Du 2009 After reading this chapter You will by e » Know the meaning of de, ; Tivatives and vari » Understand participants in derivations ots 1YPES Of derivatives, > Know salient features of ive markets, futures fair co » Differentiate between forwards «nn » Define an options contract and explain its vari » Distinguish between futures and options ees » Determine payoffs from various Positions on Call and put options » Analyse various types of financial derivatives avail bl i ve fable in Indian able to : ‘ds and futures, contracts, 6.1 INTRODUCTION TO DERIVATIVES Derivatives are financial instruments whose value depend uponoris derived from some underlying assets. The underlying assets can be real assets such ascommodities, gold etc. or financial assets such as index, interest rate etc. Aderivative does not have its own physical existence. It emerges out of the contract between the buyer and seller of the derivative instrument. Its value depends upon the value of the underlying asset. Hence returns from derivative instruments are linked to the returns from underlying assets. The most common underlying assets include stocks, bonds, commodities currencies, interest rates and market indexes. Stock futures are derivative contracts based on individual stocks in the securities market. Stock ee lures are derivative contracts where the underlying asset is an index. In 153 SHOT ON|REDM Al DUAL CAMER @ scanned with OKEN Scannerpara 62 ‘case of wheat futures, the underlying asset is (eEkiorne asset 520d Similarly we desea a financial assets. Now a days Jed on other derivatives. The derivative in ierween two oF more parties. “Derivative” includes— A) a security derived from a debt instrumen ured! or unsecured, risk instrument or com anyother form of security, (8) a contract which derives ts valwe from the pric of underlying securities of derivative contract 1. Commodity derivatives and Finan« asset such as wheat, rice, ju Financial derivatives are derivatives are traded Rational Comedies Commidhy derivates Popular than those bs atives were developed to hedge Ie commodities Henceinitaly oa Financial derivatives we Financial derivaivesan llycommo 2, Elementary derivatives and Com, lememtary or basie de simple and easily under options. Complex deriva ich ivalives are atives h ave com, 10 understa ed on metals. It m: securities Contracts (Regulation) Act, 1956 defines ga, 6.2 CLASSIFICATION OF DERIVATIVES Derivatives can be classified into broad categories type of underlying asset, the nature of derivative pulses, or even metal silver, copper, aluminium, oil etc. In case of fi underlying asset isa financial asset such as debentures, interest rate stock index, curre ‘more popular the world over. mn Multi Commodity Exchange ind Derivatives Exchange (NCDE: based on agricultural commodit lust be noted that Price risk in case of agri odity derivatives were develo re developed later in the decade of oe tradedon BS Nee (USE) and MEX 12" BSE. NSE, United stock exchange Plex derivatives standable Suef a3, etivatives which are sacrivatives are futures and P'ex provisions and features ind by an I derivatives Derivatives can be classified into Commodity der cial derivatives on the basis of the type of under of Commodity derivatives the underlying asset whe, In, so shar. aay for ithe, Or deg, 8 lm, depending cont 18 y Fact oF eh me ivatives, Hvatives agp, lying assor Inca is a Physical gg ® nancial derivay 8 equity shares, pole ent, exchange rar BE rate Comma (MCR, ani -X)in Indy are more the dri iculturel ie decade of 1981, investor. Complex rae ened pram pee rool pid against Pl viel then’ ve sa ators 2 han jpelude Exot Onions, ymthetie future nen omrntcl tit Benes mt oer (OTC) Earhaee od OFT Gerivative product traded as per th sige For came Soca and OC derivatives are private bilateral canna SO eon sanderaed The a of the parties involved. For example lunes ‘4s Shange market are OTC derivatives ra: Investors having long poston in ases ate exposed 10 1 Hedger (tne risk that ast prices wl go down On te other Fevestors having short poston in ast are ao exposed to Irie. the price of the aset may go up. Hence they ant to their position tobeimmuneto price Hedger use financial era atures contracts enable both the pars having longor shor tan Power the share price the greater ah ge th ris are pce cannot fall below zero, the maximum esha ce less premium. Hence nour ame i option writer will be & 240 (i.e. 250-10). Please note tt ine ono ator mum gain to a put option holder was 20 Feat pt option writer is limited to the opion premium rcehea preak even position of Option parties Theabove discussion shows net payoffs toa cal option holder clo ‘writer, put option holder and put option writer. in the discussion we have :kospeified the break-even level ot postion neachcae tmusibented that the buyer and seller of options (whether call or pul) ate completes pposite net payoffs. Hence their break-even level is also same. No zi ot lssto buyer also means no gain or loss tothe seller, Incase ofa call option, it will be exercised when stock pce st exation (8l)ishigher than the exereise price (X)- But the buyer of acllopton wil bebreak even, having no gain or loss, only when the stsk peat oa, tion'$1) is equal to exercise price (X) plus call option ae 6 ae ause the call option premium is alsa cost whichisareis or thcall option holder. Hence the breakeven Pot (o 9 8 TE an f when stock price is equal to X+C. The same’ he the writer of a call option. ® scanned with OKEN Scanner) at suit will be exercised when stock py exert rice) mis Pa pcon pe crepe below shows a summary of the br swe of ap Shalower! Sina ever tion (SD eae The ious partis [Por pion Buy Where SI = stock price at expiry, X ium, P = Put option premium 66.7 MONEYNESS OF OPTIONS ‘The moneyness of options is based upon the relationship be price a the time of entering into the options contract (So) “ng ag Baebes ta wher ose {othe option holder initially te. in the beginning itself or nor if pel contract is beneficial or favourable to the option buyer intially. yo" termed a8 In the Money option. If i is not beneficial ori untge tt initially, its termed as Out of Money option. Ifthe option conten therfavourablenor unfavourable then itis termed as At the Money yy In other words In the money’ implies the option holder can make my, eyiprofit by immediately exercising hs right. At the money’ impls isno chance of making money(no profit, no loss). ‘Out of money ing that itis better not to exercise the option and let it lapse. ‘ Call option With respect toa call option, if the exercise price (X)is lower than thesia Price at the time of entering into contract (SO), then the option contractis beneficial or favourable to the buyer of the call option and he can exercise itimmediately. Such a call option where, X strike pi. \put option is exercised when market price at expiration < strike price Fura call option is In the money when at the time of entering into contract the mat Dice is > strike price. A pul option is Out of money in that case. At the ez “options are those for which market price at the time of entering into conta rice. Herein the question we are given only one priceie. malt price, So we assume that the same market price prevails at the time of ene the contract and at expiration. The solution is as und ana ANCIAL DERIVATIVES MARKET Ho) 993 after Harshad Mehta jard trading and carry id not have any instrum am in I sl shave rat und that time: By providing investor is for managing risks and raising oy ie coat of capital formation