Page 130 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 4: Fundamental Analysis

(c) An increase in value added without an increase in capital expenditure signifies Notes
increase in labour productivity.
(d) A fall in the share of industry in national total implies decline of industry.

2. Cumulative Methods: These are based either on market surveys or statistical measurements,
(a) Surveys: Surveys are carried out by research agencies, consultants, industry
association and the research bureau of media. These surveys generally study the
current facilities and demand, future demand and proposed investment, and thereby
the expansion prospects vis-à-vis demand gap. Other factors like, strengths and
weaknesses of the organization, environmental forces are also brought into focus to
evaluate the future of the industry.
Surveys adopt the methodology of inquiry, through questionnaires and interviews.
The subjects will be either manufacturer or dealers/end users.

(b) Correlation and Regression analysis: Statistical methods like correlation and regression
analysis can be of much help in demand measurement. The following steps have
general application.
(i) Determine the total requirement for the type of product in question by present
customers in each industry classification.

This can be done by asking the customer or obtaining the estimate from the
salesmen, or by comparing with other customers of same size and class.
(ii) Correlation product requirement of customer establishments with a variable
to output for which accurate published data are available. Generally,
employment is the most useful variable.
The correlation can be observed by preparing a scatter diagram, as shown in
figure or calculating mathematically, using the formula given below:
N (xy) ( x)( y)
Degree of relationship (r) = 2 2 2 2
[n x ( x) ][N x ( y) ]
Where, X = Number of employees
Y = Number product items
… observation

The nearer the correlate n coefficient is to +1 or – 1, the closer the relationship
of the two variables under study.
The significance of the relationship can be determined using hypothesis testing
procedure.
(iii) Apply the relationship to estimate demand. If the degree of correlation
between purchases of a given product by present customers and their
employment size is considered significant, the demand estimation can be
done as follows:
(1) Computing the average number of items purchased per employee and
applying this ratio to total employment.

(2) Formulating an estimating equation through regression method.
y = Na + b x
x y = a x + b x

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