\Acct310 Week 1
Process of Fundamental Analysis
• Understand the business
• Analyse the information
• Forecasting payoffs
• Convert forecasts to valuations
• Make an investment decision
6 Step Process
• Careful analysis of qualitative and quantitative info needed.
• Accounting policies affect the numbers.
STEP 1: Identify the Industry Economic Characteristics
• Economic characteristics and competitive dynamics influences the strategies firms will employ.
Value chain analysis
For pharmaceutical companies
• Research to discover drugs
• Approval of drugs by government regulators
• Manufacture of drugs
• Creation of demand for drugs
• Distribution to ...view middle of the document...
Economic Attributes Framework
o Are customers price-sensitive or insensitive?
o Is demand growing rapidly or mature?
o Does demand move with economic cycle or insensitive to it?
o Does demand vary with seasons?
o Are suppliers offering similar or unique products?
o High entry barriers?
o High barriers to exit? Such as environment clean up costs
o Manufacturing process capital or labour intensive? Or both?
o Manufacturing process complex with low tolerance of error or opposite?
o Is product promoted to other businesses or to consumers?
o Is there steady demand or must firms continually create demand?
• Investing and Financing?
o Are assets of firms in industry short or long term?
o Little or high risk in assets of firms in industry?
o Industry relatively profitable and mature generating enough cash flows or growing rapidly and in need of external financing?
STEP 2: Identify the Company Strategies
• Nature of product or service
o Product differentiation strategy
• Unique products
• Achieving relatively high profit margins
o Low-cost leadership strategy
• Non-differentiated products
• Accepting a lower profit margin in return for higher sales and market share
• Integration in value chain
o Manufacturing: Is firm conducting all manufacturing operations itself or outsourcing?
o Distribution: Is firm maintaining control over distribution function or outsourcing it?
• Geographical diversification
o Is firm targeting domestic market or integrating horizontally across many countries?
• Industry diversification
o Is firm operating in single industry or multiple?
STEP 3: Assess the Quality of the Financial Statements
Assets = Liabilities + Shareholders Equity
• Assets portion of the balance sheet reports the effects of a...