andsiimulaing oe ny markets for trade and finance have Rea fh wots have strengthened these imponant ing evans, increasing market liquidity and efficiency a’ Petow of rade and finance. formed a Committee on Derivatives (popularly knownes LE Guo Peiice on derivatives) under the chalrmantig Dr. teen yr The mandate of this committee was to examine te easaay jaroducing financial derivative products in Indian sock mache. The (ommittee came out with its recommendations inthe year 198. The {onmittee recommended introduction of following derivative products Inia stock market ~ (i) Index Futures (i) Index Options ij Stock opians fr) Stock futures. ‘n December 1999, the Securities Contracts (Regulation) Act, 1956 was tended to include derivatives within the definition of Securties under ‘tion 2(h), Regulatory framework for the introduction of derivatives Products was also introduced by SEBI. hnda's tryst with derivatives ‘began in 2000: nenced trading in equity derivatives ‘* futures on S&P BSE SENSEX. On when boththe NSEand the BSE (On 9 ne, 200, BSEleunch 12 June, 2000 NSE introduce ® scanned with OKEN Scannerera AX NIFTY, Hence ile 14tUF beg sions : BSE has als ini nen futures 0 CX AIT Se taunelted in the Ini ) TA Caner A ern ek pation Jul 29 athe oui issn on February 3295 Vin, See a emits eelkamd sf rants Option Somes way nc 0 i hth srt Be penne Ose 2008 se, mcts int amework (or exchange 8 vo) r ent in do FeNey Fug Now prea agen vr tS tract telat he best risk MANET journey of equity derivagy ated ct eure i easy ac oe ee civativen mash e eben gs et iscovery, better Counterpays have beer rence with the & has how ii, price Mi duced transaction ct Sh Indus exPere T pe mmoat successful developing ce Pen ei fy a ts post. In oe or exchanged derivatives pyutyo SePye hat thesetlMeD of ang Seas ar Sclonent in i seca ta Pte cash ad seem a strepatyal on nationwide market access, anonymous elecqe eh, yi han? gn investor buys SBI futures at ¢ en a retail markt. There a increasing We wed f Pye 64, 8° ye settlement date eroaat 229 ap re Soca sla are based on a predomi and a pF cs markt plas a major role in shaping pce te it ptscase te NYE wlgtonc gi gon the spot PrICE 5 £2950, theimenn ; Eth ona iy deri — es trading in Futures and Oy st se urrently provides trading in Futures sd Options Toe ASE ur longincesn Indian market wel gat, 7 = ghd more than 100 securities iad) So, Si hare and make gain mas fo i futures and upton ar being traded on of futures contract converges tothe ps Ea (295000-280000) = 7 15000 The indices on whick ¢ CNX NIFTY Index ¢ CNX IT Index # BANK NIFTY Index «NIFTY Midcap 50 Index + CNX Infrastructure Index + CNX PSE Index GLOBAL INDICES © S&P 500 * DIA + FISEIO0 BSE has also expanded its derivatives segment by introducing new dee ative products since the year 2001. In addition to BSE SENSEX, fuura and options are available on the following five sectoral indices, 1 an investor buys @ SENSEX tes ona oblem FF stures)- On the settlement date Senge" yp) otis Pain if he had sold futures? “ What would have Han he investor has boug X saason TH pee is ? aoe 30000 in sizeof Sialue of one contract is and the valu Jind. Hence he would incur loss onhis futures poston gS febrokeraze is paid atthe time of settlement histaul oe ene {ss = (30000-29500) 50 + 1000 = 26000 Fiieinvestor has sold SENSEX futures at 30000inlt sizeof 0 vale séonecontract is 30000 X 50) and the value of SENSEX hasdectned Then Jewould make gain on his futures position, Assuming that the brokerage i pad at the time of settlement, his total gain woul {ain = (30000-29500) x 50 - 1000 = € 24000 Poblem 6.3 The market lot size is 100 and the futures prices? 1700. Ax Snstor takes a long position in futures market and buys 10 ts On the BSE TECK + BSE FMCG BSE Metal aoa date the market price of the share is € 1710. Find out the profit Srl to the investor. @ BSE Bankex i = x100 X10 = Stiaon : The purchase price of 10 lots of futures = 1700 100 x10 = t1700000 ® scanned with OKEN ScannerPea 710 x 100 10 = € 1710000 rhe sling PES rence peor ch call option Premium is & § ay, that the exercise price fo, P23 my for bon, Pea am eT ue the net outed pt oPtor rao of © ee er PAY OFF FOR CALL OPTION HOLDER (sia [option exerese option holder, call, in writer if the spot price of yl” [outfiow (trike price) [Outflow (premium paid) Total outlow [Net pay-off [ress:inflow (sale proceed) _|- Bere ssael-s [NET PAYOFF FROM CALL OPTION WRITER ce "Shan Se pis |e “The shares of FPL Ltd. are being we 1 An Investor buys a3 monk reese? pest ike price of € 252. Under which stun 12and“(e profit assuming that the option so ke 10s only on maturity. When would hee re wn Put option isthe right to sel. The investor wi ie the market price on expiration dare sot we owever he Would stat naling feo sft il below 220 (i.e. 232 - 12) because he has aesay fr 2 in buying this put option, problem 6.6 The shares of KPL Ltd. are being traded at pce ft rp apot market. Mr. X writes a call option at asinke peait nese num of€7. Under which situation Mr X willbe abs {ssuming that the option is of European style and can be exe paturity. What would be the amount of his profit. When wilh incuralss Solution : Call option is the right to Buy. Mr, Xs the cll opt siler ofthe call option. Hence he will receive option pr ‘exposed to all the downside risk. A call option s not exercised when tarket price at expiry date is lower than or equalto the strike price. Hence ‘that case the call option writer Le. Mr. X ill make prof tothe ett 4itTie. premium already received. Thus Mr. X will make a prot [Share Price at expiry [95___[100_[103 [105 [aor | Option exercise [No[No_|¥es [Yes [es [Inflow (Strike Price) I. | 100 | 100 | 100 [Inflow (Premium) [5 5 5 5 [orl tft 5 [105 [105 fas [ilo (Share Pris) ~ fies [10s __fior [Nec avo) 5 bp bl NBT PAYOFF FOR PUT OPTION HOLDER | Share Price on Exercise Day | 95 100 | 103/105 | 107 | Option exercise Yes _|No No. No No low Piaxhasrisiony | [a5 iy = i - Sully ortiranten7 7 [7 [7 __ |? then the market price at expiry is lower than or qual to 236 mar then the m i than 8236, then the cal option arket price is more than 82 : “ fe Mr. X wll have some profit be exercised by its holder. In that cas ® scanned with OKEN Scannermonths call option prey upto the price of ee 3. Assume that the eat will incor #1 chased 3 months call option of 1 ge eit payolt ofthe call rae Ne Die 7 Mr.B purchSSG9 per share and paid a pyey shen ne cell a8 PUL Option writer ee cal gate Hd gain oF loss if the actual enim oft, Basa Met 25 ay is © 47, € 49,8 5, ¢ Sy Te tual price uo! price 50,252, rey MEAL ei And age Be Prem ty by um on Puy U2, Problem 6 price of ae rea even eS on share: F8 950 (i) 350. Also Point with yaPeagt ge? ne n. he oncal 2 per shar yi diagram ‘ey emium er share, el Bp ost cal panic Sng 7 Sanda Pu option accept a 7 oa Solution: Lot size © 30 per share, Stig ee r 00 per share fe + When actual price st 250, then the eal option will not be Henethere willbe oss to Mr. B othe extent of €30 per share a he has already paid as premium. Hence net loss = 30 X 100 = 3000. i When actual price is 350. Call option will be exercised, in thatag payolf from call option will be ® 50 per share (ie. 350 ~ 300) Bae as already incurred a cost of € 30 per share as premium. Hence Problem 6,9 Sanjay has bought a call and put options. Each contacts of {(0shares.