Diesel

NIVESHAK 25
Article Cover FinLife of the Story Month
price of the equity.
2. Quantitative Analysis: Ratio analysis and
valuation play a major role in fundamental
analysis. The various ratio that are calculated is
liquidity ratios, leverage ratios, activity ratios,
profitability ratios, Valuation ratios. Valuation
ratios such as P/E, P/BV, EPS (Earnings per
share) and Sales per share are the most widely
used ratios.
Company valuations are done using Gordon
growth model, Discounted Cash flow, Relative
valuation and residual income method.
Gordon growth model is used for determining
the intrinsic value of a stock, based on a future
series of dividends that grow at a constant rate.
Given a dividend per share that is payable in
one year, and the assumption that the dividend
grows at a constant rate in perpetuity, the model
solves for the present value of the infinite series
of future dividends.
Stock value = D/k-g
Where D is the expected dividend one from now,
k is the growth rate in dividend till perpetuity
and k is required rate of return for equity
investor.
Discounted cash flow (DCF) analysis uses future
free cash flow projections and discounts them
(most often using the weighted average cost of
capital) to arrive at a present value, which is used
to evaluate the potential for investment. If the
value arrived at through DCF analysis is higher
than the current cost of the investment, the
Figure 6: Quantitative Analysis
opportunity may be a good one.
Relative valuation is a business valuation
method that compares a firm’s value to that
of its competitors to determine the firm’s
financial worth. Relative valuation models are
an alternative to absolute value models, which
try to determine a company’s intrinsic worth
based on its estimated future free cash flows
discounted to their present value. Like absolute
value models, investors may use relative
valuation models when determining whether a
company’s stock is a good buy.
Fundamental analysis mostly relies on the
financial statements and the business model
of the company whereas technical analysis is
purely a function of price and traded volume
of the asset based on the supply and demand.
Fundamental analysis captures the profits,
assets and future potential of the company
whereas technical analysis focuses on the
price movements and market behaviour. It is
rightly said that fundamental analysis captures
the rational side of traders whereas technical
analysis captures the emotional side of the
traders. Amalgamation of the two methods with
minimum correlation will help us minimize the
risks and maximise our returns.
Would like to end with the last words “In
fundamental analysis if you are good you will
be right six out of ten times, but if you want to
be right nine times you need to have a balance
of both the perspectives”.
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