIONS
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