() He has purchased 3 months call witha sikeprieof52 and jsil2 as premium. (i?) He has paid & 1 per share premium fr buying thee months put with a strike price of ® 50, Find out 4 What would be Sanjay’s position if the stock price moves upio Isto dbin3 mons? (Con) DU 202) net profit will be Payoff from call option = 50 X 100 = 5000 = (3000) Less : premium already p: Net profit = & 2000, iii Mr. B will have break-even point when actual price is equ 330 per share (ie. 300 + 30). Beyond this price he will have pros Below this price he will incur loss. Tels Storey fa erate) 2f per share in the given diagram as above Al DUAL %53 in three months? 4 What would be his position if the stock price fal ® scanned with OKEN Scanneray, fee er share jue 100 Premium on call £2 Pe sharg 210502 enn: Sor cal option, Ser 7 ge Norma WMA Nt rat Sep est in busing 2a and ap en AP 80h hag on z Stay xy {financial instrume nan UMENE ha ea fecdering sete a undesving ses ny rates and Marketing’ "SS. body Opi al PrP ae ice is ¥ 53. Sanjay will exercise cay tion. His payoff from call option tion, wats beri en market pr fn ves 9 Se eet mocne eee He gm cal= 100 1 = 100 1 er in eM Pope premiums already paid = (300) fof aie Poure conten ae gen ere ForeaeTgractean be used fore pupoict jos “e * a1 om in stocks can be hedged by seing fy Net Loss = 200). ss case Mr Sanjay will have net loss of & 200, ition in stocks ean be hedged by bun an, sont ces € 4, Satay Wl eXrese pr a (0) When mark Fr ption. His payoff from put option rae ght 8 rs 8 Br ohare. REP ge sa contrat sold By On pas orn we faite errat pree hee eRe Hence + Myson lle Ta secunty or oher hae cee et Payoff from put option = 100 X 4= 400 {aos all oF oe the expiration of the option da tt saE on x a ce Jess: Premiums already paid = (300) reapers EASELS ey [Net Profit = 100 ASgnr to "san ste oon can eet an pn nanan ac uhlea Eopansse pean a tion date. sdawaeen So, inthis case Mr. Sanjay will have net profit of € 100, Problem 6.10 Mr. Verma has bought a call and put options. () Heh sro nth call with a strike price of 32 and 1.50 as preniurs iit per share premium for buying a three months. Pu oes f ¢ 34. Find out his net profit or loss ifthe sock athe expirati bee eee ee aa 1 eae a He has paic with a strike price of ‘on the expiration date is € 35. ‘Solution : Premium on call = ¢ 1.50, Premium on Put £32 [or call option, € 34 for put option ‘Total Premium paid by Mr. Verma in buying a calll and a put option=13t yest YOURSELF TRUE/FALSE | «4. Derivatives are same as shares and debentures. 4, Futures and options are traded on an exchange. Options give unlimited profit potential o seller days cm index and set sharin is 1. Strike price #1) = 8250. When market price at expiration is ® 35, put option will not be exercised. Futures and options are available . Loss of call option holder and put option ‘holder is alveays ited { American options can be exercised at expiry on |__& Futures and options are used only for hedging. {(nower-(a)F (b)T (C)F (AT (e)T (OF (8) Payoff from call = (35-32) = Payell from Pata — Dterysi ed (250 sd lai. ® scanned with OKEN Scanner(EARNING OUTCOMES After reading this cha PLEr you > Understand Fundane, twill be able to > Differentiate be to fundament > Explain EIC framework » Identify various Factors to perform t orm tional and domestic seen Economic analysis of interna: » Identify various factors to perform analysis of Indi > Understand various financial ratios and their ut ly Te > Perform DuPont anal ny > Understand the intricacies of shareholding pattern of a company fala » Understand various stock valuation models Investors invest in a wide range of securities as available in financial markets. For the sake of simplicity these securities can be divided into two broad categories like — fixed income securities ic. bonds and debentures; and variable income securities i.e. equity shares. In the previous chapter we discussed about fixed income securities ie. bonds and debentures and provided valuation models for their pricing. The peculiar feature of bonds and debentures is that the cash inflows from these securities can be very ‘ed rate of interest income. wellpredicted in advance because they havea [ix in further they are also redeemable at maturity. Fixed income securities are 187 @ scanned with OKEN Scannerpara Th a ho do not w, pe rats inflows fron a edi pore ae enum caphalorccant yg Met eh an company paket rer gar crt sh cargo Hower bong ating Sethe a asad Patera septenrt sdk el rswmoue tess kareena it a ha are aahetar itn re eee Fa uch mveatans cao a Pe Dal atali NeE BS ein a ee esas gaol Fecal il es pcm Pa 7 grit OPO ee pete invesioent goals ag) ime teh yd Sqhy COM meh nahin prema aysrc sr ts Minera] cl ya: Tehaical analy i Iara This apie i ls ifferent from deb secur Mend GamiceepeatsitselfHenceluturercesnga tnt uty hare erahiight in acompany but ety” Ding H non Me OME pars berate ae et Baus ovine cme oe thecomean:whichin cure tng Seah {efpredet What the Bree should bof ease shares gendered ecompanY: MPICNIOIM-depelinagl ten © Pesci of trend anys ofa ete Sass als ee sancti creditors, cy bara Sone Umar t0 time the marke se Ty So cn ao eee sha Bed PTT ust be noted that ee pon Reldcormpani aT rcpac and sl of cquiy sorta | nl ara short peiod 3 ine an hon Fram, provide ator 1 ee ponds. The market pice ghar-Hage pct Men investor who just want o yu Aa sau oars are hance he market vale gf gf Lote Says Gea dtl ne a esents shareholders wert tos ine information available in ee" Te ket Hypothesis (EMH) : The prop, Share prices move information available inthe men rent Mat $ (EMH) : The propor, Recto so play a major role in share price movement pala see Orama in 1970, believe tha share part EM eg inn apenas of ha a p itrnsc valueand henselae yin . icnhasshownhighergrovthinprofabiiyncetal) lee a price, bw abner mn which chant rice ofacompany wh ‘ vmapany, which is in distress, the market price declines while fora company, 7.1 APPROACHES TO SECURITY ANALYSIS Behaviour of stock prices is an important area of research in finange plethora of research studies have shown share price movements fordac ped as well as developing countries since the decade of 1960's, The sig market provides the market price of a share or “What the price isk the price at which a share can be bought or sold. However a prospecig investor as well as an existing shareholder is interested more in knoy What the price should be" or what is the real worth of a share. So thay ‘buy’ or ‘sell decision can be made. In a bid to answer this question an predict share price, the following three approaches to security valuatos J ass involves in-depth analysis of all possible factors having beating jacompany’s profitability and future prospects and hence on share pre jhoretical or fair price). ; jNDAMENTAL ANALYSIS jnental analysis is based on the premise that in the lang un x pases fan city sha meee it gan asset isthe present value of all expected futaretashinlonior pes from that asset. In case ofan equity shareit willbe culo rect value all expected future earnings (in the form ofividend cap. {ifanetc) from that share because equity shares have infntelfe The fgeted earnings from an equity share depend upon variety of economy vite industry wide and company specific factors, Therefore fundamental have evolved over the years. 