Page 134 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 4: Fundamental Analysis

4.3 Company Analysis Notes

We have discussed the relevance of economy and industry analysis and the manner in which it
is conducted. In this unit, we will discuss the company level analyses. In order to provide a
proper perspective to this analysis, let us begin by discussing the way investor makes investment
decisions given his goal maximization. For earning profits, investors apply a simple and common
sense decision rule of maximization. That is:
1. Buy the share at a low price

2. Sell the share at a high price
The above decision rule is very simple to understand, but difficult to apply in actual practice.
Huge efforts are made to operationalise it by using a proper formal and analytical framework.
To begin with, problems faced by the investor are: how to find out whether the price of a
company’s share is high or low? What is the benchmark used to compare the price of the share?
The first question becomes easier if some benefits are agreed upon with which the prevailing
market price can be compared. In this respect, fundamental analysis provides the investor a real
benchmark in terms of intrinsic value. This value is dependent upon industry and company
fundamentals. Out of these three, company level analysis provides a direct link to investor’s
action and his investment goal in operational terms. This is because an investor buys the equivalent
of a company and not that of industry and economy. This framework indeed provides him with
a proper background, with which he buys the shares of a particular company. A careful
examination of the company’s quantitative and qualitative fundamentals is, therefore, very
essential. As Fischer and Jordan have aptly put it: “If the economic outlook suggests purchase at
the time, the industry analysis will aid the investor in selecting the proper industry in which to
invest. Nonetheless, when to invest and in which industry is not enough. It is also necessary to
know which companies industries should be selected.”
The real test of an analyst’s competence lies in his ability to see not only the forest but also the
trees. Superior judgment is an outcome of intelligence, synthesis and inference drawing. That is
why, besides economic analysis and industry analysis, individual company analysis is important.
4.3.1 Framework of Company Analysis

The two major components of company analysis are:
1. Financial
2. Non-financial
A good analyst gives proper weightage to both these aspects and tries to make an appropriate
judgment. In the process of evaluating the investment-worthiness of a company’s securities, the
analyst will be concerned with two broad categories information: (i) internal and (ii) external.
Internal information consists the data and events relating to the enterprise as publicized by it.
External information comprises the reports and analyses made by sources outside the company
viz. media and research agencies.
1. Non-financial Aspects: A general impressionistic view is also important in evaluating the
worth of a company for investing in securities. This could be obtained by gathering and
analyzing information about companies, publicized in the media, the stock exchange
directory, annual reports and prospectus.
(a) History and business of the company
(b) Top management team

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