Page 117 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Company Specific
Board Source/Form
Macro- Economic
Industry Factors
Factors
of Earnings
Competitive
Sales
savings, Monetary policy
demand/supply
strength
credit, Export-import
policies, Population, price
level.
Operating
Less Costs of sales
Industry wage
National wage policy price
Levels: Industrial
levels, Economic
efficiency
infrastructure, Raw
Infrastructure
materials production
Import-export policy
Capital
Earnings Before
Interest rates in the
Industry cost of
Economy, Capital
Structure/financial
capital
Interest
leverage policy
conditions
Depreciation &
Taxes (EBIDT)
Less Interest
Less
Capital goods import
Industry practices
Operational
leverage
Depreciation
policy
Fiscal Policy
Tax Planning and
Industrial lobby
Less Tax
Management Industry National income, sp.
Net Earnings After
Tax (NEAT)
Less Capital Structure Industry Practices Interest Rate Structure,
(Preference Policy Capital… Conditions
Security Analysis and Portfolio Management
Dividend)
Distributable
Earnings
Less
Notes
Equity Dividend Dividend Policy Industry Practices Fiscal Policy, Credit Capital
Market conditions
Retained Earnings

The analysis of economy, industry and company fundamentals as mentioned above is the main
ingredient of the fundamental approach. The analyst should take into account all the three
constituents that form different but special steps in making an investment decision. These can be
looked at as different stages in the investment decision-making. Operationally, to base the
investment decision on various fundamentals, all the three stages must be taken into account.
4.1 Economy Analysis
In actual practice, you must have noticed that investment decisions of individuals and the
institutions made in the economic set-up of a particular country. It becomes essential, therefore,
to understand the star economy of that country at the macro level. The analysis of the state of the
economy at the macro level incorporates the performance of the economy in the past, how it is
performing in the present and how it is expected to perform in future. Also relevant in this
context is to know how various sectors of the economy are going to grow in the future.
Figure 4.1

Economy

Industry

Company Analysis

4.1.1 Macro Economic Analysis
The analysis of the following factors indicates the trends in macro economic changes that effect
the risk and return on investments.
1. Money supply
2. Industrial production
3. Capacity utilisation
4. Unemployment
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