1. Fundamental Analysis : It ied on the premise that in the longi i run true or fair value of an equity share is equal to its intrinsic vf Fidamental analysts forecast, among other things, future level ofthe ue. The intrinsic value of a share is the present value of all uur J Konomy’s GDP, future sales and earnings of alarge numberof indusies great Jd carnings of a large number of companies. Eventually such forecasts wm the shares of expected cash inflows from the share. If the intrinsic valu than current price ofthe share, the share is underpriced and he converged to estimate the expected cash inflows fr #g08d bras Cn.ihe-other hand, if intrinsic value is less than cure ® scanned with OKEN ScannerFUNDAMENEAL ANALYSIS : naa jsion Making Using Fun a shore ean be 10 ApPrOAEHES (6 Fudan, eee nouns ha, hese come pd Baton u approach ang Meee ach inflowes ree of Ee eae 1 i eave Petares eash inflows from qe 42 ra ih: With this approach the Finanetal ang. Wee ol I of the SeeUrLY OF share ang gig rope APRERE ata or eeconen hen forge ag PES le tesa osha de tag Forecasts othe cone Men or thing nce ace orca US pany’ orecast are Based ota enujermced a ate cn an Pn Fag the concerned industry ey ender and apr of Bat UP PDE, ang, ac eof the companies fst, then fea ihe prospec nies His, then fon a, tae tie econam Such baton oe a W.2nconsistent assumptions. Forecasts oreeSing’ ir company forecasts because yan ypproaeh: In Bottom UP La se biCframeworkistheTopdowna bons analyst makes a forces seta, wenperforms Industry ange at tere 2 ees from the company’s share thay (lial vie ca a will be tp sss Shea thes Is isa rn erik i vale of a sha Scud bowed Pips aro level anal versa wide rang nt Com practice, Top down approach is widely use css This Mvide and company- wide factors ay dic geet sSenan eee pvstactorsofinterestin fundamental analysis canbe by conomic Analysis pesbedagitie ~ economy wide factors, Industry wise | performing industry level analysis and firm lvl ee ant wide factors, Hence we have ta pare Fe vidends and earnings iis ingornt yon casting '¥ ronment in which it operates, Nae the broad nic 00 analysis isthe study of various economy wiefacuri Bon parket viz. Gross Domestic Product (GDP) grexth sc usirfrest Fate, exchange rate, balance of payment fic dnt is ary provisions, infrastructure etc. Animportantaspcal ena see now a days is the political environment especial inanemerene like India. Political stability is a necessary requirement for sabe an 0 Ei owing financial market of that county. Furs, sus sch ie Analyst sdusry Anal Analysis wn approach of fundamental analysis is also referred i ‘ork, where E implies economy, I implies industy ai ompany level analysis. ———— eruption, law and order, economic policies ete. are of pertinent we for ‘TOP-DOWN APPROACH eonomic analysis. 1. Economy Tenomic analysis is a useful tool to understand the general direction of 2. Industry Sieeconomy and deciding about the right time to invest. Thiss pat 3. Company iydone by large and institutional investors whose potfliocamprsesol cuties from across a number of countries. Conducive macroeconomic BOTTOMUP APPROA rironment leads to bullish and/or stable stock market wile neste esas nomic outlook affects stock prices adversely. Various ecanom vie span | Ixiors analysed in economic analysis are explained below 3. Economy ® scanned with OKEN Scannernom Iso Put his fu 1 Rate : Gross domes ont OS roen prade 2 ih rate in GDP isan ype vonomy. Therelure tug ees tonal news and sentiments, Sy oP q Frame the craton eee Pa cn factors toconsider while doi cof the ly examine GDP, Meng Norse imrentmem ore CQ courte earch NBER) ui US EGrowtl begin will gnome growth rate signals reves rate - Healt Fate juntry. An adverse global gro (») Policies of lea related measures, international trade me of leading nations like USA, UK, Germany jmportant factors to discuss while making investment, Fore monetary policy of US federal reserve is a major event bea interestratecut in US can effect investment flowsin Indiansecw of international economy of eh, mee of coun fume dampen theinfiogsyaersap “inet wmproverent ih GDF snp “eesti and dearer, te Therefore a ndons Indes of Ida ay ess pub Wr Eon SS ets increas al econo 85 Wel nd oe fl nd economic codon the es ‘ernational environment poses ny wsiness Or recession. If there is optimism and es ei, sudden gOVEFMIMEN! COUP, Peony yasmin COMPANIES ‘Sftal leadership, et. can inrease volatility in Securit srgtion : Inflation erodes purchasing power of mop nip bacange rte ~ Exchange tate of COUN cuter 9 tla of ilation nomial return dsr (iy xchangs Pesan courts has the potential to change ea fren roman asset. Mountinginiatoninsone ones of fot Sirengthening of foreign currency in gga thous inading In ne of he rans forlen mone Se vale of domestic currenc, thereby rg. eae Increase i inflan rates ao aves QNport contraction and import bill inflation yg Shand and hence corporate profitability destinesin ivy Intemational Credit ratings - International rating a squares Rates: Term structure of interest rateinan (i) toeard & Poor's, Fitch, Moody's etc. release reponse i (aah investment and hence income lve. Higher ince otek and credit rating of major economies of the word. Ara capnbol of tight monetary policy and increases cos of baron sani ade should be a taken as an important signal to 2 pin turn lowersinvestment and businessexpenson Thier investment portfolio. yates are negatively related with stock performance in an econ “dig nations- Monetary policy, fiscal pole nvsing (jp External Sector: Foreign trade sector or eral er ons sures and indvstialpig omy is an important factor to analyse in ths er of olson China, France, etc. External sector of an economy can be examined with the help of balance of payment (BOP) account which isa statement of recip ts of a given country forthe transaction entered ity jons are further classified and payment with the rest of the world. These transaeti eand services ori intocurrent account (for merchandis capital account. A widening current account defi cre ing exnomic ot isbes)and market, ‘Therefore tis pertinent toanalyse international economy beforemorHf for, tis pertinent toanalyse international economy before mot! onexchange rate and leads to further deteriora ‘ause global economic envi Me {) Infrastructure : An economy with s such as power, telecommunication, roads & trat i Prelerred by institutional investors {Good infrastractar® or continuous and growing production lS ® scanned with OKEN Scanner fundamentalsof domestic economy be rminant of nation’s economic performance.Pars peovstons & Fical Defi: Fiscal hy ac engl igh fiscal defi, expendi Tiggs adversely affected productiy mi ee ee aca deficit a number of by oer Pere spending on infrastructure sey ch ta ochemiesaso alfeet stock marine gt fea og Tce anes and - by the stock market in India, altho nas (oo Buds ale: it) Comps 2 ion of tan bua hol s welcome of GDP = Its not only GDP growth ray [DP which is of interest to economic analyst he, am eof the county. nda fe een er eso. ahetistoFGDPcama eae any soretvof bad monsoon adversely affects agriculture neo a oe a arate ea apres eck ichin tareliig adverse iy ‘at sii) Employment : The unemployment rate is the perc, apesthe extent to which an economy is operating a feta itigh unemployment rateisa sign of contracting econo adversely allects stock performance, entage (is) Government's Economie Poi sinconfeonomieatvy snes anal gm casos policiessuchas fiscal policy, monetary poles i ote ete whichdirectlyaffectsanindustry’sandl rence performance Fiscal policy, especially, tax policy of the gover has a direct relationship with personal disposable income ane porate profitability. Monetary policy especially changes in ne rales can inlluence investment and savings especially in short ea An increase in interest rate, increases cost of production anda maybecome counter productive in an already contracting coe Besides above number of other economic indi of an economy such as foreign exchange reserves, money supply a vields, purchasing iger's index (PMI) etc. Business cycles {Boom al recession) aso play an important role in economic analysis. fs :In order to understand hf rma ors help analysethes Economic Forecasting Angle C arin»scconomy wide factors can beperformed using —Sfatistteal techniques such as trend analysis or sophisticated econo™™ ncaa sa Siindustres may not be same. Some ind _polor 2COMOICT Oren shel = dy gine es Meg strats THI ny ng, 5 6 atic Forecasting : Usin oy 8 proba prot pay Forecast severest ale probability of occurrence, resreetMyrie modelling © An econ Se a StI, He ae ce inorder aa tt enous e make these fin be a SE genous or carat Scie a Seer GDP grows weal pn rae ma may berg erement ‘and inflation rate, nase ma voc agen eat ANAS USN EC rage on aud of peculiar femtae amet fentch ngn economy. Before desing Sate enti tobe done, anima 2 puter prormance and prospects ofthe indus ah pete Fipgustry analysis performed on thebaie be Im ifthe economy in gnerd ee ees te However the per ties mat pe Gpiothers may not catch up with expected boominthe economy srcies have different return and risk profile and perion, about th Hr Scenario for all the industries is psi Ipdosry performance is an important determinant of expected cating, gpl dividends of a company. Industry analysis covers 2 wide anor sd ficors such as the type of industry, nature of industry product Indusrs Hfecyce, Industry growth rate, govt. policy towards indusry and soon These factors are discussed below: J. Nature and Type of Industry : Depending upon an industry's response to business eyeles,itcan be classified as a cyclical industry or defensive industry as explined below i. Cyclical Industries : Industries which are more responsive or sensitive to business cycles are vermed as ec industies Theperformance of cyclicalindustriesvariesaccoding O°EY ness cycles, During expansion or boom patio thse se0 ‘outperform otherindustries Examples fecal consumer durables, automobiles, capital goals co ® scanned with OKEN Scannerae sepurchases oH Nese 08 an Hecate Pine particulaey servant e ir dost ae wales of these dustin ye en Teele athymic nedustrlen : In CODLEESE U0 Cycle Ah, 1. Dele Aline 1 re ydsties produelny! ood A ae ee dintrics include pharmaceun , oh mtry is evelical or defens Whether the ind om jee certan Features of the dustry The iy Ciaciallorproper "ind sessment and forecastin crit uviiends at the company level sinh indusry bile Cyele: Indunties can albo Be elas f dt inv industry life cycle viz. start up stage hia eciing growth sige, start up Stage This tage is usually characterize iharket share. At the firm level profit margins arose’ This phase witnesses rapid and increasing growth fo Sinartphones is growing more rapidly than that of TV. [rigerator. Industees in start up stage although promi return but are also very risky in nature. : (ii) Growth Stage : This is also referred to as consolidations due to stable growth in the industry. Due to stable go companies may enjoy higher profitsanid therefore comp growth stage industries promise higher return tothe inves At the end of growth stage, the product becomes very m commonly used and the growth rate starts declining aha Industries in growth stage are lu With consistently growing returns at relative maturity stage also the produ a decreasing rate. At the end of ths a saturation point when the dena tal iar ee son the growth in indus depend characterized by 0 is al Cian industry Fe i Pie of all cormparis, in ge Tejgala a Pre nl in tae oswheelers ete, These oa “ reof the product of theindus, renal pity. Hf the productisseanay st iprotiaite will depend on monn Shee row sO product is not an end-product i anssher industries then the Fen rah wheres aple growth and profitability spe air pmobile industry. ratepan ten porexa Nature of Competition ttounderstand then risimportant atureof compet tuetiner perfect competition, monopolsic ‘dip Umpanies in an industry with perfect competines nx cay ascompared toa company in monoptlvinioce iPindustry in India has monopolistic competition Industrial Policy of the Government Government’s policy towards a particular industy abo sca growth prospects and hence performance. Since 1991, Gavemmert ‘of India has followed liberalization and privatization poli allowin private and foreign companies ina numberof industries dominated ty public sectors such as banking, insurance and retail industries, ‘This led to stiff competition as wel as improvement in ficiency of good companies in these industries. Further, there aes few ius tries which enjoy tax exemptions and/or special subsidies such as biotechnology, oil and gas etc. Government aso protects sill and cottage industries by procuring their products and providing subst dies, This leads to growth of micro and small enterissin inka Labour Conditions and Trade Union 4 Incase of labour intensive industriessuch asagsoulture mins Construction itis important toanalse labour contort of cheap labour, and how strongisthe trade union ® scanned with OKEN Scannerpera 13 MEAT ANALY, sedlabour or trade unions may face i ence m pro wath organized Sonic. Especially in Tage qqvatucds HENCE A PrOSPECtvG ng eremanae iat norte already holds seg Be, worker ging and aucomobile industri ore inves uch she 1 an opeet on STC, ath gf ee ofa company depengs an: si va hich in turn depenas UP he ah F215 earnings of the company the Pe alysis Manet ing Jetg8t) oe sources for collecting ne = 1 ceva el datas primarily ojo or le arly collect feel secomme company such ase ents “ Soop inpnls hiRcradeuna : ww Heonomy Industries Boned v-Ne 7 attnce may also be classified as being tradition Hct jeation, financial services etc) @ aT coal industies iso but conse a inorder to analyse risk-return aspects of various in, is ‘statement sn ondr tana mine the performance of es tial ta dices of BSE or NSE. MB seca poses 10 financial statements ( Bankex ~ Banking Index aauaitor’s rePOTt - Aout epons any ‘social Gorporate governance Feports PANY ANALYSIS analysis covers the following parameters 7.3.3 Company Analysis aa ework analysis is company level especially ear alysis, analysis tthe bottom of EIC framework analysi pany levelanalysis. cy, vote governance, analysis of product, isis is the study of various characteristics of . 2 a i cal prformance and Fture pee a oes These poameters can be casted. decker decides to invest in a particular industry on the basis of and industry analysis, tis important to select the company or com in which investment is to be made. For example, if an investor deaie, : invest in IT industry, the next step is to decide in which company nag TH=® include earnings, assets, sales ete, and is done using nana ao Wipro, HCL, TCS etc. analysis. In fact the estimation of future dividends and earnings from a conpays Facial ratio or accounting ratio is based on the historical performance depends upon its past performance and managerial competence.Sukag tthe company. These ratios can be calculated using balance het and estimate is made within the broad framework of economy wide digg ”mestatement data. It covers analysis of profitability, quit solveney dustry analysis. The outcome of the Company analysis is expected fue, * elficiency level of a company. czshinfow rom he share ofthat company whichis usedin deen (Earnings analysis or Prfitabilty Of the intrinsic value of the share of that company. The intrinsic vt Past profitabili as indicator oft future the share is then compared with the prevailing market price to id egies eae be ee end cmat whether the share is undervalued or overvalued. If the share of ac analysis because fsture echinflows from aneqiystae depends isavailable inthe market ata price less than its true intrinsic valueless because [ature cash ne ny Acoma Sa ‘arcis undervalued. Hence a prospective investors Profitability may be analysed using operating pot maa REET urchaseiit-On the other hand if the share of a company is availablei On Capital Employment (ROCE), Return On AS (ROA), Ret saeinet a p430 snore than its true intrinsic value then itis ssi ht oe : vie year OM (ip Petro index (ii) Pharma-index (iv) TTindex 14c0M co diferente Finance ® scanned with OKEN Scannerpara 74 sn ¢ROD, net POF MATEIN C16 Hy jy ari portant ear are se plana h na Some o nc vity (ROE) : Retwen on equity gg Penh eon en oie hich belongs tocaun ea cia sol the corpany sto equity ahs nino aiving profit alter taxand prefers ha alte ne paroholdors Taner PAT-Preference divieng '* ™°Mh etwen on Equity neler dled y indicates whether Return on equity i cquity share He Gaquate return on tel Funds or no, Rete 2 ehiaher than return on investment if the company i 2" urerurn on equity rather than the overall ae pany because that is what matters to th +b, Earnings Per Share (EPS) : Earnings per shai Nersed Profitable fe iy 7 ‘is calcula artis the amount of profitaftertaxand preferencagetty pein nal number of outstanding equity shares of yin Jence it shows how much amount is earned p Pan ts company. It is easy to understand thar a 8 tio and is widely reported in news and media, An ine EPS shows the relative strength of the company." = PAT Preference dividend arning pet Shar® = “Number of equity shares On the basis of the past trend analysis of EPS a fundamen analyst may very well forecast its Future or expected EPS i Gan be used in the valuation of equity shares. The earningsm tiplier approach of equity valuation determines the fair rig of an equity share as the multiplication of Price earnings aia and expected EPS of the company. Price Earnings Ratio (P/E) : Analysis of price earnings ato P/E ratio as we popularly call it is an important ingrediend company analysis. P/E ratio is calculated by dividing mat price per share by the EPS. Market price per share EPS Earnings Ratio att ideas there p/B t ek marke Ai pay istic about the yrany fs oP premium oF highs pa ghP/Eratiool acy a Meare overDFICeA in thy shatetmplies that the marker ati ofthe company gaa Pays 2h pate Where fg uraded at relative ine lative one setae underce r Fecs thee 10 buy stocks withoy Ppt pret dervalued es rook Equity to Market Equity Raga Boot Fos Book eqltycoNara ato dng the Book Value of Equity share Book Value per shane Market prc ere tumust be noted that book vale pers Share BE/ME rato ines hrc oiet company in stock market. Aigh besa of cra ispessimisticabouttee ee Ma hence its shares are being traded se ket. However a very high P/E ratio dt scone also mean that the sharesare underpricedinne ss sith high BE/ME ratio are considered «iene otherhand low BE/ME ratioimplesthat theme bout the earnings potential and groutho! the hence the shares of the company are being radea high price in the market. It may also mean thatthe stocks are overpriced in the market, Low BE/ ME rato stocks ae called Glamour Stocks or Growth stocks, Hence some esto pele to buy stocks with high BE/ME ratio as they believe tha thes are undervalued, Fama French (1992) have shown tht igh BE//ME ratio stocks outperform low BE/MEraistoksinte market. BE/ME Ratio e. Growth rate in Earnings: Anotherimportantaspectof company analysisis to forecast growthrateof the company. Growthrass can be calculated for assets, sales, turnover aswelles eran For equity valuation and analysis, growth rate in are of prime importance. A forecast about the futuy 207 of earnings of a company can be made on the ® scanned with OKEN Scannertrical pas anomie Value Added (vq) isto ahe earnings per she fearing Pros Are by has, PT to € 20.11 over the pane tach Ae ola het he compound growth rerio tag foshat s hereto that y pound Browth rate iyo Hive rereasured by Econoe nish pa inthe mm then ii tthe company eKonomic profit goin c Wo sha icy of the company: Generall peal economnie Prot Hongo shar pividend Policy tnbuted #3 dividends A'pag et operating BeOS) which rei Diderot touted es dvidends, Apa tn tas, ancy specs ada ais Ci yaaa ssi perating of - os of dt roam at iso vay overtime Dien} pace crorsrofit Cot of Equity 2. comallowing two important and related measur mt sein = NOPAT (Capital Waco g i Dividend per share we cans shareholders get, eva = Operaing Bocas fcr 1c a iat a Dividend payout ratio gonads iii. Growth rate in dividends Fa scrim aan em c iy of a and hence liquidity analysiisin peo pyvidend PerShare DPS)iscaleulatedby dividing erent an vanalyeca? Png by the number of equity shares, "smug Liquid <0 bbe assessed using cue nan ‘Total profits distributed ‘Strato ofa company, Caren rata DPS = Humber of equity shares tat taf curtent assets bythe amoun Mumber of equity amvent ratio ina manufacturing companyic) foc kes ratio we divide quick assets by current auch te arkeablesecuriiesandacinae a ee ye LA wena ‘The amount of dividend per share shows the act Fhe Strom the equity shares. Hence its an iny calculating intrinsic value of a share. Dividend payout ratio is the ratio which shows how m bankruptcy due to lack of liquidity vrtion (or ) of the total earnings is distributed as di ent ratio = CHEM Asseis_ Frealculated by dividing the dividend per share by tad) corent80~ Syren ae per share. It can also be calculate by dividing total anoury dividends by the total Earnings. Dividend per share Earnings per share tal easy ortant inp ‘portant inpuiy chp Quick ratio = Cash Marketable securities ~ Actus Reena Curent Laiies {u) Long Term Solvency or Capital Structure Besides liquidity analysis, it is important to assess long term sohen- cy of a company. It can be done with the help of Debteqisyaio, capital gearing ratio or capital structure. A high evel of deb-au ratio over the past years, makes a company more vulnerable ant been growing or are expected to grow increases the profitability of financial distress On the thertands is used to determine the amount of exp very Low level of debt equity ratio implies thatthe cones 0, Hae pert dividend payout ratio is same then gig) sing its debt capacity so as toineenss EO cis Dae rate in earnings and growth rate in dividends will beam Financial leverage indicates the extent financial in iF zy (i) Operating Efficiency The operatin; f any i efficiency of acompany rs of various turnover ratios such as ~ Stok ten Dividend Payout rati canbe: ascend iP ® scanned with OKEN Scannerpor turnover fof improved operage=Seing Atos over i PEraLng eh, Turnover Ratio = yonape dssere rato, working ea he years Is Assets Net sates jtal Turnover Ratio = 5 sale i “ forking Working C2 Financial Leverage Business Riskand yy, era agin a compan} timportantoanaly Sa Belo ee yeh results in operating eH Oe and finane™ Operating leverage arises duc to the preg AMpectvey. Operating ome reson costs (eg emt depreciation et) in the cot ig Graipany. Higher amount of operating costs increases que'Wtay Sopa ced cost obligations in bad times one ch’ Series ot operating leverage con bea Be {Change in EBIT io Change in Sales The higher the degree of operating leverage, the greaterg Jing nk of the company: heap, Financial leverage, on the other hand, measures the level of apclleverage cn he es and ene thet ost in costs structure of a company ie. the use of debt.capit degree of financial everage can be calculated as given below Change in EPS_ % Change in EBIT ‘The higher the degree of financial leverage, the greater wil beg nancial risk of the company. At times, when operating profits fig company are declining, it leads to adverse impact on earnings pe share and hence shareholder's return. (vi) Cash flow analysis Cash is one of the most important asset for any business Iniavs. ing, there is an old adage - ‘Cash is King’. However, investors tal to ignore the cash flow analysis of firms. Most people are inciod towards profitability ratios to take a final call on choosing a coma for investment. Without doubt, profits are important for long te: survival ofa firm, but itis equally essential to have liquid cash tofu future projects. Secondly, in light of limitations of accrual bass investors must analyse cash tojudgea company scurs prospects. Therefore, it is necessary to realise that (v) Operatingand: : o Degree of operating leverage = Degree of Financial leverage any deals ith its es com nits Shares, param WON OT AONE wet $y xy sos “iy ll ah lows - Cash a Total Cepenses like depreciny’ cash eae fran Suche ad eat ive outlay of cash, sothes se inv gh, Deng oe repo after tax any vichise mera investing and fet Tificialhy saninvest Sfacompa company erating. ope ah flow fom operations Cast starting point for analy go0e generate cash from day-ay ty Seieing goods and services wo SB ow from operationsmeans afm cash from continuingoperationswithos w= funds. A negative value indicates her were required for day-to-day operations g Free Cash Flows -Free cashflow FcFyisaninn cash flow from operations. Itis causa eR ital expenditures and dividend paymen re operations. FCF figure is excess cath fou tan can use, as per its discretion, for retiring debt dein products, buy-back of shares increasingdividendparmesia However, excess cash flow also makes a compan ansttserg candidate for takeover. c d. Free cash flow per share - I is the amount f fre ash aus available per share. Itis computed by usngihefclovngiat. mula: rama ah tnd 1 Activities C38 Ho lumen fe Freecash fins Tonal numberof equi shares Free cash flow per shar This ratio tells how much free cash the company genera the trailing twelve months that can be use by manigemen = it deems beneficial. & Price to Free Cash Flow Ratio dividing the stock's price by previous flow per share. It tells the value thatthe ives PS ined bs «This ratios determined 12 mons free cash nthe ® scanned with OKEN Scannerpara t ys ability to generate €ash in future, tg compa ice narkel's ExPECtaUiONS PeEarding etctal Flexibility. price Free cash flo ratio= Othe, 8 fing sh _ieraioofacompany rive tobi ind Lot at alued the tock Higher nn oe tts overvalued the stocks Shey, map Flow Growth Rate The compound ay J Fac Cah Fo iw per ahare over tne ana ate tain of Wend in cath tor decisions fy sca Share! 59 Implications for Invest Higher cash lows nd cash flows from Operations indica, @ business. ' ter free eash flows should translate into higher 5 ee to free cash flow per shares sn “The ratio of stock price to er share isa war valce: Comparing a company’s ratio to those of other) hy selucisy norms,and historical averages provides some echo ‘much like the traditional price-carnings ratio, @ valle felon Firms with owprice-to-ree-cash-flow ratios may represen, ie firms at attractive prices. (e) Higher the Free cash flow growth rate, the better itis, Medan 7.42 Non-financial Performance Indicators/Parameters ides the financial performance of the company as explained a Hobe of non- nancial indicators are also required to be oe financial performance indicators primarily include ESG parameters ice Estands or Environment, stands for Social and G Stands for Govermne, Besides ESG, Management competence and product innovations are dy to be analysed before picking up a good share. ‘These non-financial parameters are explained below: (@ Performance with respect to environment and Social responsi Ities : In the wake of rising concern for corporate Social rej sibility and environment, one of the most important non-inar Parameters is the performance of the company regarding its sil responsibility and concern for environment. Many of the compat prepare sustainability reports and conduct social audit, A compe providing huge return may not be a good company to invest ial ‘wvironment and does not discharge its corporates the concern for social and environment issues #" p Socially Response, 920 Oe one 2 rT ible neers soa Tent and Corporate Gn Sone aT competence fe ely prolate cn Peale not adequate Fore as as one of the moa we, declined sigaicar | the seit bad COmporate gover fraud ane that the companies, 8 Jenn sus me fficleney and profes fampetePe © governance norm * Differentiation and Innovations # Bauct (such as detergent, sroduct from other prod if in product innova of brand also hk oduct engaet Si fonher reat profits ides above it iS NECESSArY to ana} Bestigies of 2 company and its fuure sitjgers and acquisitions etc All thse hip imetings and hence dividends tothe shar ua puFont Analysis - Decomposing Firm's Earning Power putont Analysis decomposes ROE (Return On uit parcmargin, Asset turnover and Equity multigiee 08 = (Profit margin) X (Asset turnover) x (Equity mh {at Proft/Equity Capital = (Net profit/Sales)x Sales Faulty) + Profitability (as measured by net profit margin) # Asset Use efficiency (as measured by asset tumover + Financial leverage (as measured by equity mii The DuPont analysis breaks down Retum on Equity (thats the ens tha equity investors receive from the firm) int three disinct ceens. Thsanalysis enables the analyst to understand the source af suse fleor) return by comparison with companies in similar ints" “ween industries). {ts DuPont analysis is more useful for insti in manos such as automobiles. Some industries, sucha fasion al wing deve ® scanned with OKEN Scannerenue ratio (Price Over gy jue ratio, also known gs p rover jation of the compan Sto oy para Tt vg own analysis. Managem acum at pletely mpl Thi ne fan ny HO Gs ar coe PaOY i optimistic Tend to predict modest result aia any investor ler sales At for came anal anclaed: An vex shea i foes fr cleat a sock ca thrice seat one Bi ed iets 10 investigate for rt compare the stock price." "°®S0nahy Nar ot peeing | ey olen oth, Fo ee sesson of whether recom |) HEN cla than an Fee ra nextel igh sock price or ia" aa sie rca where the input, “eng Jc» Mtl, 50 the sensitivity of rind Oy ‘wth prospects for the company, ewyincorporated companies uth lished co Netory to calculate P/E. ge, well-established companies, for an Wi is! high growth. Large, panies, for insta ing vompanies Having Met loses dye come, but ite oppertonesiste fer dependable dividend income, but itl opportunity forge Bc) COMPSCrory phase and henge eM apa coer growth rate an estimate. Is subjecr sg Tem? introductory Bhase and hence neg pill nay A compan’ arowth rate san estimate. Ii subject o her inggingful indicator in valuing ea seal oe ote ew scons |e gucraiocan coach ey, se abi sein place of PE ration dhe (gy promising &° Disadvantages ee “The PEG ratio is less appropriate for measuring companies chang ep Market seene Ts and hype of investors. Also, the convention that wyenuie Ratio = Matket Price per share serropriate i somewhat arbitrary and considered a ral tit price Revenue Sales Per Share metric. jo = Market Captazai The simplicity and convenience of calculating PEG leaves ou, ‘, Price Revenue Ratio Manis Catan eral important variables. First, the absolute company grow," tsedin the PEG does not account for the overall growth rateyice J tnlerretation economy, and hence an investor must compare a stock's PEgy, J 4 declining Price Revenue ratio arises from fai average PEG's acros its industry and the entire economy togay f)srease in year-on-year Feveniue. General, ange ae OE accurate sense of how competitive a stock is for investment. Ay | Rexenue ratio are a good buy bet becarce thlow Bice (attractive) PEG in times of high growth in the entre economy ny mace z not be particularly impressive when compared to other stocks an, (@) They are trading at a price below fair value. tice versa for high PEG's in periods of slow growth or recession () Secondly, they have increasing revenues. Inaddition, company growth rates that are much higher thanthec J Such stocks display value potential and growth prospec inthe nomy's growth rate are unstable and vulnerable to any problensile J longer term when compared to the company’ pst performenc or company may face that would preventitfrom keepingitscurrentrae other comparable companies. Therefore, ahigher-PEG stock witha steady, sustainablegrowhn pias of Price/Revenue (compared to the economy's growth) can often be a moreattace: J Sa sie investment than alow-PEG stock that may happen to just beau Revenue alone may not be a good indator ol iso company as it does not consider operating expens a revenue is of significance only if it can be tl ao a any’ li i inestorsshoulds ¥’s bottom-line earnings. Therefore invesorsto Price Revenue ratio by net profit ratio to take short-term growth‘streak’.A sustained higher-than-economy grt rate over the years usually indicates a highly profitable company.bé can alse ‘adiczte v scam, especially if the growth is a flat percent no matter how the rest of the economy fluctuates. ® scanned with OKEN Scannerro book value rato (7B ratio) & computed mer calculating t ni tg eg ‘0 ye vratig = Market price per share Price 10 Book Valseratia = Be valve per share Some shate rsa good measure of rlative valet Dak in the stock market. High P/B ratio means the share ot ® come inn morketbecsuse the investors are gpnsate oye potential and growth of the company. Whereas a't Pesca the shat underpriced innate gee bese ashe ene perm pene ie ature 8 low patty estore my Price appr rece 7.43 Shareholding pattern of the company AA company’s shares are held by different persons like prom, investors, institutional investors. DIL& Fi ere Tee proportion ret capital held by various categories of shareholders is known holding pattern of the company. It shows how shares of cos" split among the entities that make up its owners. PANY age A study of shareholding pattern and change in shareholding pa, be useful o the investors. The Shareholding pattern is dechets™ quarter and is available in annual reports of the company. It a <4 on the stock exchange’s website, all financial websites as wel company’s website. ( Shareholding Pattern Promoters’ Holding 8 aval Is ne Institutional investors [Banks, Insurance Compass ‘Mutual Funds, Foreign Institutional Investors e. Small investors like YOU and ME sor decision for shareholding pattern are 28 Follow, he gy ake :A8 rule of thu mn low confidence of Ply 1d ese in promoter apron Rill commitadditional fog ‘growth of their come a not an abschite rue fy powetSy funds: invested by promoters wl fe ies fr promoters are increqats Will bead, Me on he ale Sa AM? at Bpolders ; : : ‘a decline in promoter holding i atl, 8 oe can be duc to van one Sboulg sila Cine ci © various fac ihr wards emPIOVEe stock option, ee Uh oing of fresh shares to strategie for investors. al p ings ead news a er,pledgingof shares by promotersis, sone alin share pce Comet panies aren aadSromoters’ shares that have been pledgat ery high promoter holdin, ily, @ Very 1B 5 NOL a good « ia tating power. A derail sence of institutional investors lates i eae = Brake random decisions or harm the interes sisof smal neta firs shareholding : FI stake is used sa parametefornee yon A higher stake of FIT Foreign institute Investor shone oaimism and a lower FI participation indcatsln hn Fisin the company. Increase in Fl stakeisthushulsh se confidence about the future prospectsofthecompan, Hann fp side of huge FIL holdings thatthe stock pic ile ibeora high volatility when FIls off load the stake. 0, too high or too low of promoters stake or Fl hangs not favourable. (@ Large investors : Along with holding patterns, companies do di close the entities - other than the promoters - that hold more than | per cent in their share capital. Such an information is important for investors. For instance, a 2% or 5% equity stake held ‘by Rakesh Shunjhunwala creates buoyant behaviour amongst smal ines ‘who follow his trading strategies. ® scanned with OKEN ScannerMany ae ial data for an automobile company Sree portant rote avr cl ta i tale Sem Sr Aa, Print ed 2081 20% ae pevtorm eo " SRE AUTOMOBILES 17D. “ peLa/C FOR THE YEAR ENDING ON 31" Macy, nice [ATs Gin of Goode Sl : ‘tes [ee [sro profit 8 (ise ined Fy, [Tass Interest fax (PBT) [i [rroi Before [e[Prft afer Tax PAD [H_ [Dividend distributed (aS ON MARCH END) Selling expenses Tess: Provision for Tax BALANCE SHEET pes cut current Liabilities 7 es creltors provision and others G Net Current assets or working capital |350 im iNet Assets(D+G) 1050 1010p A Net Assets 1080 enatket price per share is ® 20, 22.5 and 25 respecnch iy is Face value of share is @ 10 each. (in Lakhs) Girne SaaS] 20x [20x2 analy [A [Net Worth I Tiss aR = [- [Share Capital i tenet ratio 200/250=32 [S011 4001400 [400 TIS se mover ra 30007 1050=1505 25 f [Reserve oor Taso o 5/1050 19 | 0 i [Net Worth 900 | 950 10m) [ste capital turnover |20007380=368 B | Borrowings | Tbs 7 e | JB? seeps ratio 1507900017 ® scanned with OKEN ScanneraN Ls pars a [pao | ap ere Eas Br area We Ae? 30/<0=075, i 5 [os/165=0455 [125/139 ra8 i [ovsend mate [078/145-0485 Ttas/n smo LN im ‘Three step DuPont Anaissis of profit earning capabiy ggg, se etalon , 62000-0035 [eax BA | oe. Se 28007 seem 2 att mer ~ ymover ratio | Asset Use irate dens iy maine | Franca Bee worth [leverne Owners oberg ROE= (Profit margin)X(Asset turnover) (Equity multiplies. ~—-— Net Profit Equity Capital = (Net profit/Sales)X(Sales/Aset(Anay For 20X3, ROE= 12 It can be analysed from the following subcomae ROE = Profit margin (A) x Asset turnover (B) X Equity mukipe = 34x 244 X 1435 1.9 or 12% ROE (row D) Interpretation The ROE of the firm remained constant from 20x] to 20x2 despite of vee decline in net profit margin from 3.33% to 2.6%. It can majorly be arta betterasset use efficiency reflected in an improvement in asset turnovers 1.904 to 264, The firm generated more sales in 20x2 from its more orks asset base. The firm witnessed a minor loss of financial leverage from Li to 1-12in20x2 due to discharging of debt of ¢ 30 lakhs. Therefore, the posite of asset use efficiency was nullified by a poor profit margin resuling.n®=} ereaseia ROE to 7.584 in 2082 from 7.33% in 20x! a etter profit, 2053 10 er sehen acs oe inal ar tena ringer na Fr perating marein peuron ase 3 Rater etwstens fy ene eit esos Vy toga rim apelin Et ro profitably oem oedingny Hoe nana eno te sued debentures tga tanten MENG of es leit EBIT = Operating Income - Depreciation [Net Assets = Fixed Assets + Working Capital P FRB ] ticular RMA oni5/@15V65) =] 08045) 080258) Operating margin = EBIT/Ne nls eiS/onss)= | eR-oyoseS [990 5)/950+785) =| EE a rips (ecto. |S35/135=2052% [ROA= EBT Ne aes fee ston Par i. Nerwor al ® scanned with OKEN Scanner